TDS Rate on subcontracting charges paid to Chinese subsidiary will be 10% instead of 20% under Indo-China DTAA

Infosys Limited Vs DCIT (ITAT Bangalore)

Conclusion: The applicable rate of TDS on subcontracting charges paid to Infosys China should be considered at 10% as per the India-China DTAA instead of 20% as per section 206AA.

Held: Assessee was an Indian company, engaged in the business of development and export of computer software and related services. Infosys China was a company incorporated in China. It was a wholly owned subsidiary of the assessee. Pursuant to sub- contracting agreement, assessee sub-contracted certain overseas work in China to Infosys China. During the year under consideration, assessee made payment of sub-contracting charges to Infosys China. The said payments were made without deduction of tax at source. Assessee’s contention was that the payments were not chargeable to tax under the Act; or under the relevant Double Taxation Avoidance Agreement (DTAA). It was held in the case Nagarjuna Fertilizders and Chemicals Ltd. v. ACIT reported in (2017) 78 taxmann.com 264, if rate of tax applicable under DTAA was lower than 20% tax rate prescribed u/s 206AA, TDS had to be deducted at such lower rate even if non-resident deductee failed to furnish its PAN. Further, the Hon’ble Delhi High Court in the case of Danisco India P. Ltd. v. UOI reported in (2018) 90 taxmann.com 295 (Delhi) had held that provisions of DTAA override section 206AA. Hence, the applicable TDS on subcontracting charges paid to Infosys China should be considered at 10% as per the India-China DTAA instead of 20% as per section 206AA of the IT Act. It was noted that while passing the order u/s 20 1(1) and 201(1A) for assessment year 2012-2013, AO had calculated TDS liability at 10% as per the Indo-China DTAA.

FULL TEXT OF THE ORDER OF ITAT BANGALORE

These appeals at the instance of the assessee are directed against two orders of the CIT(A) and are pertaining to assessment years 2011-2012 and 2012-2013 (for assessment year 2011-2012, the CIT(A)’s order is dated 28.11.2013 and for assessment year 2012-2013, the CIT(A)’s order is dated 24.03.2014). The orders of the CIT(A) arise out of orders passed u/s 201(1) and 201(1A) of the I.T.Act. Common issues are raised in these appeals, hence, they were heard together and are being disposed of by this consolidated order.

2. The adjudication of appeal for assessment year 2011­2012 will apply mutatis mutandis for disposal of appeal for assessment year 2012-2013. Therefore, we shall adjudicate first IT(IT)A No.4/Bang/2014 pertaining to assessment year 2011-2012.

IT(IT)A No.4/Bang/2014 (Asst.Year 2011-2012)

3. The grounds raised read as follows:-

“1.1 The order passed by the learned Commissioner of income tax (Appeals) – IV, Bangalore [learned CIT(A)] is bad in law and liable to be quashed.

2.1 The learned CIT(A) has erred in concluding that there was no violation of principles of natural justice in passing the order passed under section 201 (1) of the Income tax Act, 1961 [Act].

2.2 The order passed by the learned Deputy Director of Income tax (International Taxation), Circle 1(1), Bangalore without providing sufficient and proper opportunity of hearing, without allowing the appellant to rebut I submit explanation in respect of the conclusions drawn from examination of the senior employee of appellant, is against the principles of natural justice, bad in law and hence liable to be quashed.

3.1 The learned Deputy Director of Income tax (International Taxation), Circle 1(1), Bangalore has erred in concluding that payments made to M/s Infosys Technologies (China) Company Ltd [overseas subsidiary] amounting to Rs.239,93,89,985/- resulted in accrual or arisal of income in India under section 5(2), consequently chargeable to tax in India in the case of the overseas subsidiary and the learned CIT(A) has erred in concluding that the issue of accrual or arisal of income under section 5(2) is academic in nature and hence need not be adjudicated.

4.1 The learned CIT(A) has erred in confirming the impugned conclusion of the Deputy Director of Income tax (International Taxation), Circle 1(1), Bangalore that the payments made to overseas subsidiary constitute ‘fees for technical services’ under section 9(1)(vii) of the Income tax Act, 1961. The said payments were covered within the exception clause of section 9(1 )(vii)(b), therefore, outside the purview of section 9(1)(vii) and consequently not liable for TDS under section 195.

5.1 The learned CIT(A) has erred in confirming the impugned conclusion of the Deputy Director of Income tax (International Taxation), Circle 1 (1), Bangalore that the payments made to overseas subsidiary constitute ‘fees for technical services’ under Article 12 of the Double taxation avoidance agreement (DTAA) between India – China.

6.1 The learned CIT(A) has erred in confirming the impugned conclusion of the Deputy Director of Income tax (International Taxation), Circle 1(1), Bangalore that the payments made to overseas subsidiary constitute ‘royalty’ as per Explanation 2 to section 9(1)(vi) of the Income tax Act, 1961.

6.2 Assuming without admitting that the payments made to overseas subsidiary constitute ‘royalty’ as defined in Explanation 2 to section 9(1)(vi), such payments, having been made in respect of right, property or information used or services utilised for the purposes of business carried on by the appellant outside India or for the purposes of making or earning any income from any source outside India, were outside the scope of section 9(1)(vi) of the Income tax Act, 1961 and consequently not liable for TDS under section 195 of the Act.

7.1 The learned CIT(A) has erred in confirming the impugned conclusion of the Deputy Director of Income tax (International Taxation), Circle 1(1), Bangalore that the payments made overseas subsidiary constitute ‘royalty’ under Article 12 of the DT AA between India – China.

8.1 On facts and in the circumstances of the case and law applicable, the impugned conclusion the learned CIT(A) that the reimbursement of expenses is liable for deduction tax at source under section 195 is incorrect, bad in law and liable to be quashed.

9.1 Assuming without admitting that the payments made to overseas subsidiary were chargeable to tax in India, the learned CIT(A) has erred in concluding that the said payments are liable for TDS at the rate of20% as per section 206AA of the IT Act, 1961

9.2 The learned CIT(A) has erred in not appreciating that

(i) Overseas subsidiary was not required to obtain PAN under the provisions of the Income tax Act, 1961 and consequently there was no requirement to furnish its PAN under section 206AA;

(ii) Section 206AA does not override the Double Taxation Avoidance Agreements an or section 90 of the Income tax Act;

(iii) in any case, the TDS rate as per section 206AA cannot exceed the rate at which the income is chargeable to tax in the hands of non-resident.

9.3 In any case and without prejudice, despite having called for and obtained the PAN of overseas subsidiary during the appellate proceedings, the learned CIT(A) erred in concluding that the impugned payments were liable for TDS at 20% under section 206AA of the IT Act, 1961.

10.1 The learned CIT(A) has erred in confirming the levy of interest under section 201(1A) of the Act amounting to Rs. 24,82,57,4411- On facts and in the circumstances of the case and law applicable, interest under section 201 (lA) is not leviable. The appellant denies its liability to pay interest under section 201(lA) of the Income tax Act, 1961.

