LA PALABRA PROHIBIDA

Under section 9(1) (vii), following incomes by way of “fees for technical services” shall be deemed to accrue or arise.

(a) Payable by the Central Government or any State Government;

or

(b) Payable by resident, except where the fees are payable in respect of services utilized in a business or profession

(i) carried on by such person outside India; or

(ii) for the purposes of making or earning any income from any source outside India;

or

(c) Payable by a non resident, where the fees are payable in respect of services utilized in a business or profession

(i) carried on by such person in India; or

(ii) for the purposes of making or earning any income from any source in India;

The term “fees for technical services:” means any consideration (including any lump sum consideration) for rendering any managerial, technical or consultancy services (including the provision of services of technical or other personnel) but does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head “salaries”.

Important Judicial Precedents & Board Circulars:

1. In G.V.K. Industries Ltd. v. ITO [228 ITR 564 (AP)], the success fee was payable by the petitioner company to the non-resident company.

The question before the Andhra Pradesh High Court was in respect of nature of payments. The court held that, from a combined reading of section 9(1)(vii)(b) and Explanation 2 thereto, it becomes clear that any consideration whether lump sum or otherwise, paid by a person who is resident in India to a non resident for running any managerial or technical or consultancy service, would be income by way of fees for technical service and would, therefore, be within the ambit of

“income deemed to accrue or arise in India”.

2. From a combined reading of clause (vii)(b) of section 9(i) and Explanation 2, thereto, it becomes abundantly clear that any consideration, whether lump sum or otherwise paid by a person who is resident in India to a non-resident for rendering any managerial or technical or consultancy service would be income by way of fees for technical services and would, therefore be within the ambit of ‘income deemed to accrue or arise in India. It is also to be noted that under section 9(1)(vii)(b), the expression used is “fees for services utilized in India” and not the expression ‘fees for services rendered in India”.

It may be that some of the services are rendered abroad by the personnel employed or deputed by non-resident company under collaboration agreement with the Indian company. But, if the fees are paid for services utilized by the Indian company, in its business carried on by it in India, irrespective of the place where the services

were rendered, the amounts of the fees should be deemed to accrue or arise in India. [Elkem Technology v. DCIT 250 ITR 164 (AP)]

3. In CIT v. Sundwiger EMFG & Co. [262 ITR 110], the fact were, Midhani, a resident company entered into a contract with a non-resident company for supply of various capital equipment in connection with setting up of special metal and alloy projects.

Further, a supplementary contract was also entered into between the parties for providing technical services covering supervision of erection, start-up, etc. for which the non-resident had to send on deputation their employees who were specialist, to India. Apart from payment on per day basis, Midhani had to meet the expenses of travel, living and pocket expenses of the specialist coming to India. It was also further agreed that all payments to the contractor and the specialists under the contract would be without deduction of taxes, assessment, duties etc., and if leviable, would be assumed to be paid by the purchaser only.

On these facts, the Andhra Pradesh High Court held that Midhani, as one principal had entered into an agreement with another principal, the non-resident company in respect of purchasing of machinery. The supplementary contract was only by way of an abundant caution and it did not mean that the payment was either to be taxable or would be tax free. All that it meant was that in case the payment was taxable the same would be borne by Midhani. The expenses met by the Midhani under the supplementary contract were part of the consideration for setting up of the machinery. The expenses met could not be viewed in isolation from the main contract and if that was so, whether the payment were made on daily basis or not for any technical services rendered, they would form part and parcel of consideration for the purchase of machinery. Thus, the provisions of section 9(i)(vii) would not be applicable. On the other hand, such payments were exempted under Explanation 2 to section 9(i)(vii) 4. Where the object of the preparation of designs and drawings is to

bring home point as to how the manufactured equipments is required to be erected, same should also be considered as technical advise rendered except where it could be proven that the design and drawings were part of plant and machinery purchased and were therefore required to be added to the cost of plant and machinery.

AEG Aktiengesllschaft v. Commissioner of Income-tax [2004] 137 Taxman 1 (KAR)

5. For section 9(1)(vii) to be applicable, it is necessary that services provided by a non-resident assessee under a contract should not only be utilized within India, but should also be rendered in India.

Ishikawajma-Harima Heavy Industries Ltd v Director of Income-tax [2007] 158 Taxman 259 (SC)

This decision stands nullified for the limited purposes of place business or place of rendering of services in connection with “fees for technical services” since s 9(1)(vii) has been amended by the Finance Act 2010 w.r.e.f 1.06.1976 which provided that where the income is deemed to accrue or arise in India under clauses (v), (vi) and (vii) of s 9(1) such income shall be included in the total income of non-resident whether or not the non-resident has a residence or place of business or business connection in India; or the non-resident has rendered services in India

6. Delhi High court in CIT v Havells India Ltd [2012] 208 taxman 114 has put at rest the doubts surrounding the application of exception provided by s 9(1)(vii)(b). The court clarified that the export activity having taken place or having been fulfilled in India, the source of income was located in India and not outside. Mere fact that the export proceeds emanated from persons situated outside India did not constitute them as the source of income. 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 assessee's 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. He is, therefore, only the source of the monies received. The income component of the monies or the export receipts is located or situated only in India.

There is a distinction between the source of the income and the source of receipt of the monies. In order to fall within the second exception provided in section 9(1)(vii)(b ), the source of the income, and not the source of receipt, should be situated outside India.