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Date:23^rd June 2010	Compiled by: M Sathya Kumar
Taxing times for offshore services The ITAT, in a recent case, dealt with the taxability of payments made by an Indian company in respect of services provided by a Chinese company Recent upsurge in outsourcing and globalization has led many Indian companies to obtain various services from overseas. Taxability of payments made by Indian companies for such services has given rise to many complex but interesting issues. The Income Tax Appellate Tribunal (ITAT), Mumbai Bench, in a recent case of Ashapura Minichem Ltd vs ADIT dealt with the taxability of payments made by an Indian company in respect of testing services provided by a Chinese company. Ashapura Minichem (“the taxpayer”) was in the process of building an alumina refinery using bauxite. It entered into a contract with the Chinese company for testing the said bauxite. The said testing services were undertaken by the Chinese company in its laboratories in China and the test reports for the samples were also prepared in China. TDS issue The taxpayer made necessary application to the tax officer seeking authorisation for remitting the consideration for the said testing services to the Chinese company, without deducting any tax at source on the grounds that the payment made to the company was is in the nature of business income and in the absence of any permanent establishment of the Chinese company in India, the same was not taxable in India. The taxpayer therefore contended that it was not under any obligation to deduct any tax at source. The tax officer, however, did not agree with the taxpayer's contention and held the payment to be taxable as ‘fees for technical services' under the provisions of the Income-tax Act as well as under the Double Taxation Convention (DTC) entered into between India and China, which position was upheld by the Commissioner of Income Tax (Appeals). On further appeal to the ITAT, the taxpayer contended that the payment made to the Chinese company was not taxable in India as services were rendered outside India. The taxpayer went on to argue that even under the DTC between India and China, the Article dealing with fees for technical services is uniquely worded which required the services to be rendered in India for the payments to be taxed in India. In the present case, since undisputedly, the services were rendered by the Chinese company outside India, the same were not taxable in India and, therefore, the taxpayer was not required to deduct any tax at source. Act, Tax Treaty Before we proceed further, let us have a brief synopsis of the provisions of the Act as well as the DTC between India and China. Before the enactment of the Finance Act, 2010, the Supreme Court, in the Ishikawajima Harima Heavy Industries Ltd case, had held that the services should also be rendered in India for them to be taxed in India. This landmark ruling was subsequently followed by the Bombay High Court in the Clifford Chance case and several others. However, the Finance Act, 2010, made a retrospective amendment in the Act right from 1976 to bring within its ambit even the services rendered outside India. Similarly, Article 12(4) of the DTC between India and China is worded uniquely to define the term ‘fees for technical services' to mean provision of managerial, technical or consultancy services in the other contracting state. Most of the DTCs that India has entered into do not contain the condition of provision of services in other contracting state. Hence, a prima facie reading of the above Article suggests for the payments to be taxed in India, the services should be rendered in the other contracting state, that is, India. Article 12(6) further states that such fees for technical services shall be deemed to arise in India where the payer is a resident of India. Change in law Coming back to the facts of the case before the Tribunal, the tax authorities reiterated that by virtue of the amendment made by the Finance Act, 2010, there was a change in law and, therefore, the decisions relied upon by the taxpayer no longer hold good. Further, even under the DTC between India and China, the payment being made by a resident of India, fell within the deeming provisions of Article 12(6) and hence taxable in India. The Tribunal held that in view of the retrospective amendment by the Finance Act, 2010, the satisfaction of condition of services to be rendered in India is no longer required, in order for the fees for technical services to be taxed in India. The Tribunal also observed that by virtue of the said amendment, the decisions relied upon by the taxpayer no longer hold good. Moving on to the provisions of the DTC between India and China, the Tribunal observed that the definition of fees for technical services is wider in scope as it provides for provision of services instead of provision of rendering of services (which is the wording in some other treaties entered into by China) and, therefore, it will cover the services rendered outside India as well. The Tribunal also held that considering the deeming provisions of Article 12(6), the services would be taxed in India even when the same are not rendered in India, else the deeming provisions will be redundant. The Tribunal accordingly concluded that the payments made by the taxpayer for provision of bauxite testing services in China, would be taxable in India, both under the provisions of the Act as well as the DTC between India and China and, therefore, subject to deduction of tax at source in India. This ruling assumes significant importance as it reaffirms the taxability of services rendered outside India, under the provisions of the Act, on the basis of the retrospective amendment made by the Finance Act, 2010 as well as under the DTC between India and China. However, it may be noted that the Tribunal, while commenting on the provisions of the DTC between India and China, has commented only on the scope of the term ‘provision of services' vis-à-vis ‘provision of rendering of services' but has not emphatically dealt with the latter part of the definition which states that the said provision of services must be ‘in the other contracting state', except for observing that the 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. Hence, even if the term ‘provision of services' is wider in scope, as held by the Tribunal, the term ‘in the other contracting state' may necessarily involve performing the services in the other contracting state. To sum-up, when viewed in entirety, the present definition of fees for technical services under Article 12(4) of the DTC between India and China, may still require that the services should be provided in India, for them to be taxed in India. It would have been interesting to note whether the latter part of the definition would have had any bearing on the ultimate decision, had the same been dealt with emphatically by the Tribunal. The authors are Director and Deputy Manager, respectively, Deloitte Haskins & Sells. The article was earlier published in one of the financial dailies.
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