11.1 In view of the above and other grounds to be adduced at the time of hearing, the appellant prays that the order passed under section 201(1A) be quashed Or in the alternative

(i) Payments made to overseas subsidiary be held as not accruing / arising in India under section 5(2) of the Income tax Act, 1961;

(ii) Payments made to overseas subsidiary be held as outside the purview of section 9(1)(vi) under the Income tax Act, 1961;

(iii) Payments made to overseas subsidiary be held as not in the nature of ‘royalty’ under Article 12 of the DTAA between India – China;

(iv) Payments made to overseas subsidiary be held as outside the purview of section 9(1 )(vii) under the Income tax Act, 1961;

(v) Payments made to overseas subsidiary be held as not in the nature of ‘fees for technical services’ under Article 12 of the DT AA between India – China;

(vi) Payments made to overseas subsidiary to overseas subsidiary be held as not chargeable to tax in India under the provisions of the Income tax Act and the Treaty;

(vii) Payments made to overseas subsidiary be held as not liable for deduction of tax at source under section 195 of the Act.

(viii) In any case and without prejudice, section 206AA and the 20% rate of TDS mentioned thereunder be held as inapplicable in the present case.

(ix) Interest levied under section 201(lA) be deleted.

4. Brief facts of the case are as follows:

The assessee is an Indian company, engaged in the business of development and export of computer software and related services. Infosys Technologies (China) Co. Ltd. (hereinafter referred to as `Infosys China’ or `ITCL’ for the sake of brevity) is a company incorporated in China. It is a wholly owned subsidiary of the assessee. Pursuant to sub­contracting agreement dated 01.10.2005 and 01.08.2011, the assessee sub-contracted certain overseas work in China to Infosys China. During the year under consideration, the assessee made payment of sub-contracting charges to Infosys China. The said payments were made without deduction of tax at source. The assessee’s contention was that the payments were not chargeable to tax under the Act or under the relevant Double Taxation Avoidance Agreement (DTAA).

5. The assessee, however, received order u/s 201(1) and 201(1A) of the I.T.Act (order dated 31.03.2013 for assessment year 2011-2012) whereby the Assessing Officer held that the assessee to be an `assessee in default’ for not deducting tax at source u/s 195 of the I.T.Act. The A.O. held that the payments made to Infosys China is liable for tax deduction u/s 9(1)(vii) of the I.T.Act, as fees for technical services (FTS).

The A.O. while concluding, placed heavy reliance on the order of the Mumbai Bench of the Tribunal in the case of Ashapura Minichem Limited v. ADIT reported in (2010) 40 SOT 220 (Mum.). The A.O. also rejected the plea of the assessee that it is entitled to the exception of section 9(1)(vii)(b) of the I.T.Act (refer page 26 to 36 of the A.O.’s order passed u/s 201(1) and 201(1A) of the Act).

6. Aggrieved, the assessee filed an appeal to the first appellate authority. The CIT(A) confirmed the order passed u/s 201(1) and 201(1A) of the Act. The CIT(A) held that the payments made by the assessee to Infosys China is both liable as FTS and royalty under the domestic law as well under the relevant DTAA.

7. Aggrieved by the order of the CIT(A), the assessee has filed this appeal before the Tribunal. The learned AR has filed elaborate submissions stating that the assessee is not liable for tax deduction at source u/s 195 of the I.T.Act either under the domestic law or under the relevant DTAA. The submissions of the learned AR summarized as follows:-

• Infosys Limited (“the appellant”) is an Indian Company engaged In the Business of development and export of Computer Software and related services.
• The software development and related services undertaken by the appellant for its clients across the world could be onsite work (outside India) and / or offshore work (in India).
• The onsite portion of software work is sub contracted to Infosys China.
• Infosys China undertakes the sub contract work in China In. other words, the services are’ rendered by Infosys China in China. It does not have a PE in India.
• Details of sub contracting charges paid to Infosys China, with description of service, customer name, customer address and customer country for FY 2010-11 [AY 2011-12] and FY 2011-12 [AY 2012-13] are available at page 192 to 198 and page 199 to 205 of paper book filed on 22.1.2015.
• Out of these details only 2 payments were made to Infosys China in FY 2010-11 [A Y 2011-12] where the customer was in India [Sl No 13 and 69 at page 192 and 194 of the paper book] Similarly, during the FY 2011-12 [AY 20~2-13] only 3 payments were made to Infosys China, where the customer was in India [Sl No 12,13,117 at page 199 and 203 of the paper book]. All other payments were in respect of services rendered by Infosys Ltd to overseas customers.
• Save the instances referred to above, the balance payments to Infosys China were in relation to services rendered by Infosys Ltd to overseas customers, which were utilized outside India by Infosys Ltd for the purpose of (a) carrying on business outside India and / or (b) making or earning any income from any source outside India. Thus, these payments would not be regarded as royalty / fees for technical services as per the exception contained in section 9(1)(vi)(b) / 9(1 )(vii)(b). .

Decisions, Circulars relied on

• Infosys Ltd v DDIT (International Taxation) IT(IT)A Nos. 2 & 3/Bang/2014 – dated 25.5.2016 ITAT Bangalore bench [Page 1072 to 1086 of compilation filed on 9.12.2021] Paras 11 to 13
• OGE to IT AT order passed on 27.12.2017 for AY 2009-10 & 2010-11 [page 1088 to 1091 of compilation filed on 9.12.2021] Paras 4 to 8
• Qualcomm Incorporated v ADIT [2015] 56 taxmann.com 179 (Delhi Trib) [Page 910 of compilation filed on 17.3.2017 – Para 67
• Circular No 1/2011 dated 6.4.2011 explaining the provisions of Finance Act 2010 – page 1093 of the compilation filed on 9.12.2021] [Para 5.1]
• Device Driven (India) P Ltd v CIT [2021] 126 taxmann.com 25 Kerala High Court [Page 1140 to 1150 of compilation filed on 9.12.2021] [Paras 23 to 30]
• PCIT v MotifIndiaInfotech P Ltd [2018] 409 ITR 178 (Guj) [Page 1119 to 1126 of compilation filed on 19.1.2022] Para 7 to 11
• Ashapura Minichem Ltd v ADIT [2010] 131 TTJ 291 Mumbai Trib [Page 854 to 868 of compilation filed on 17.3.2017] Para 5, Para 19
• The ITAT Mumbai Bench in Deloitte Haskins & Sells v ACIT [2017] 79 taxmann.com 175 Para 17
• Announcement 19 issued on 16th March 20111 by the State Administration of Taxation, China on the treatment of technical fees under the India-China DTAA.
• The Announcement 19 indicates that unless the activities underlying the technical fees give rise to an establishment under the domestic law of China or a permanent establishment under the treaty in China, such fees for technical service shall not be subject to corporate income tax in China. The taxability of ‘fees for technical service’ only arise if the services occur in China. To put it otherwise, services performed outside China are not subject to tax in China
• Circular issued by one of the Treaty partner country is applicable in the other country. Vishakhapatnam Port Tiust v CIT (1983) 144 ITR 146 (AP) & Concentrix ‘Services Netherlands BV vITO (TDS) [2021] 127 taxmann.com 43 (Delhi) – Para 17.6 to 18
• The term’ Fees for technical services’ under the India – China DT AA is defined as any payment for the provision of services of managerial, technical or consultancy nature by a resident of a Contracting State in the other Contracting State. Thus, the provision of services by Infosys China has to be in the other contracting state i.e., India. In the present case, it is an admitted fact that Infosys China did not render any service in India. Thus, the definition of ‘Fees for technical services’ under the DTAA is not satisfied. Consequently, the sub contracting charges paid to Infosys China cannot be regarded as ‘Fees for technical services’ under the Treaty.

