Mumbai Tribunal Ruling: Fees for Technical Services, even if rendered outside India, are taxable consequent to retrospective amendment in Section 9 by the Finance Act, 2010 (Ashapura Minichem Limited Vs. ADIT) (ITA No. 2508/M/2008)
Ashapura Mini chem Limited (AML/ Assessee), an Indian company entered into an agreement on 5 April 2007 with China Aluminum International Engineering Corp. Ltd. (CAIECL), a company based in China. AML, was in the process of building an alumina refinery in Gujarat and in this regard it was to pay a sum of USD one million in consideration of bauxite testing services availed from and for preparation of test reports by CAIECL. These services were rendered by CAIECL in its laboratories in China. These test reports of bauxite samples were to cover complete chemical composition of bauxite, physical phase constitution of bauxite, abradability test of bauxite, pre-desilication of bauxite, digestion performance test and red mud settling performance test.
AML approached Tax Department by filing an application under section 195 of the Income tax Act (Act) at the time of remittance of this sum to CAIECL for obtaining a nil withholding tax certificate. The Assessing Officer (AO) passed an order directing AML to deduct tax at source on the ground that these services rendered by CAICEL were in the nature of ‘fees for technical services’ as per Article 12 of India-China Double Tax Avoidance Agreement (‘tax treaty’).
On appeal, the Commissioner of Income tax [CIT (A)] upheld the order of the AO. Therefore, AML preferred an appeal before the Income tax Appellate Tribunal (Tribunal).
Contention of the Assessee:
- In order attract tax ability under section 9(1 )(vii) (fees for technical services), not only that the services should be utilised in India, but should also be rendered in India.
- The testing services were rendered in China and not in India; and therefore, these services would not be considered as fees for technical services as defined in section 9(1 )(vii) of the Act. In this connection, reliance was placed on Ishikawajima Harima Heavy industries Ltd. v. DIT (288 ITR 408) (SC) and Clifford Chance v DCIT (318 ITR 297)(Bom).
- Even in terms of Article 12 of the India-China tax treaty, tax ability of fees for technical services can only arise when not only the services are used in India but also rendered in India.
- Unlike the provisions in most other tax treaties, the tax ability of fees for technical services in the India-China tax treaty has an additional requirement of ‘place of performance’ in the source country, to be satisfied before it can be taxed as fees for technical services in the source country.
- In order to highlight that India-China tax treaty is unique in its wordings and its scope as far as tax ability of fees for technical services is concerned, an attention was invited to the provisions of India-China tax treaty, China-Pakistan tax treaty, India-Israel tax treaty, India-South Africa tax treaty and India-Germany tax treaty.
- In view of the above, it was contended that if at all this amount is liable to tax in India, it is by way of business profits only; and in the absence of any Permanent Establishment of CAIECL in India, such business profits would not be liable to tax in India.
Contention of the Revenue:
- If the royalties and fees for technical services can only be taxed in India only when not only the services are utilised in India; but also rendered in India, the source rule will cease to have any meaning.
- The judgement of the Supreme Court in the case of Ishikawajima (supra) and Bombay High Court in the case of Clifford Chance (supra) are contrary to the legislative intent and the doubts, if any, have been set at rest by the retrospective amendment in Explanation to section 9(1)(vii), as introduced in Finance Act, 2010. Once the amendments are carried out in the Act, these judicial precedents will no longer constitute good law.
- As regards the applicability of Article 12 of India-China tax treaty is concerned, it was contended that the deeming provision of Article 12(6) [royalties or fees for technical services shall be deemed to arise in a Contracting State where the payer is a resident of a Contracting State] is quite clear and categorical, and therefore, it was urged to give it a sensible and reasonable meaning which makes the provision workable rather than making the provision redundant.
- The services rendered by CAIECL are liable to tax under domestic tax law as well as tax treaty.
Tribunal’s observation and Ruling:
- As per the retrospective amendment in section 9(1) by the Finance Act, 2010, utilisation of services in India is enough to attract its tax ability in India. To that extent, recent amendment in the statute has virtually negated the judicial precedents supporting the proposition that rendition of services in India is a sine qua non for its tax ability in India.
- The impugned receipt of fees of technical services from AML is to be deemed to accrue or arise in India under section 9(1 )(vii) of the Act.
- As per Article 12(4) of India-China tax treaty, technical services provided by a resident of China to a resident of India are liable to tax in India. Even under deeming provisions contained in Article 12(6), the said fees are liable to tax in India.
- The argument that in using the words “in the Contracting State“, Article 12(4) incorporates the “place of performance test” and negates the “source rule” and that services rendered offshore are not taxable is not acceptable for two reasons. Firstly, because the expression “provision for services” is wider than the term “provision for rendering of services” and covers services rendered in the one State but used in the other State. Secondly, because the interpretation will render Article 12(6) redundant. A literal interpretation to a tax treaty which renders a treaty provision unworkable should be avoided. In this regard, the Tribunal has reiterated the Principles of treaty interpretation.
- In view of the above, AML was liable to deduct tax at source under section 195 of the Act at the time of remittance of fees to CAIECL.
The Legislature, in wanting to nullify the effect of the Supreme Court judgement in the case of Ishikawajima (supra), had attempted to amend the Act in 2007 by the Finance Act, 2007 by adding an explanation to section 9(2) of the Act, with retrospective effect from 1 June 1976. However, subsequently the Karnataka High Court in the case of Jindal Thermal Power Company Ltd. Vs. DIT (182 Taxman 252) held that the explanation, i.e. the 2007 amendment (supra), in its present form, does not do away with the requirement of rendering services in India, for such fees for technical services to be taxable under section 9 of the Act. In order to remove any doubt about the legislative intent of the aforesaid source rule, the amendment has been carried out again in section 9 by the Finance Act, 2010. This judgement has brought out this aspect by holding that as per the retrospective amendment in section 9(1) by the Finance Act, 2010, utilisation of services in India is enough to attract its tax ability in India. However, it would be interesting to see how the Courts will interpret the law even after the amendment to section 9, as regards the tax ability of payments for fees for technical services, irrespective of territorial nexus of such fees to the state of India.
Although this judgement is in line with the retrospective amendment in section 9 to the extent of tax ability of fees for technical services in the hands of a non-resident, we believe that as far as payer’s obligation to withhold tax under section 195 is concerned, he may not be hit by the retrospective amendment in section 9 in the absence of any such extension of retrospective effect either in section 195 or section 201 of the Act. This is on the basis that the payer has withheld tax in a bonafide manner applying the law prevalent at the time of remittance. Further, the withholding tax is in the nature of vicarious liability and therefore, the payer should not be considered as ‘an assessee in default’ on account of any retrospective amendment carried out subsequently in the charging section of the Statute. In this connection, reliance can placed on the decision rendered by Nagpur bench of Tribunal in the case of Canara Bank Vs ITO (ITA Nos. 366 to 370/Nag/2007) and Hyderabad Tribunal in the case of State Bank of India Vs DCIT (20 10- TIOL-23 1 -ITAT-HYD). Thus, expecting the tax payer to act on foresight of a retrospective amendment would be hit by the doctrine of impossibility of performance