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  Date: 3^rd March 2010

 Compiled by: Sathya  

Taxation of non-residents' services

Budget 2010 states income in the nature of interest, royalty or technical services would be taxable in India under the main provision.

In 1976 an amendment was made to clarify that dividend, interest, royalty and fees for technical services would be liable to taxation on source basis. In other words, it was desired by the Government that these types of income would be liable to taxation in India on the basis of payer irrespective of the place where the services were rendered or utilised. Of course, certain exceptions were built in.

Territorial nexus

This concept was challenged in the Supreme Court in the Ishikawajima-Harima Heavy Industries Ltd case.

Here the court held that despite the deeming fiction in Section 9, for any such income to be taxable in India, there must be sufficient territorial nexus between such income and the territory of India and for establishing such territorial nexus, the services have to be rendered in India as well as utilised in India.

The Government felt that this interpretation was not in accordance with the legislative intent that the aforementioned types of income were taxable in India based on extended source principle. So far as services are concerned it was felt that these would be taxable in the hands of non-residents even if those are rendered outside India.

Accordingly, to remove doubts regarding the source rule, an Explanation was inserted in 2007 in the Section 9 to clarify that interest, royalty and fees for technical services of the non-resident would be taxable under Section 9, regardless of whether the non-resident has a residence or place of business or business connection in India.

However, this insertion failed to the serve the purpose. Recently, the Karnataka High Court, in the Jindal Thermal Power Company Ltd case, held that on a plain reading of the Explanation to Section 9, the criteria of rendering services in India and the utilisation of the service in India laid in the Ishikawajima-Harima case (supra) remains untouched and unaffected by this Explanation.

Position clarified

Now, Budget 2010 proposes to clarify the position in more unambiguous manner by substituting the explanation to Section 9 inserted by the Finance Act 2007 by another Explanation.

It states clearly that even if services are rendered outside India or even if the non-resident does not have a residence or place of business or business connection in India, the income in the nature of interest, royalty or technical services would be taxable in India under the main provision.

Obviously, this position is in line with the one taken by India in the Organisation of Economic Cooperation and Development (OECD) and before various courts and also in many tax treaties that India has. However, this differs from the position taken by many countries and notably by the OECD.

Internationally, technical services are taxed in the hands of non-resident as business income and only if the services are rendered in the country or if there is permanent establishment. The approach is almost similar for royalty.

It will be interesting to see how the courts react to the amended provisions.

Article by Singh, a renowed chartered accountant. The article was earlier published in reputed financial daily.

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