Without prejudice,

• For the AY 2011-12; sub contracting charges of Rs.16,74,44,314 was paid on 1.5.2010 [Page 19 of the paper book] which is prior to the enactment of Finance Act 2010. The said Act received the presidential assent on 8.5.2010. As the above payment was made before 8.5.2010, the law applicable on the date of payment is applicable. As per the decision of the Supreme Court in Ishikawajima Harima Heavy Industries Ltd v DIT 288 ITR 407, in order to attract ‘fees for technical services’ under section 9(1)(vii), the services must be rendered in India This position was overruled by the Finance Act 2010 w.e.f. 8.5.2010. The OGE to ITAT order passed for AY 2009-10 and AY 2010-11 has accepted the fact that services were rendered by Infosys China outside India only. Thus, applying the said principles, sub contracting charges of Rs.16,74,44,314·paid on l.5.2010 for services rendered by Infosys China outside India was not chargeable to tax in India ·and consequently not liable for TDS under section 195.

Non applicability of section 206AA

• Without prejudice, for AY 2011-12, the. learned AO has computed TDS under section 195 at 20% by invoking section 206AA for the reason that PAN of Infosys China is not available. [refer page 106 of the order passed under section 201 (1)&(1 A) for AY 2009-10 to AY 2011-12] The learned CIT(A) called for the PAN of Infosys China and the same was submitted on 27.9,2013. [Page 363 to 366 of paper book] However, the learned CIT(A)has not allowed any relief on this issue.
• Ground No 9.1 to 9.3 before the Tribunal challenges the applicability of section 206AA.
• DTAA overrides section 206AA – Decisions relied on – Nagarjuna Fertilizers and Chemicals Ltd v ACIT [2017] 78 taxmann.com 264 (Para 33) Hyderabad Special bench.
• Danisco India P Ltd v UOl [2018] 90 taxmann.com 295 (Delhi). Thus, assuming without admitting that the TDS is applicable on sub contracting charges paid to Infosys China, the rate of TDS should be considered as 10% as per the India – China DT AA and not at 20% as per section 206AA.
• It may be noted that while passing the order under section 201(1)&(1A) for AY 2012-13, the learned AO himself has calculated the TDS liability at 10% as per the India – China DTAA. The appellant submits accordingly.

8. The learned Standing Counsel, on the other hand, had made elaborate argument contending that the assessee is liable both under the domestic law as well as under the relevant DTAA for non-deduction of tax for payment made to Infosys China. The submissions of the learned Standing Counsel in this regard read as follows:-

“1. It is submitted that the payment made by the assessee to Infosys China is in the nature of Fee For Technical Services and Royalty. Insofar as the contention of the assessee regarding the exception provided to Section 9(1)(vii) of the Act is concerned, the same has been dealt by the AO at para-2.6 page 28 of the 201 order. It is submitted that as the assessee has contracted to render services to the customers outside India and the payment being made from India, source rule of income being followed by India, the income accrues or arises in India and hence taxable in India.

2. The above position has been laid down by the Hon’ble Supreme Court in the case of GVK Industries 371 ITR 453 (pages 1 to 12 in the paper book).

3. It is submitted that even as per Explanation to Section 9(1)(vii) of the Act, the payment would fall within the ambit of FTS.

4. It is further submitted that the assessee has claimed benefit of Section 10A/ 10B of the Act claiming to be export of software from specified unit from India. Hence it is not open to the assessee to contend that no services were rendered / utilised in India.

5. The reliance on the judgement of Hon ‘ble Supreme Court In the case of Ishikawajma Harima Heavy Industries Ltd is not applicable in view of amendment to Section 9(1)(vii) r.w Explanation. In view of the amendment, rendering of services in India is no more requirement and so for as the utilisation is concerned as final product after utilisation of the partial services rendered by Infosys China being exported from India, the test of utilisation also satisfied.

6. The issue raised in the above appeal is covered by the decision of the ITAT Mumbai bench in the case of Ashapura Minichem Ltd, wherein the similar issues has been considered in the context of DTAA with China.

7. The reliance placed by the assessee on the judgement of the Kerala High Court in the case of Device Driven India Private Limited, the said judgement is not applicable to the facts and circumstances of the present case as the services rendered by Infosys China have been utilised by the assessee in India before exporting the software Wherefore it is respectfully prayed that this Hon’ble Tribunal may be pleased to confirm the order passed u/s 201 of the act and order of CIT(A) and dismissed the appeal filed by the assessee in the interest of Justice and equity.”

9. We have heard rival submissions and perused the material on record. We are of the view that the issue of tax deduction at source u/s 195 of the I.T.Act on the payment made by the assessee to Infosys China, whether it comes within the purview of section 9(1)(vii) is squarely covered by the order of Mumbai Bench of the Tribunal in the case of Ashapura Minichem Limited v. ADIT (supra). The Mumbai Bench of the Tribunal had held that the retrospective amendment to section 9, by the Finance Act, 2010 and substitution of Explanation to the said section, the effect of the judgment of the Hon’ble Apex Court in the case of Ishikawajima Harima Heavy Industries Ltd. v. DCIT reported in (2007) 288 ITR 408 (SC) has been negated (The Hon’ble Apex Court had held that rendering of services and utilization in Indian tax jurisdiction was a must for the purpose of taxability u/s 9(1)(vii) of the I.T.Act). It was concluded by the Mumbai Tribunal that it is no longer necessary that, in order to invite taxability u/s 9(1)(vii) of the I.T.Act, the services must be rendered in Indian Tax jurisdiction. The Mumbai Bench of the Tribunal, as regards the liability under the domestic law had held as follows:-

“4. We have given our careful consideration to the rival contentions, perused the material on record and duly considered factual matrix of the case as also the applicable legal position.

5. As regards the taxability under the domestic law, we have noted that section 9(1)(vii) provides that “ income by way of fees for technical services payable by, inter alia, “a person who is a resident, except where the fees are payable in respect of services utilised in a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India” will be deemed to accrue or arise in India. There is also no dispute that the fees received by the assessee is covered by the scope of ‘fees for technical services’ under Explanation 2 to Section 9(1)(vii) which provides that “ for purposes of this clause, “fees for technical services” means any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services (including the provision of services of technical or other personnel)”. There is also no dispute that the exclusion clause set out in the said definition is not attracted.

