Ashapura Minichem vs. ADIT (ITAT Mumbai)

Fees for Technical Services, even if rendered outside India, are taxable

The assessee, an Indian company, entered into an agreement with a Chinese company for bauxite testing services in its laboratories (outside India) and for preparation of test reports. The assessee filed an application u/s 195(1) in which it argued that as the services were rendered outside India and the recipient did not have a permanent establishment in India, the payments were not chargeable to tax under the India-China DTAA and no tax was required to be withheld at source. The AO took the view that the payments constituted “fees for technical services” u/s 9(1)(vii) and Article 12 of the DTAA and tax was required to be withheld at 10%. This was upheld by the CIT (A). The assessee appealed to the Tribunal. HELD dismissing the appeal:

(i) As regards taxability u/s 9(1)(vii), in Ishikawajima-Harima Heavy Industries 288 ITR 408 and Clifford Chance 318 ITR 237 (Bom) it was held that “fees for technical services” were not chargeable to tax in India if two conditions were not satisfied viz. that the services were (a) rendered in India and (b) were utilized in India. However, these judgements are no longer good law in view of the retrospective amendment to the Explanation to s. 9(1)(vii) by the Finance Act, 2010. The effect of the amendment is that “fees for technical services” are chargeable to tax in India even if rendered outside India. Except in a situation in which a territorial method of taxation is followed, which is usually also a lowest common factor in taxation policies of tax heavens, source rule is an integral part of the taxation system. It is thus fallacious to proceed on the basis that territorial nexus to a tax jurisdiction being sine qua non to taxability in that jurisdiction is a normal international practice in all tax systems. (The concepts of “territorial nexus” and “source rule” discussed);

(ii) As regards taxability under the DTAA, Article 12(4) defines “fees for technical services” as “the provision of services of .. technical .. nature by a resident of a Contracting State in the other Contracting State“. Article 12(6) provides that such technical services shall be deemed to arise in a Contracting State when the payer is a resident of that State;

(iii) 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. (Principles of treaty interpretation reiterated);

(iv) Consequently, the payment was chargeable to tax under s. 9(1)(vii) as well under Art. 12 of the DTAA and tax had to be withheld at source u/s 195.