TAX NEWS - 
2010
India Tax: India ITAT rules fees for technical services taxable even if services rendered outside India
Facts
Indian company Ashapura Minichem Ltd. (the taxpayer) entered into an agreement with a Chinese company to carry out bauxite testing services for Ashapura. The bauxite samples received from the taxpayer were tested in the Chinese company's laboratories in China.
When making payment to the Chinese company for the services, the taxpayer applied to the tax officer to remit the fees without withholding any tax at source on the grounds that the fees to be paid for the testing services were in the nature of business income and, in the absence of a permanent establishment of the Chinese company in India, the fees were not taxable in India under the India-China tax treaty.
he tax officer disagreed, concluding that the services rendered by the Chinese company were in the nature of fees for technical services (FTS) under both Indian domestic tax law and the treaty and, therefore, instructed the payer to withhold 10% tax at source under the treaty. The taxpayer appealed, but the first appellate authority upheld the decision of the tax officer. On further appeal to the ITAT, the taxpayer argued that the payment to the Chinese company was not taxable in India because the services were rendered outside India and, under the treaty, the article on FTS is worded to require that the services be rendered in India to be taxed in India.
Since it was undisputed that the services were rendered by the Chinese company outside India, the services were not taxable in India and, therefore, the taxpayer was not required to withhold tax.
Decision of the ITAT
The ITAT held that the fees payable to the Chinese company fall within the scope of for technical services (FTS) as defined under Indian tax law (i.e. fees paid for managerial, technical or consultancy services). The ITAT stated that, in light of a recent amendment to Indian law under the Finance Act, 2010, it is no longer necessary that services be rendered in India for for technical services (FTS) to be taxed in India: the mere utilization of services in India is sufficient to attract taxability in India. This amendment, which applies retroactively as from 1 June 1976, overrules previous Indian case law that required the services to be supplied and used in India to be taxable in India. It changes the source rules, so that payments made to a nonresident for the provision of services – even services rendered outside India – are taxable in India, regardless of whether the nonresident has a place of business in India if the recipient uses the services in its business in India (notably, this provision also applies to services provided by a nonresident to another nonresident).
Moving on to the provisions of the India-China tax treaty, the ITAT noted that the treaty definition of FTS was broad in scope. Under the treaty, FTS means any payment for the "provision of services." The ITAT also held that, considering the deeming provisions of article 12(6) of the India-China treaty, the services would be taxed in India even if they had not been rendered in India; otherwise, the deeming provisions would be redundant. The ITAT observed that a literal interpretation of a tax treaty that renders treaty provisions unworkable or contrary to the clear and unambiguous purpose of the treaty must be avoided.
The ITAT accordingly ruled that the payments made by the taxpayer for the provision of bauxite testing services in China would be taxable in India under Indian tax law and the India-China tax treaty, making the payments subject to withholding at source in India.
The ITAT's decision reaffirms the position that, after the amendment to India's tax laws, withholding on FTS will be required if services are utilized in India, regardless of where the services were rendered.
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