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TMI Blog2010 (5) TMI 602X X X X Extracts X X X X X X X X Extracts X X X X ..... technical services by the petitioner is not liable to the Indian income-tax under the Act - Decided in favor of the assessee - 448 OF 1994 - - - Dated:- 5-5-2010 - F.I. REBELLO D.G. KARNIK, JJ. JUDGMENT D.G. Karnik, J. The short question that arises for our consideration in this petition is whether the amount paid by petitioner No. 1 to petitioner No. 2 outside India as consideration in terms of the basic engineering and training agreement dated October 22,1989 is liable to Indian income-tax as income deemed to have accrued to petitioner No. 2 in India in view of section 9(1)(vii) of the Income-tax Act, 1961 ? 2. Petitioner No. 1 is a company incorporated in India in which public are substantially interested and has principal place of business at Bombay. Petitioner No. 2 is a company incorporated under the laws of Delaware and has principal place of business in Pennsylvania, USA. Petitioner No. 2 does not have any office or place of business in India and is not resident in India. Petitioner No. 1 being desirous of setting up a sponge iron plant approached petitioner No. 2 for technical assistance. By an agreement dated October 22, 1989 (for short "the BEAT agr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it to petitioner No. 2. In the said letter, petitioner No. 1 emphasized that the provisions of section 9(1)(vii) of the Income-tax Act (for short "the Act") which deems the payment of fees for technical services to a non-resident by a resident were not applicable as no part of the activity for earning the technical fees was carried out in India and therefore, the income did not accrue or arise to petitioner No. 2 in India. Respondent No. 3, however, by his reply dated December 5, 1989, expressed a view that considering the provisions of section 9(1) (vii) of the Act, the fees payable by petitioner No. 1 to petitioner No. 2 were taxable as income deemed to have been accrued to petitioner No. 2 in India. Thereupon, petitioner No. 1 effected tax deduction at source (TDS) on the first instalment of US$ 5,356 million and paid as tax Rs. 2,73,73,084 under protest on December 6, 1989. Again as insisted by respondent No. 3, petitioner No. 1 effected tax deduction at source and paid under protest as tax Rs. 2,81,83,272 on the second instalment of US$ 5.356 million under protest on September 5,1990. For the assessment year 1990-91, petitioner No. 2 submitted its return of income on March 31, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itioner, however submitted that in respect of the offshore services rendered by petitioner No. 2 to petitioner No. 1 under the BEAT agreement no income-tax was payable. In support, he relied on a decision of the Supreme Court in the case of Ishika-wajima-Harima Heavy Industries Ltd. v. DIT [2007] 288 ITR 408. For section 9(1) (vii) to be applicable, submitted Mr. Mistry, it is necessary that the services of a non-resident are not only utilised in India but also rendered in India or have a live link with India so that the entire income from the fees earned by the non-resident becomes taxable in India. Since the services under the BEAT agreement were rendered by petitioner No. 2 to petitioner No. 1 wholly outside India, the amount paid by petitioner No. 1 and received by petitioner No. 2 outside India could not be treated as an income of petitioner No. 2 taxable in India. 6. In view of the challenge to the constitutional validity of section 9(1)(vii) having been given up, learned Additional Solicitor General did not address us. 7. Mr. Suresh Kumar, learned counsel for the respondents submitted that in Ishikawajima [2007] 288 ITR 408, the hon ble Supreme Court has only interpreted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e total income of a person who is resident in India and a person who is not resident in India is obvious. In respect of a resident Indian, his global income (that is whether earned or received in India or out of India) is subject to the Indian income-tax. But in respect of a non-resident person only his income which is received or accrued or deemed to be received or accrued, in India is subject to Indian income-tax. This is because Indian Parliament does not have a power to tax income of a non-resident, non citizen earned outside India. In order to tax any income of a non-resident, there must be a territorial nexus of receipt or accrual of the income with the Indian territory. Reference in this connection may be made to the following observations of the Supreme Court in Ishikawajimal [2007] 288 ITR 408, 444 : "The global income of a resident although is subjected to tax, the global income of a non-resident may not be. The answer to the question would depend upon the nature of the contract and the provisions of the DTAA. What is relevant is receipt or accrual of income, as would be evident from a plain reading of section 5(2) of the Act. The legal fiction created although in a g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o be considered having regard to the other provisions of the Act and also keeping in view the fact that while the legislative competence of Parliament extends to enact a law taxing global income of an Indian so far as the income of a non-resident is concerned it can tax his income only to the extent it arises or accrues in India. Parliament, of course, can define what income of a non-resident accrues or arises or deemed to accrue or arise in India, but the definition cannot be stretched so far as to treat the income of a non-resident which has no nexus with the Indian territory as deemed to have accrued or arisen in India. In Ishikawajima [2007] 288 ITR 408 the Supreme Court has held that the territorial nexus doctrine plays an important part in the assessment of tax (see paragraphs 37 to 39 of 288 ITR 408). 12. Section 9(1)(vii) of the Act says that the income by way of fees for technical services payable by three classes of persons shall be deemed to have accrued or arisen to the recipient in India. The three classes of payees are described in three sub-clauses, viz. (a), (b) and (c) of clause (vii). Sub-clause (a) is in respect of an income received by way of fees payable by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e laboratory who is a non-resident would fall in the first part of sub-clause (b) of section 9(1) (vii) of the Act and the fee received by the owner of the laboratory would be subject to the Indian income-tax unless it falls within the exception provided under sub-clause (b) itself. If we were to read the expression "such person" in sub-clause (b) to refer the person making the payment i.e., the resident Indian, then obviously the case would not fall within the exception because the fees were not payable in respect of any business or profession carried on by "such resident Indian" outside India. Consequently, the income received by the owner of the pathology laboratory would be subject to Indian income-tax. By no stretch of imagination, the owner of the pathology laboratory who is a non-resident Indian can be subjected to income-tax because Parliament obviously would have no legislative competence to tax him in respect of services rendered by him (who is a non-resident and non-citizen) outside Indian territory. However, if the expression "such person" appearing in sub-clause (b) of section 9(1) (vii) is construed to refer to the recipient of the fees, then he would be covered by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o be applicable, it was necessary that the services not only be utilized within India, but also be rendered in India or have such a live link with India that the entire income of the fees becomes taxable in India. The Supreme Court adopted a twin test of (i) services being utilized in India, and (ii) rendered in India or to have such a live link with India for taxing in India the income earned by a non-resident for technical services rendered outside India. Though the Supreme Court has referred to sub-clause (c) of section 9(1)(vii) in some part of its judgment it was obviously considering the case of taxability of income of a non-resident for technical services rendered outside India which falls under section 9(1) (vii)(b) of the Act. The decision of the Supreme Court in Ishikawajima [2007] 288 ITR 408 was considered by a Division Bench of this court in Clifford Chance v. Deputy CIT [2009] 318 ITR 237, Income-tax Appeal No. 182 of 2002 decided on December 19, 2008 (Coram : Dr. S. Radhakrishnan and V.C. Daga JJ.). In paragraph 44 of the decision, after referring to the Ishikawajima [2007] 288 ITR 408 this court observed (page 250) : "Reading the provision in its plain sense, as p ..... X X X X Extracts X X X X X X X X Extracts X X X X
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