2014 (7) TMI 1299 - HC - Income Tax

Taxability in India - Payment on account of technical services to a non-resident - Whether the sum paid or credited to the account of the foreign resident by the assessee on account of service rendered in relation to forex derivative transactions is chargeable to tax in India under Section 9(1)(vii)? - whether the assessee was liable to deduct tax? - HELD THAT - The assessee has received whatever services have been rendered only in India. The media used for the purpose of communicating the service has not been disclosed. Even if we presume that the service was rendered through electronic media, the conclusion is irresistible that the process of rendering services could not have been concluded outside India. We are as such of the opinion that even without the amendment introduced by the Finance Act, 2010, the liability of the foreign resident to taxation under the Indian laws was there. The amendment introduced by the Finance Act, 2010 has specifically been made with retrospective effect from 1st June, 1976. These are clarificatory amendments. They always have a retrospective effect. In this case expressly they have been made retrospective. In the matter of taxation, equity has no place. When a law has been amended with retrospective effect Court has to proceed on the basis that the amendment was always there with effect from 1st June, 1976. Therefore, the transaction which took place during the financial year 2007-08 could not have been saved, in any case. The second submission of Mr. Murarka is, therefore, not acceptable. First question formulated above is answered in the affirmative and in favour of the revenue. Second question is a consequential question and is also answered in the affirmative and in favour of the revenue.

Summary

Issues Involved: Taxability of consultancy charges paid to a foreign entity, applicability of Double Taxation Avoidance Agreement (DTAA), and the obligation to deduct tax at source.

Issue-wise Detailed Analysis:

1. Taxability of Consultancy Charges Paid to a Foreign Entity:
The primary issue was whether the sum of Rs. 3,00,22,646/- paid or credited to a foreign entity for services related to forex derivative transactions is chargeable to tax in India under Section 9(1)(vii) of the Income Tax Act. The assessing officer classified these payments as fees for technical services, invoking Explanation 2 to Clause (vii) of sub-section (1) of Section 9 and the Explanation introduced by the Finance Act, 2010, effective from 1st June 1976. The CIT(A) and the Tribunal, however, concluded that the consultancy services, although falling within the definition of "fees for technical services" under the Income Tax Act, did not qualify as such under Article 12(4) of the DTAA between India and Singapore. They emphasized that the services were rendered outside India, with no nexus to any permanent establishment in India, thus not chargeable to tax in India.

2. Applicability of Double Taxation Avoidance Agreement (DTAA):
The CIT(A) held that the consultancy services provided by the foreign entity from Singapore were not taxable in India under the DTAA. The Tribunal endorsed this view. The revenue, however, argued that the DTAA did not apply to the transaction, and under Article 23 of the DTAA, such income should be taxed according to the domestic laws of the respective countries. The court concluded that since the DTAA did not apply to the transaction, the provisions of the Income Tax Act would prevail. The court rejected the argument that the income should be considered as business profits under Article 7 of the DTAA, as the services were specifically for consultancy and not general business profits.

3. Obligation to Deduct Tax at Source:
The court examined whether the assessee was liable to deduct tax at source on the payments made to the foreign entity. The assessee argued that they could not have foreseen the retrospective amendment introduced by the Finance Act, 2010, and thus should not be held liable for non-deduction of TDS. The court rejected this argument, stating that the explanation introduced by the Finance Act, 2007, already clarified that income deemed to accrue or arise in India under Section 9(1)(vii) would be taxable, irrespective of the non-resident's place of business or business connection in India. The court held that the services were consumed in India, and therefore, the income was taxable in India, making the assessee liable to deduct tax at source.

Conclusion:
The court concluded that the consultancy charges paid to the foreign entity were indeed chargeable to tax in India under Section 9(1)(vii) of the Income Tax Act. Consequently, the assessee was liable to deduct tax at source on these payments. The appeal was allowed in favor of the revenue, and the operation of the order was stayed for eight weeks upon request.