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Finance Bill 2010: Ishikawajima superseded .. finally!

In Ishikawajima-Harima Heavy Industries 288 ITR 408 the Supreme Court held {on a misreading of s. 9 (1) (vii)} that in order to be chargeable to tax in the hands of the non-resident, fees for technical services had to be rendered in India as well as utilized in India. It held that if both conditions were not fulfilled, the fees for technical services was not chargeable to tax in India.

That the judgement was wrong was said so by the AAR in Worley Parsons Services Pty. Ltd (AAR) 312 ITR 273. It observed that Ishikawajima had wrongly referred to s. 9(1) (vii) (c) instead of s. 9 (1) (vii) (b) even though the two dealt with different situations. It also noted that the Supreme Court had stated that s. 9 (1)(vii) (c) requires that the services have to be rendered as well as utilized in India in order to be taxable in India even though the word “rendered” was not to be found even in the inapplicable clause (c). It also noted that the law was that “a decision not expressed and accompanied by reasons and not proceeded on a conscious consideration of issue cannot be deemed to be a law having binding effect as is contemplated under Art.141 of the Constitution. That which has escaped in the judgment is not the ratio decidendi” though it finally found a way to “distinguish” Ishikawajima.


To supercede the judgement in Ishikawajima, an ill-drafted Explanation to s. 9 (1) was inserted by the Finance Act, 2007 w.r.e.f. 1.6.1976. However, the draftsman clearly had no clue as to what Ishikawajima was saying and what the Explanation was supposed to supersede.

The result: Ishikawajima was held to be good law despite the retrospective amendment by the Bombay High Court in Clifford Chance 318 ITR 237 (B0m) and by the Karnataka High Court in Jindal Thermal Power Company 225 CTR 220.

The Finance Bill 2010 now seeks to substitute the said mis-worded Explanation by the following Explanation:

“Explanation.—For the removal of doubts, it is hereby declared that for the purposes of this section, income of a non-resident shall be deemed to accrue or arise in India under clause (v) or clause (vi) or clause (vii) of sub-section (1) and shall be included in the total income of the nonresident, whether or not,—

(i) the non-resident has a residence or place of business or business connection in India; or

(ii) the non-resident has rendered services in India.”.

The words “income … shall be deemed to accrue or arise in India … whether or not … the non-resident has rendered services in India” should hopefully be sufficient to lay Ishikawajima to rest – three years after it was delivered.


6 comments on “Finance Bill 2010: Ishikawajima superseded .. finally!
  1. padmanabhan says:

    What will happen if the service rendered is on a asset that is a moving type eg ship where a telephone company in particular has offered its services.This company has no office in India and is based in a foriegn land. Invoices and payments are done/made outside India. This is not coastal but foriegn going ship and registered in India. So service is rendered on a Indian registered vessel in foriegn water, And by chance if that vessel comes to India what will happen, will that service suddenly become chargeable? this will lead to more confusion and additional work load. These rules are not clear leading to more confusion. for small small amount of services they must exempt the TDs, otherwise the rules are very confusing and lead to additional work loads and paper work. We will be sitting in the office only and we cannot go home and lead a normal life. Is it worth it?

    Hope government clarifies the stand on TDS for services performed on a moving asset like ship and give exemptions instead saying and refering to double tax rules etc etc

  2. madhavvan says:

    In view of the above what will be the consequences of the following

    a non resident company based in germany has been awarded a contract for installation and commissioning services in india and it has been given a place inside factory premises of the indian company

    it receives payments for the services in its bank a/c abroad for services rendered in india

    whether the non resident foreign company is required to file its return in india and is the receipt taxable and under which head and what is rate of tax is tax audit required to be carried out since the fees received exceeds rs. 40 lacs

    can the non resident foreign company claim credit for tds deducted on the payments received abroad for services rendered in india if it files its return in india.

    is non resident foreign company required to dedcut tax at source on payments made in india in respect of services rendered in india and is it required to file tds returns and can it issue tds certificates
    The foreign company does not have a PAN In India

  3. Akhil Bansal says:

    The scope of Section 9(1)(vii) of the Income Tax Act, 1961 tends to cover payments in the nature of fee for technical services only. Thus, any payments which are in the nature of commission, etc which cannot be covered under the ambit of FTS would not be governed by the above section.

    It had always been an accepted position that territorial nexus theory is applicable for ascertaining the “Business connection” and not the taxability of FTS, etc which are anyways covered under the deeming provisions. The Apex court in its decision of Ishikawajima-Harima changed this position which again was over-turned by way of amendments in the Act subsequently.

  4. Deven Bafna FCA says:

    since the amendment is having retrospective effect, i am affraid about the impact in the pending assessments for a y 2008-09 and returns filed for a y 2009-10 without deduction if TDS. even this aspect is to be covered for current year which is nearing its completion. GOING TO CREATE HUGE MESS FOR BUSINESSMEN.

  5. Ravindranath Nalam says:

    Obviously the answer is a big

    Y E S

  6. Gopal says:

    Does this mean that on selling commission paid to overseas agent for procuring orders from overseas customer will be liable to income tax, tds besides service tax?

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