6. The case of the assessee, however, is that since the services are not rendered in India, the provisions of Section 9(1)(vii) cannot be invoked. The support for this proposition is assessee’s reliance on the Hon’ble Bombay High Court’s judgment in the case of Clifford Chance vs. DCIT6. It is, therefore, necessary to deal with this case in some detail.

7. In the case of Clifford Chance, the appellant, an English law firm, was rendering legal services in connection with three projects in India, namely, Bhadravati Power Project, Vizag Power Project and Raviva Oil and Gas Field Project. While the claim of the assessee was that only such portion of the fees received, in connection with these projects is taxable in India as is attributable to services performed in India, the Assessing Officer opined that the total fees received for the India Project, whether the work was done in India or outside India, was taxable in India. When this dispute finally travelled before the Hon’ble Bombay High Court, it was, inter alia, contended by the assessee that “the place of utilization of service is not relevant but place of performance of the service is what 6 (supra) would be determinative (of taxability)……” and reliance was placed on Hon’ble Supreme Court’s judgment in the case of Ishikawajima Harima Heavy Industries Ltd. vs. DIT7 Their Lordships noted that the taxability is to be determined under section 9(1)(vii) of the Act, and observed as follows :

“The apex court had occasion to consider the above question in the case of Ishikawajima Harima [2007] 288 ITR 408 (SC), wherein, while interpreting the provisions of section 9(1)(vii)(c) of the Act, the Supreme Court held as under (page 444) :

“Section 9(1)(vii)(c) of the Act states that ‘a person who is a nonresident, where the fees are payable in respect of services utilized in a business or profession carried on by such person in India, or for the purposes of making or earning any income from any source of India.’”

Reading the provision in its plain sense, as per the apex court it requires two conditions to be met the services which are the source of the income that is sought to be taxed, has to be rendered in India, as well as utilized in India, to be taxable in India. Both the above conditions have to be satisfied simultaneously. Thus for a nonresident to be taxed on income for services, such a service needs to be rendered within India, and has to be part of a business or profession carried on by such person in India.

In the above judgment, the apex court observed that (page 444):

“section 9(1)(vii) of the Act must be read with section 5 thereof, which takes within its purview the territorial nexus on the basis whereof tax is required to be levied, namely, (a) resident; and (b) receipt of accrual of income”. According to the apex court, the global income of a resident although is subjected to tax, the global income of a non­resident may not be. The answer to the question would depend upon the nature of the contract and the provisions of the DTA. What is relevant is receipt or accrual of income, as would be evident from a plain reading of section 5(2) of the Act subject to the compliance with 90 days rule.

As per the above judgment of the apex court, the interpretation with reference to the nexus to tax territories also assumes significance. Territorial nexus for the purpose of determining the tax liability is an internationally accepted principle. An endeavour should, thus, be made to construe the taxability of a nonresident in respect of income derived by it. Having regard to the internationally accepted principle and the DTAA, no extended meaning can be given to the words “income deemed to accrue or arise in India” as expressed in section 9 of the Act. Section 9 incorporates various heads of income on which tax is sought to be levied by the Republic of India. Whatever is payable by a resident to a nonresident by way of fees for services, thus, would not always come within the purview of section 9(1)(vii) of the Act. It must have sufficient territorial nexus with India so as to furnish a basis for imposition of tax. Whereas a resident would come within the purview of section 9(1)(vii) of the Act, a non­resident would not, as services of a nonresident to a resident utilized in India may not have much relevant in determining whether the income of the nonresident accrues or arises in India. It must have a direct link between the services rendered in India. When such a link is established, the same may again be subjected to any relief under the DTAA. A distinction may also be made between rendition of services and utilization thereof.

With the above understanding of law laid down by the apex court, if one turns to the facts of the case in hand and examines them on the touchstone, section 9(1)(vii)(c) which clearly states…where the fees are payable in respect of services utilized in a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India”. It is thus, evident that section 9(1)(vii)(c), read in its plain, envisages the fulfillment of two conditions : services, which are source of income sought to be taxed in India must be (i) utilized in India, and (ii) rendered in India. In the present case, both these conditions have not been satisfied simultaneously.

8. It is thus clear that the judgment of Hon’ble Bombay High Court rests on the legal premises that, under section 9(1)(vii), “services, which are source of income sought to be taxed in India, must be (i) utilized in India; and (ii) rendered in India” and the conceptual premises that 8 Clifford Chance Vs DCIT (supra) “territorial nexus for the purpose of determining the tax liability is an internationally accepted principle”. Learned counsel has laid lot of emphasis on these two principles.”

9.1 As regards the issue whether or not income earned by the Chinese company is liable to be taxed in India under the India-China Tax Treaty, the Tribunal had categorically held that the deeming fiction under Article 12(6) of India-China DTAA will have application and royalty or fees for technical services shall deem to arise in a contracting State where the payer is situated. In other words, it was held by the Mumbai Tribunal that irrespective of the situs of technical services having been rendered, according to India-China DTAA, the fees for technical services will be deemed to have been accrued in the tax jurisdiction in which the person making the payment is located. The relevant finding of the Tribunal holding that the assessee is liable under the relevant DTAA read as follows:-

“12. The next issue to be examined by us is whether or not the income earned by the Chinese company is liable to be taxed in India under Article 12 of the India China tax treaty.

13.Article 12 of the India China tax treaty provides as follows:

Royalties and fees for technical services

1. Royalties or fees for technical services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other Contracting State.

2. However, such royalties or fees for technical services may also be taxed in the Contracting State in which they arise, and according to the laws of that Contracting State, but if the recipient is the beneficial owner of the royalties or fees for technical services, the tax so charged shall not exceed 10 per cent of the gross amount of the royalties of fees for technical services.

3. The term “royalties” as used in this Article means payment of any kind received as a consideration for the use of or the right to use, any copyright of literary, artistic or scientific work including cinematograph films and films or tapes for radio or television broadcasting, any parent, trade mark design or model, plan secret formula or process, or for the use of, or the right to use, industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience.

4. The term “fees for technical services” as used in this Article means any payment for the provision of services of managerial, technical or consultancy nature by a resident of a Contracting State in the other Contracting State, but does not include payment for activities mentioned in paragraph 2(k) of Article 5 and Article 15 of the Agreement.

5. The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the royalties or fees for technical services, being a resident of a Contracting State, carries on business in the other Contracting State in which the royalties of fees for technical services arise, through a permanent establishment situated therein, or performs in that other Contracting State independent personal services from a fixed base situated therein; and the right, property orcontract in respect of which the royalties or fees for technical services  are paid is effectively connected with such permanent establishment or fixed base. In such case the provisions of Article 7 or Article 14, as the case may be, shall apply.

