Mumbai ITAT rules offshore services taxable in India

In a recent ruling Mumbai Income Tax Appellate Tribunal in the case of Ashapura Minichem Ltd. (ITAT) [2010] 5 taxmann 57 (Mum.-ITAT)] on the issue of tax ability of payments made by the Taxpayer for services rendered outside India, under the provisions of the Indian Tax Laws (ITL) as well as the India- China Tax Treaty (Tax Treaty) held that such payments are taxable in India both under the ITL as well as the Tax Treaty and the Taxpayer is liable to withhold taxes (WHT) from such payments.

Facts

• The Taxpayer, a company resident of India, was in the process of building an alumina refinery using bauxite from the state of Gujarat. It engaged a Chinese company (China Co) for providing bauxite testing services in its laboratories and for preparing test reports which would be used by the Taxpayer to define the process parameters. China Co rendered the services from China and a consideration of USD 1m was agreed to be paid to China Co.
• The test reports of bauxite samples were to cover complete chemical composition of bauxite, physical phase constitution of bauxite, performance tests etc.
• The Taxpayer was of the view that no taxes were required to be withheld from the payments made to China Co. Accordingly, the Taxpayer moved an application for obtaining a nil withholding certificate from the Tax Authority.
• The Tax Authority took a view that the payments made for services rendered by China Co were taxable as ‘fees for technical services’ (FTS) under the ITL as well as the Tax Treaty.
• The Taxpayer appealed before the first appellate authority which upheld the Tax Authority’s view. Aggrieved by the above, the Taxpayer appealed before the ITAT.
• Under the ITL, any income by way of FTS payable to a non-resident by a resident of India is generally taxable in India. FTS is defined as any consideration for rendering any managerial, technical or consultancy services. A Supreme Court (SC) decision rendered in 2004 had held that, for FTS to be taxable in India, the services should not only be utilised in India but should have also been rendered in India. The Finance Act, 2010 introduced a retrospective amendment in the ITL, with effect from 1 June 1976, to clarify that FTS would be taxable in India even if rendered from outside India.
• Under the Tax Treaty, FTS is defined as consideration for provision of managerial, technical or consultancy services by a resident of one country in the other country. FTS is generally deemed to be taxable in the country where the payer is a resident (Source Rule).

Issue before the ITAT :- Whether the payments made for services rendered by China Co are taxable in India and whether the Taxpayer is required to WHT while making such payments.

Taxpayer’s contentions