2009 (3) TMI 401 - HC - Income Tax

Income deemed to accure or arise in India Remuneration of non-resident - (1) Whether the payments made to REOL attract tax liability under section 9(1) (vii) (c) read with the Explanation to section 9(2) of the Income-tax Act and whether Jindal was obliged to effect TDS in the payments made to REOL under section 195 of the Income-tax Act?- suggests that the criteria of residence, place of business or business connection of a non-resident in India have been done away with for fastening the tax liability. However, the criteria of rendering service in India and the utilisation of the service in India laid down by the Supreme Court in Ishikawajima s case 2007 288 ITR 408 to attract tax liability under section 9(1)(vii) remain untouched and unaffected by the Explanation to section 9(2). amounts received by non-residetn for technical services, start-up services and overall responsibility Held that technical services not taxable in India Remuneration for start-up services and over all responsibility taxable in India - Held that person responsible for deducting tax at source on payment to non-resident has a right to appeal against order holding remuneration of non-resident taxable Assessee-Jindal has not produced the customs duty documents to show that the amounts paid to REOL in respect of technical services, start-up services and overall responsibility form part of the cost price of the equipment. Therefore, the Income-tax Appellate Tribunal has rightly held that Jindal is not entitled to benefit under article 12(2) of the Double Taxation Avoidance Agreement. Accordingly, the appeals are partly allowed

Summary

Issues Involved:
1. Tax liability under section 9(1)(vii)(c) read with the Explanation to section 9(2) of the Income-tax Act.
2. Exemption under article 12(5) of the Double Taxation Avoidance Agreement (DTAA).
3. Locus standi of Jindal to file the appeals.

Detailed Analysis:

1. Tax Liability under Section 9(1)(vii)(c) read with the Explanation to Section 9(2) of the Income-tax Act:
The court examined whether payments made to REOL attract tax liability under section 9(1)(vii)(c) of the Income-tax Act. The Explanation to section 9(2) was introduced to clarify that income deemed to accrue or arise in India under clauses (v), (vi), and (vii) of sub-section (1) would be included in the total income of the non-resident, irrespective of the non-resident's place of business or business connection in India. The court noted that the Supreme Court's decision in Ishikawajima Harima Heavy Industries Ltd. v. Director of Income-tax required both the rendering of services and their utilization in India to attract tax liability. The court concluded that the Explanation to section 9(2) does not affect the criteria laid down in Ishikawajima's case. Therefore, for "technical services" rendered entirely outside India, no tax liability arises. However, for "start-up services" and "overall responsibility," where services were rendered and utilized in India, Jindal had a duty to effect TDS, failing which Jindal is liable to pay the tax.

2. Exemption under Article 12(5) of the DTAA:
Jindal contended that the technical services rendered by REOL were ancillary and inextricably linked to the supply of property, thus exempt under article 12(5) of the DTAA. The court found that Jindal failed to produce customs duty documents to prove that the technical services formed part of the cost price of the equipment. Consequently, the Income-tax Appellate Tribunal (ITAT) rightly held that the technical services were distinct and independent from the cost price, and Jindal was not entitled to the benefit under article 12(5) of the DTAA.

3. Locus Standi of Jindal to File the Appeals:
The court addressed whether Jindal had the right to appeal against the orders in question. It was argued that the primary liability to pay tax is on REOL, and Jindal, being responsible only for TDS, had no representative capacity to challenge the assessment. However, the court referred to sections 195, 201, 246(1), and 248 of the Income-tax Act, which collectively provide that a payer (Jindal) has the right to question the tax liability of its payee (REOL) to avoid vicarious consequences. Therefore, the contention that Jindal had no right of appeal was rejected.

Conclusion:
The court concluded that Jindal was liable to pay tax on the amounts paid to REOL for "start-up services" and "overall responsibility" but not for "technical services." Jindal is entitled to a refund of tax paid in respect of "technical services." The appeals were partly allowed in these terms.