6. Royalties or fees for technical services shall be deemed to arise in a Contracting State when the payer is the Government of that Contracting State, a political subdivision a local authority thereof or a resident of that Contracting State. Where, however the person paying the royalties or fees for technical services, whether he is a resident of a Contracting State or not, has in a Contacting State a permanent establishment or a fixed best in connection with which the liability to pay the royalties or fees for technical services was incurred, and such royalties or fees for technical services are borne by such permanent establishment or fixed base then such royalties or fees f or technical services shall be deemed to arise in the Contracting State in w hich the permanent establishment or fixed base is situated.

7. Where by reason of a special relationship between the payer and the beneficial owner or between both of them and some other person, the amount of the royalties or fees for technical services, having regard to the use right or information for which they are paid,
exceeds the amount which would have been agreed upon by the payer and the beneficial owner in the absence of such relationship, the provisions of this Article shall apply only to the last mentioned amount. In such case, the excess part of the payments shall remain taxable according to the law of each Contracting State, due regard being had to the other provisions of this Agreement.

14. A plain reading of the above treaty provisions show that under Article 12 (4) shows that what is covered by the basic definition of the expression ‘fees for technical services’ is the “Provision of services of managerial, technical or consultancy nature” by a resident of a Contracting State in the other Contracting State. In other words, technical services being provided by resident of one of the contracting state in the other contracting state is what will be covered by the basic rule under Article 12 (4). The expression ‘provision of services’ is not defined or elaborated anywhere in the tax treaty. The argument of the learned counsel is that ‘provision of services’ should be construed as `rendition of services, but we will come to that aspect a little later.

15. It is also important to take note of the deeming fiction under Article 12(6) of the treaty. This article, inter alia, provides that, “Royalties or fees for technical services shall be deemed to arise in a Contracting State when the payer is the Government of that Contracting State, a political subdivision a local authority thereof or a resident of that Contracting State”. In other words, irrespective of the situs of technical services having been rendered, according to this treaty provision, the fees for technical services will be deemed to have accrued in the tax jurisdiction in which person making the payment is located. That is a typical manifestation of the source rule that we have discussed earlier in this order in the context of domestic law provisions, and which, in principle, requires taxability of an income in the tax jurisdiction in which it is sourced. Normally, the source of an income is the country in which person making the payment is located. There could, of course, be situations in which a payment related to business or profession being carried out in one country is being made by a resident of another country who is carrying out such business or profession in the first country. In these situations, even though the payment is not received from a resident of the first country, the true source of earning is located in the first country. Second limb of Article 12(6) takes care of such situations and makes the manifestation of source rule even more unambiguous. It provides that even when person making the payment is not resident of the other contracting state but the payment is being made by him in connection with a permanent establishment or fixed base in the other contracting state, such royalties and fees for technical services will be deemed to have accrued in the other contracting state. In such a situation, the true source jurisdiction will be that other contracting state even though the payment may be made from outside both the contracting states, and, therefore, the income is deemed to have accrued in that other contracting state.

16. When we put it to the learned counsel that in view of the deeming fiction of Article 12(6), it is not really necessary to go into the broader question about the merits of his arguments on the scope of Article 12(4) and proceed on the basis that the payments made by an Indian company will be deemed to have arisen in India even under the Indo China tax treaty, he has submitted that once a fees for technical service is not covered by the basic provisions of Article 12(4), which is confined to services having been rendered in the source state, there is no occasion of invoking Article 12 (6). It is submitted that the deeming provision for Article 12(6) is confined to what is already covered by ‘royalties and fees for technical services’ which are neatly defined in Article 12(4) and it does not seek to extend the scope of the said basic definition. It is only after 12(4) is satisfied that the deeming fiction can be invoked. He invites our attention to corresponding article of China Pakistan tax treaty10 , i.e. Article 13, which does not have any such deeming fiction but which provides that “the term ‘fees for technical services’, as used in this Article, means any consideration (including any lump sum consideration) for the provision of rendering of any managerial, technical or consultancy services by a resident of one of the contracting state in the other contracting state”. It is pointed out that in China Pakistan tax treaty, there is no additional source rule, i.e. deeming fiction, for the fees for technical services, even though there is a deemingfiction of source rule for ‘royalties’. It is th us pointed out that Chinese tax treaties, which do not generally have ‘fees for technical services’ clause, have a ‘place of performance test’, or negation of source rule, in several tax treaties. We are urged to recognize this underlying principle in Chinese tax treaties.

It is also pointed out that this phenomenon is not unique to Chinese tax treaties. Our attention is invited to India Israel tax treaty11 which provides, under Article 13(5), that ‘fees for technical services’ will be deemed to arise in a contracting state only when services are rendered in that state and the payer is resident of that state. A reference is then made to India Saudia Arabia tax treaty in which a specific provision for taxability of ‘fees for technical services’ is said to be altogether absent, which, according to the learned counsel, shows that it is not at all necessary that the source rule must extend to all payments for fees for technical services.

17. We are unable to see any merits in this line of arguments either. Whether a particular income is to be covered by the benefits of a tax treaty or not is essentially a decision at the level of the Government and it depends on several considerations ‐ all of which do not necessarily reflect sound taxation or sound economic policies. Just because India does not seek a source taxation right in tax treaty with Saudia Arabia, or because Pakistan gives up a source taxation right in tax treaty with China, it cannot influence as to what is the scope of India China tax treaty. It is not at desirableto be influenced with what has been decided in other tax treaties entered into by the contracting states. As regards the references to India Israel and India Saudia Arabaia tax treaties12 , therefore, these are tax treaties with different countries and whatever is decided in these tax treaties does not influence the scope of tax treaty before usAs far as China Pakistan tax treaty is concerned, we have noted that while China Pakistan tax treaty refers to “provision of rendering of any managerial, technical or consultancy services (emphasis supplied by us)”, India China tax treaty refers to “provision of services of managerial, technical or consultancy services”. The scope the expression ‘provision of services’ has to be something wider than ‘provision of rendering of services’. If at all this contrast with China Pakistan tax treaty shows something, this contrast shows that the India China tax treaty intends to follow the source rule, while China Pakistan tax treaty gives up the source rule for fees for technical services. The difference between these two clauses can hardly be missed, and it becomes all the more clear when one takes into account the fact that while there is a deeming fiction clause in Article 12(6) of India China tax treaty, taking care of the situations in which payments are made by persons not resident in the other contracting state, though they have a permanent establishment or fixed base in the other contracting state, there is no such corresponding clause in China-Pakistan tax treaty. It is thus clear, from the material placed before us, that while India China tax treaty follows the source rule in the matter of fees for technical services, Pakistan China tax treaty does not do so. That’s a conscious choice by the respective Governments, and just because China Pakistan have negotiated a bilateral tax treaty in a particular manner, it does not mean that India China tax should also be construed on the same basis.

