Fees for services utilised in India is taxable

Homi P Ranina

Under the provision of section 9(1)(vii) of the Income Tax Act, 1961, income by way of fees for technical services would be deemed to accrue or arise in India where it is payable by the Central Government or the state government, or an Indian resident, or a non-resident where the fees are payable in respect of services utilised in a business or profession carried on by him in India or for the purposes of making or earning income from any source in India.

Explanation 2 of section 9(1)(vii) defines “fees for technical services” for the purposes of that clause. Accordingly, it means any consideration (including any lump sum consideration) for the rendering of 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”.

From a harmonious reading of clause (vii)(b) of section 9 and explanation 2, it is clear that any consideration, whether lumpsum or otherwise, paid by a person who is resident in India to a non-resident for rendering any managerial or technical or consultancy services 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”.

In Elkem Technology v Dy CIT (2001 117 Taxman 382), the assessee, a non-resident company based in Norway, entered into a contract with an Indian company for supply of equipment as well as engineering data besides personnel services for establishing a sub-merged arc furnace. In terms of the contract, a total amount of Rs 6.257 million NCK was payable by the Indian company. During the accounting year under consideration, the Indian company remitted Rs 69,85,000 towards charges for engineering and other services.

The assessee claimed this amount as not taxable in its hands on the ground that the payment was for construction and assembly undertaken by the recipient and the same being business profits was not taxable since it did not have a permanent establishment in India in terms of the provisions of double taxation avoidance agreement between India and Norway.

The assessee relied on explanation 2 to section 9(1)(vii) to claim that the payment did not come under the definition of “fees for technical services”. The assessing officer, however, rejected the appellant’s contention stating that the consideration was mainly on account of provision of the services of technical personnel and that the appellant-company itself had not undertaken any construction, assembling, mining or like project so as to claim that the same was not taxable.

He, accordingly, completed the assessment levying tax at the rate of 15 percent on the amount of Rs 69,85,000. The order of the assessing officer was confirmed both by the appellate authority and the tribunal.

On appeal under section 260-A of the Act, the Andhra Pradesh High Court noted that under section 9(1)(vii)(b), the expression used is “fees for services utilised in India” and not the expression “fees for services rendered in India”. It may be that some of the services were rendered abroad by the personnel employed or deputed by the non-resident company under the collaboration agreement with the Indian company.

However, if the fees were paid for services utilised 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.

In Cochin Refineries Ltd v CIT (222 ITR 354), the refineries requested a foreign company to evaluate whether coke produced from a blend of vaccum bottoms and clarified oil from Bombay High crude was suitable for making anode for aluminum industry. The tests were carried out in USA in regard to which the assessee made a payment of Rs 7,69,614. The assessee also paid Rs 1,19,303 and Rs 38,271 which were in the nature of reimbursement of payments made to the personnel of the said consultant.

It was held that the services rendered by the foreign company would be in the nature of technical services and would, therefore, consequently, be covered by the explanation to section 9(1)(vii). Further, it was held even with regard to the two payments of Rs 1,19,303 and Rs 38,271 in the nature of reimbursement of payments made to the personnel, that no different situation arose because these payments were part and parcel in the process of advice of a technical character and fell for coverage only within the meaning of the above explanation.

In this view of the matter, in the case of Elkem Technology, the payment of Rs 69,85,000 made by the Indian company to the Norway company towards charges for engineering and other personnel services was part and parcel in the process of utilising those technical services in India and fell within the meaning of the explanation to section 9(1)(vii).

In conclusion, it may be pointed out that if a provision of a double taxation avoidance agreement is contrary to section 9(1)(vii), such provision of the treaty would prevail over the statute.