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:
Contention of the Revenue:
Tribunal’s observation and Ruling:
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
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