18. We have also noted that any other meaning being assigned to the scope expression ‘fees for technical services’ will render Article 12(6) meaningless. When we put this proposition to the learned counsel for the assessee, he could not point out any situations in which, in such a situation, Article 12(6) will have any application but then he added that merely because  rendered infructuous, he should not be shy of giving the treaty a correct lit eral interpretation. We donot think that will be a correct approach for us. In the case of Hindalco Industries Ltd Vs ACIT14 this Tribunal had an occasion to set out the principles on the basis of which tax treaties are to be interpretated. Summarzing these principles, and speaking through one of us (i.e. the Accountant Member), this Tribunal has observed as follows: The school of thought emerging from the above discussions 14 94 ITD 242 ITA No. 2508/Mum/08 Assessment year 200809 Page 28 of 31 leads us to conclude that the principles governing interpretation of tax treaties can be broadly summed up as follows :

* A tax treaty is an agreement and not taxing statute, even though it is an agreement about how taxes are to be imposed. The principles adopted in the interpretation of statutory legislation are not applicable in interpretation of treaties.

* A tax treaty is to be interpreted in good faith in accordance with the ordinary meaning given to the treaty in the context and in the light of its objects and purpose.

* A tax treaty is to required to be interpreted as a whole, which essentially implies that the provisions of the treaty are required to be construed in harmony with each other.

* The words employed in the tax treaties not being those of a regular Parliamentary draughtsman, the words need not examined in precise grammatical sense or in literal sense. Even departure from plain meaning of the language is permissible whenever context so requires, to avoid the absurdities and to interpret the treaty utres magis valeat quam pereat i.e., in such a manner as to make it workable rather than redundant.

* A literal or legalistic meaning must be avoided when the basic object of the treaty might be defeated or frustrated insofar as particular items under consideration are concerned. Words are to be understood with reference to the subject matter, i.e., verbaaccopoenda sunt secundum subjectum materiam.

* It is inevitable that interpreter of a tax treaty is likely to be required to cope with disorganised composition instead of precision drafting. Therefore, the words employed in the treaty are to be given a general meaning general to lawyers and general to layman alike. * When a tax treaty does not define a term employed in it, and the context of the treaty so requires, it can be given a meaning different from domestic law meaning thereof. The meaning of the undefined terms in a tax treaty should be determined by reference to all of the relevant information and all on the relevant context. There cannot, however, be any residual presumption in favour of a domestic law meaning of a treaty term. (Emphasis supplied by us by underlining)

19. In view of the above, a literal interpretation to a tax treaty, which renders treaty provisions unworkable and which is contrary to the clear and unambiguous scheme of the treaty, has to be avoided. In any case, even on merits, we are of the considered view that the scope of the expression ‘provision for services’ is much wider in scope that the expression ‘provision for rendering of services’ and will cover the services even when these are not rendered in the other contracting state, as long as these services are used in the other contracting state. Therefore, the technical services in question are clearly covered by Article 12(4) of the treaty. This position is further clarified, and is specifically covered by the deeming fiction under Article 12(6) as well. The impugned payment to the Chinese company, therefore, is covered by the scope of “fees for technical services” within meanings assigned to that expression under Article 12 of the Indian China tax treaty, and is taxable in India as such.

20. For the detailed reasons set out above, we are of the considered view that the impugned payment was taxable in India under the provisions of the Indian Income Tax Act, 1961, as also under the provisions of the applicable India China tax treaty. The tax withholding liability of the appellant, under section 195, being in the nature of vicarious liability, therefore, did extend to deduction of tax at source from the payment of US $ 1,000,000 made to the Chinese company. We, therefore, approve the conclusions arrived at by the learned CIT(A) and decline to interfere in the matter.”

9.2 The learned AR had sought to distinguish the above order of the Tribunal. We shall consider each of the arguments of the learned AR. As regards non-applicability of section 9(1)(vii) of the Act, the learned AR submitted that the issue is covered in favour of the assessee by the judgment of the Hon’ble Apex Court in the case of Ishikawajima Harima Heavy Industries Ltd. v. DCIT (supra). The learned AR submitted that the twin conditions as laid down by the Hon’ble Apex Court, i.e., the services being (a) utilized in India, and (b) rendering in India, are not satisfied. Therefore, the provisions of section 9(1)(vii) is not applicable. The reliance by the learned AR on the judgment of the Hon’ble Apex Court in the case of Ishikawajima Harima Heavy Industries Ltd. v. DCIT (supra) is not applicable in view of the retrospective amendment to section 9(1)(vii) of the Act read with Explanation. In view of the amendment, rendering of services in India is no more required. As regards the utilization is concerned as a final product after utilization of partial services rendered by Infosys China being exported by the assessee the test of utilization is satisfied. The learned AR has further made claim on non-applicability of TDS provision considering the beneficial provision the treaty between India and China. Since the said contention is centered around the applicability of Article 12 of the Treaty, the same is reproduced below:-

“Royalties and fees for technical services

1. Royalties or fees for technical services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other Contracting State.

2. However, such royalties or fees for technical services may also taxed in the Contracting State in which they arise/ and according the laws of that Contracting State/ but if the recipient is the beneficial owner of the royalties or fees for technical services, the tax so charged shall not exceed 10 per cent of the gross amount the royalties or fees for technical services.

3. The term “royalties” as used in this Article means payment of a kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films and films or tapes for radio or television broadcasting, any patent, trade mark, design or model, plan secret formula or process/ or for the use of, or the right to use, industrial, commercial or scientific equipment or for information concerning industrial, commercial or scientific experience.

4. The term ”fees for technical services” as used in this Article means any payment for the provision of services of managerial, technical or consultancy nature by a resident of a Contracting State in the other Contracting State/ but does not include payment for activities mentioned in paragraph 2(k ) of Article 5 and Article 15 of the Agreement.

5. The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the royalties or fees for technical services, being a resident of a Contracting State, carries on business in the other Contracting State in which the royalties or fees for technical services arise, through a permanent establishment situated therein, or performs in that other Contracting State independent personal services from a fixed base situated therein and the right, property or contract in respect of which the royalties or fees for the technical services are paid is effectively connected with such permanent establishment or fixed base. In such case the provisions of Article 7 or Article 14, as the case may be, shall apply.

6. Royalties or fees for technical services shall be deemed to arise in a Contracting State when the payer is the Government of that Contracting State, a political sub-division, a local authority thereof or a resident of that Contracting State. Where, however, the person paying the royalties or fees for technical services, whether he is a resident of a Contracting State or not, has in a Contracting State a permanent establishment or a fixed base in connection with which the liability to pay the royalties or fees for technical services was incurred, and such royalties or fees for technical services are borne by such permanent establishment or fixed base, then such royalties or fees for technical services shall be deemed to arise in the Contracting State in which the permanent establishment or fixed base is situated.

7. Where, by reason of a special relationship between the payer and the beneficial owner or between both of them and some other person, the amount of the royalties or fees for technical services, having regard to the use, right or information for which they are paid, exceeds the amount which would have been agreed upon by the payer and the beneficial owner in the absence of such relationship, the provisions of this Article shall apply only to the last-mentioned amount. In such case, the excess part of the payments shall remain taxable according to the laws of each Contracting State, due regard being had to the other provisions of this Agreement.”

