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In Ishikawajima-Harima Heavy Industries 288 ITR 408 the Supreme Court held {on a misreading of s. 9 (1) (vii)} that in order to be chargeable to tax in the hands of the non-resident, fees for technical services had to be rendered in India as well as utilized in India. It held that if both conditions were not fulfilled, the fees for technical services was not chargeable to tax in India. That the judgement was wrong was said so by the AAR in Worley Parsons Services Pty. Ltd (AAR) 312 ITR 273. It observed that Ishikawajima had wrongly referred to s. 9(1) (vii) (c) instead of s. 9 (1) (vii) (b) even though the two dealt with different situations. It also noted that the Supreme Court had stated that s. 9 (1)(vii) (c) requires that the services have to be rendered as well as utilized in India in order to be taxable in India even though the word “rendered” was not to be found even in the inapplicable clause (c). It also noted that the law was that “a decision not expressed and accompanied by reasons and not proceeded on a conscious consideration of issue cannot be deemed to be a law having binding effect as is contemplated under Art.141 of the Constitution. That which has escaped in the judgment is not the ratio decidendi” though it finally found a way to “distinguish” Ishikawajima.

To supercede the judgement in Ishikawajima, an ill-drafted Explanation to s. 9 (1) was inserted by the Finance Act, 2007 w.r.e.f. 1.6.1976. However, the draftsman clearly had no clue as to what Ishikawajima was saying and what the Explanation was supposed to supersede.

The result: Ishikawajima was held to be good law despite the retrospective amendment by the Bombay High Court in Clifford Chance 318 ITR 237 (B0m) and by the Karnataka High Court in Jindal Thermal Power Company 225 CTR 220.

The Finance Bill 2010 now seeks to substitute the said mis-worded Explanation by the following Explanation:

“Explanation.—For the removal of doubts, it is hereby declared that for the purposes of this section, income of a non-resident shall be deemed to accrue or arise in India under clause (v) or clause (vi) or clause (vii) of sub-section (1) and shall be included in the total income of the nonresident, whether or not,—

(i) the non-resident has a residence or place of business or business connection in India; or

(ii) the non-resident has rendered services in India.”.

The words “income … shall be deemed to accrue or arise in India … whether or not … the non-resident has rendered services in India” should hopefully be sufficient to lay Ishikawajima to rest – three years after it was delivered.

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  1. murali says:

    does this mean tds is required in all types of payment to nri inclding
    commission to agents working outside india n receiving payment
    directly in their a/c by swift money transfer

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May 2024