Cherry Bansal (Practicing Chartered Accountant) (80 Points)
23 August 2011Dear All,
I need one clarification.
If a SEZ unit pays service fees on technical consultancy to a foreign company having PE in India but the services are rendered without any involvement of PE, then the tax needs to be deducted from the payments to be made to Foreign Company @ 10%. Please confirm if my understanding is correct!!
I oblige your reply.
Thanks
CA Cherry Bansal
CA RAJESH BALSARA
(Proprietor)
(262 Points)
Replied 23 August 2011
CHERRY, please refer below-highlighted Extract of Section 9, introduced vide Budget 2010.
(CA RAJESH BALSARA )
Section 9 provides for situations where income is deemed to accrue or arise in India. Vide Finance Act, 1976, a source rule was provided in section 9 through insertion of clauses (v), (vi) and (vii) in sub-section (1) for income by way of interest, royalty or fees for technical services respectively. It was provided, inter alia, that in case of payments as mentioned under these clauses, income would be deemed to accrue or arise in India to the non-resident under the circumstances specified therein.
The intention of introducing the source rule was to bring to tax interest, royalty and fees for technical services, by creating a legal fiction in section 9, even in cases where services are provided outside India as long as they are utilized in India. The source rule, therefore, means that the situs of the rendering of services is not relevant. It is the situs of the payer and the situs of the utilization of services which will determine the taxability of such services in India.
This was the settled position of law till 2007. However, the Hon’ble Supreme Court, in the case ofIshikawajima-Harima Heavy Industries Ltd., Vs DIT (2007)[288 ITR 408], 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. It further held that for establishing such territorial nexus, the services have to be rendered in India as well as utilized in India.
This interpretation was not in accordance with the legislative intent that the situs of rendering service in India is not relevant as long as the services are utilized in India. Therefore, to remove doubts regarding the source rule, an Explanation was inserted below sub-section (2) of section 9 with retrospective effect from 1st June, 1976 vide Finance Act, 2007. The Explanation sought to clarify that where income is deemed to accrue or arise in India under clauses (v), (vi) and (vii) of sub-section (1) of section 9, such income shall be included in the total income of the non-resident, regardless of whether the non-resident has a residence or place of business or business connection in India.
However, the Karnataka High Court, in a recent judgement in the case of Jindal Thermal Power Company Ltd. vs DCIT (TDS), has held that the Explanation, in its present form, does not do away with the requirement of rendering of services in India for any income to be deemed to accrue or arise to a non-resident under section 9. It has been held that on a plain reading of the Explanation, the criteria of rendering services in India and the utilization of the service in India laid down by the Supreme Court in its judgement in the case of Ishikawajima-Harima Heavy Industries Ltd. (supra) remains untouched and unaffected by the Explanation.
In order to remove any doubt about the legislative intent of the aforesaid source rule, it is proposed to substitute the existing Explanation with a new Explanation to specifically state that the income of a non-resident shall be deemed to accrue or arise in India under clause (v) or clause (vi) or clause (vii) of sub-section (1) of section 9 and shall be included in his total income, whether or not,
(a) the non-resident has a residence or place of business or business connection in India; or
(b) the non-resident has rendered services in India.
This amendment is proposed to take effect retrospectively from 1st June, 1976 and will, accordingly, apply in relation to the assessment year 1977-78 and subsequent years. [Clause 4 of finance Bill 2010]
CA. Anuj Gupta
(Practices in NRI Int.Tax FEMA TP FDI/FIPB & FCRA)
(7024 Points)
Replied 08 September 2011
| Originally posted by : Cherry Bansal | ||
 |
Dear All, I need one clarification. If a SEZ unit pays service fees on technical consultancy to a foreign company having PE in India but the services are rendered without any involvement of PE, then the tax needs to be deducted from the payments to be made to Foreign Company @ 10%. Please confirm if my understanding is correct!! I oblige your reply. Thanks CA Cherry Bansal |
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Yes you are correct, but there is always an element of doubt in such cases. i suggest you approach ITO for certificate u/s 195/197 to stay clear from penalties under Income tax Act,1961.
Anuj
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