9.3 The learned AR has directly taken a plunge into interpretation of Article 12(4) and juxtaposing it with Article 12(6), without any regard to para (2). Para 1 is dealing with primary right to tax which lies with resident country. As per para 2, the secondary right to tax “fees for technical services” lies with the source country in which such payments arise. With respect to definition of the term “fees for technical services”, reference may be made to Article 12(4) which also deals with general scope of the term “accrual”. With respect to deemed accrual, reference may be made to the specific provision i.e., Article 12(6). It is well accepted that what is in specific prevails over generic items. Further, the Article 12(4) is primarily dealing with definition of the term FTS and therefore there is a necessity to read down `accrual’ concept as referred thereunder to the extent there is conflict with Article 12(6) of the Act. The provisions of the Article 12(4) and 12(6) have to be read harmoniously but not antagonistically by applying well accepted and well settled canons of construction of statutes i.e. doctrine of harmonious construction. As Article 12(6) deems that the payment arises in the country of payer, thereby attracting provisions of Article 12(2) of the Indo-China treaty. Therefore, in the absence of any distinguishing factor, we are constrained to follow the ruling of Mumbai ITAT in the case of Ashapura Minichem Limited v. ADIT (supra).

9.4 The learned AR had sought to claim the benefit of exception provided u/s 9(1)(vii)(b) of the I.T.Act, which includes the payment by a resident for services utilized in a business carried on by such person outside India or for the purpose of earning any income from any source outside India. This plea of the learned AR is not legally tenable. First, for the purpose of taxation, the assessee is different from its subsidiary in China, i.e., Infosys China. The assessee had submitted that it has procured the contracts from overseas clients and the same is sub-contracted to Infosys China. Given the above background, the assessee is now trying to portray that the activities carried on by Infosys China is business activity of the assessee, which is not correct. Merely because the clients are outside India does not means that the assessee is carrying on business outside India. In this context, we rely on the judgment of the Hon’ble Delhi High Court in the case of CIT Hawells India Ltd. reported in (2013) 352 ITR 376 (Delhi), wherein their Lordship made a distinction between receipt and source. It was held by the Hon’ble High Court that payment made to US company for certification facilitating Export, the source of income is within India and the assessee do not come with the exception of section 9(1)(vii)(b) of the I.T.Act. The relevant finding of the Hon’ble Delhi High Court reads as follows:-

”13. Section 9(i)(vii)(b) contemplates a source located outside India. It is difficult to conceptualise the place/ situs of the person who make payment for the export sales as the source located outside India from which assessee earned profits. The export contracts obviously are concluded in India and the assessees products are sent outside India under such contracts. The manufacturing activity is located in India. The source of income is created at the moment when the export contracts are concluded in India. Thereafter the goods are exported in pursuance of the contract and the export proceeds are sent by the importer and are received in India. The importer of the assessees products is no doubt situated outside India, but he cannot be regarded as a source of income. The receipt of the sale proceeds emanate from him from outside India. He is, therefore, only the source of the monies received. The income component of the monies or the export receipts is located or situatedonly in India. We are making a distinction between the source of the income and the source of the receipt of the monies. In order to fall within the second exception provided in Section 9(1)(vii)(b) of the Act, the source of the income, and not the receipt, should be situated outside India. That condition is not satisfied in the present case. The Tribunal, with respect, does not appear to have examined the case from this aspect. Its conclusion that the technical services were not utilised for the assessees business activity of production in India does not bring the assessees case within the second exception in Section 9(1)(vii)(b) of the Act. It does not bring the case under the first exception either, because in order to get the benefit of the first exception it is not sufficient for the assessee to prove that the technical services were not utilised for its business activities of production in India, but it is further necessary for the assessee to show that the technical services were utilized in a business carried on outside India. Therefore, we cannot also approve of the Tribunals conclusion in para 29 of its order to the extent it seems to suggest that the assessee satisfies the condition necessary for bringing its case under the first exception. Be that as it may, as we have already pointed out, since the source of income from the export sales cannot be said to be located or situated outside India, the case of the assessee cannot be brought under the second exception provided in the Section

14. Mr. Vohra, learned counsel for the assessee, however, contended that income arose not only from the manufacturing activity but also arose because of the sales of the products and if necessary a bifurcation of the income should be made on this basis and that portion of the income which is attributable to the export sales should qualify for the second exception. This argument is only a limb of the main contention that the income arises from the export sales and the source of the income is located outside India. We have already expressed our difficulty in accepting that argument. It is true that the profits arise both from the manufacturing activity and from the sale. There are several authorities dealing with this question in the context of cases where an assessee had its manufacturing facility in British India but sold the goods outside British India. In such cases, it has been held that the profits arose both from manufacture and the sales and that part of the profit which arises from sales outside British India would be exempt from tax: See Anglo French Textiles Co. Ltd. v. CIT, (1953) 23 ITR 101 (SC); CIT v. Ahmedbhai Umarbhai & Co. (supra).But these cases are not of any assistance to the assessee in the present case since the contention here is that the source of income is the export sales and the export sales are located outside India.

15. For these reasons we are unable to hold that the assessees case falls under the second exception provided in Section 9(1)(vii)(b) of the Act. In other words, we are unable to accept that the fees for technical services were paid by the assessee to the US Company for the purpose of making or earning any income from any source outside India.”

9.5 Further, the assessee has claimed benefit of section 10A / 10B of the I.T.Act for the export of software from the specified units from India. Hence, it is not open to the assessee to contend that no services were rendered or utilized in India. The learned AR had placed reliance on the judgment of the Hon’ble Kerala High Court in the case of Device Driven (India) Pvt. Ltd. v. CIT reported in 126 taxman.com 25. The said judgment is not applicable to the facts of the present case, as the services rendered by Infosys China has been utilized by the assessee in India before exporting the software. The issue of claim of benefit of exception provided u/s 9(1)(vii)(b) of the Act has been elaborately dealt by the Assessing Officer in the impugned order passed u/s 201(1) and 201(1A) of the I.T.Act. The A.O. followed various judicial pronouncements including AAR Ruling in assessee’s own case reported in 350 ITR 178 (AAR), wherein the facts are identical to that of the instant case and held that the assessee’s case does not fall with the exception of section 9(1)(vii)(b) of the Act. The relevant observation of the AO in this regard reads as follows:-

“2. It is claimed by Infosys that only onsite work in China is subcontracted by Infosys to ITCL. This is based on the assumption made by Infosys Limited that only work pertaining to clients located in China is outsourced to ITCL. In the submission dated 24th October 2011 at page 18 of Annexure V it is claimed that the Infosys subcontracts work to ITCL only in respect of customers in China. It is also claimed that ITCL provides software development services on behalf of Infosys to customers in China. It is also claimed that the entire software development and other incidental and ancillary activities is carried out in China. Therefore, it is stated that services of ITCL are utilized by Infosys in a business carried on by Infosys outside India.

2.1 There is no basis at all to this claim. This is not factually correct. Annexures to the submission dated March 22nd 2012 given the details of those customers of Infosys Limited whose projects are outsourced to ITCL. In FY 2008-09 only in respect of one customer from China, the work has been outsourced to ITCL. None of the customers are from China for the FY 2009-10,

9.6 The learned AR had raised an alternate claim for the assessment year 2011-2012. It was submitted that subcontracting charges of Rs.16,74,44,314 was paid on 01.05.2010, which is prior to the enactment of Finance Act, 2010 (since the said Act received the presidential assent on 08.05.2010). Therefore, it was contended that the assessee cannot be made liable for the tax liability on the said payment u/s 201(1) and 201(1A) of the I.T.Act. In this context, the learned AR relied on the judgment of the Hon’ble Apex Court in the case of Ishikawajima Harima Heavy Industries Ltd. v. DCIT (supra) and the order of the Tribunal in assessee’s own case for assessment year 2009-2010 and 2010-2011 in IT(TP)A Nos.2 & 3/Bang/2014 (order dated 25.05.2016). The assessee has also placed on record the order giving effect to the ITAT order wherein it has been accepted that the services were rendered by Infosys China outside India only. Thus, applying the dictum laid down by the Hon’ble Apex Court it was submitted that the assessee cannot be fastened with the liability u/s 201(1) of the I.T.Act in respect of contracting charges paid on 01.05.2010. The ITAT in assessee’s own case for assessment years 2009-2010 and 2010-2011 had restored the issue of payments made prior to 08.05.2010 to the AO for de novo consideration. The relevant finding of the ITAT in assessee’s own case (supra), reads as follows:-

“11. Thus, it is clear that when the services are not rendered in India, then merely because of the retrospective amendment by which the pre-requisition condition of rendering of services in India had been done away, would not impose a liability on the assessee to deduct tax at source on the payment made prior to such retrospective amendment. Accordingly, we are of the view that retrospective amendment will not change withholding tax liability of the deductor on the payment made prior to such amendment brought into statute. However, this legal proposition applies only in respect of payments which are on account of services rendered outside India by the non­resident. Though the assessee has claimed that payment in question has been made to Chinese subsidiary, ITCL in respect of services provided outside India, however, the AD rejected this claim of assessee by stating in para 2 and 2.1 at pages 26 & 27 of his order as under:-

“2. It is claimed by Infosy that only onsite work in China is sub-contracted by Infosys to ITCL. This is based on the assumption made by Infosys Limited that only work pertaining to clients located in China is outsourced to ITeL. In the submission dt. 24.10.2011 at page 18 of Annexure V it is claimed that the Infosys sub-contracts work to ITCL only in respect of customers in China. It is also claimed that ITCL provides software development services on behalf to Infosys to customers in China. It is also claimed that the entire software development and other incidental and ancillary activities is carried out in China. Therefore it is stated that services of ITCL are utilized by Infosys in a business carried on by Infosys outside India.

2.1 There is no basis at a/l to this claim. This is not factually correct. Annexures to the submission dt. March 22″d 2012 gives the details of those customers of Infosys Limited whose projects are outsourced to ITCL in FY 2008-09 only in respect of one customer from China, the work has been outsourced to ITCL None of the customers are from China for the FY 2009-10 whose work has been outsourced to ITCL. Similar is the case for FY 2010-11 where there are only two customers based in China whose work has been outsourced by Infosys to ITCL.”

12. The AO has stated in the order that this claim is factually not correct and it is only in respect of one customer from China for the A Y 2009-10 and none of the customers from China for the AY 2010-11 in respect of which the work has been outsourced to ITCL. Since the hearing for these two assessment years have been confined only on the point of applicability of retrospective amendment in respect of withheld tax liability towards payment made to the non­resident prior to such retrospective amendment, therefore in the absence of any supporting details and documents, it is not possible to given conclusive finding whether the en ire payment was made in respect of services rendered by Chinese subsidiary, ITCL outside India. We further note that the CIT(Appeals) has taken note of the finding of the AO, however, despite the objection raised by the assessee regarding the finding of AO, the CIT(Appeals) has not given any finding on this factual aspect of the matter. Accordingly, in the facts and circumstances of the case, we find that this factual aspect has not been properly examined by the AO and therefore, we remit this limited issue, whether any part of the payment in question is relating to services rendered in India to the record of the AO and direct the AO to decide the same in view of our foregoing observations. We make it clear that the issue of nature of payment, whether it is “FTS or not” is left open.”

9.7 In the light of the above order of the Tribunal, which had followed the dictum laid down by the Hon’ble Apex Court in the case of Ishikawajima Harima Heavy Industries Ltd. v. DCIT (supra), we restore the issue of taxability with regard to subcontracting charges paid on 01.05.2010, to the files of the AO. The AO is directed to take a decision in accordance with law after affording a reasonable opportunity of being heard to the assessee.

9.8 Another alternate contention of the assessee is that for assessment year 2011-2012, the AO has computed TDS u/s 195 of the I.T.Act at the rate of 20% by invoking section 206AA of the Act for the reason that PAN of Infosys China was not available. Before the CIT(A) the same was submitted on 27.09.2013. However, the CIT(A) did not allow any relief on this issue.

9.9 We have heard rival submissions and perused the material on record. The relevant ground with regard to the above issue are grounds 9.1 to 9.3. The Special Bench of the Tribunal in the case of Nagarjuna Fertilizders and Chemicals Ltd. v. ACIT reported in (2017) 78 taxmann.com 264 had held if rate of tax applicable under DTAA is lower than 20% tax rate prescribed u/s 206AA of the Act, TDS has to be deducted at such lower rate even if non-resident deductee fails to furnish its PAN. Further, the Hon’ble Delhi High Court in the case of Danisco India P. Ltd. v. UOI reported in (2018) 90 taxmann.com 295 (Delhi) had held that provisions of DTAA override section 206AA of the Act. In view of the above cited judicial pronouncements, we hold that the applicable TDS on subcontracting charges paid to Infosys China should be considered at 10% as per the India-China DTAA instead of 20% as per section 206AA of the I.T.Act. It is also to be noted that while passing the order u/s 201(1) and 201(1A) of the Act for assessment year 2012-2013, the Assessing Officer has calculated TDS liability at 10% as per the Indo-China DTAA. Therefore, ground 9.1 to 9.3 is allowed.

9.10 In the result, the appeal filed by the assessee for assessment year 2011-2012 is partly allowed.

IT(IT)A No.1182/Bang/2014 (Asst.Year 2012-2013)

10. In this appeal, all the grounds pertain to the liability of the assessee u/s 201(1) and 201(1A) of the Act with reference to the payment made to Infosys China whether it comes within the term FTS u/s 9(1)(vii) of the Act. For our reasoning mentioned in para 9 to 9.9 (supra), we reject the appeal of the assessee filed for assessment year 2012-2013. It is ordered accordingly.

11. In the result, the appeal filed by the assessee for assessment year 2011-2012 is partly allowed and for assessment year 2012-2013 is dismissed.

Order pronounced on this 11th day of April, 2022.