Under the present law the concept of deemed income in the context of non resident taxation include payment for fees for technical services (FTS). FTS is further defined in clause (vii) of section 9 (1) as under:
“(vii) income by way of fees for technical services payable by–
(a) the Government ; or
(b) a person who is a resident, except where the fees are payable in respect of services utilised in a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India ; or
(c) a person who is a non-resident, where the fees are payable in respect of services utilised in a business or profession carried on by such person in India or for the purposes of making or earning any income from any source in India:
Provided that nothing contained in this clause shall apply in relation to any income by way of fees for technical services payable in pursuance of an agreement made before the 1st day April, 1976, and approved by the Central Government.
Explanation 1.–For the purposes of the foregoing proviso, an agreement made on or after the 1st day of April, 1976, shall be deemed to have been made before that date if the agreement is made in accordance with proposals approved by the Central Government before that date.
Explanation 2.–For the purposes of this clause, “fees for technical services” 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”.” (Unquote)
In the context of payment by any resident to a non resident the fees for technical services are chargeable to tax in India only when the services are supposedly utilised in a business in India. In other words payment made for services utilied outside India remain outside the tax net. This fact has been confirmed by the Supreme Court in Ishikawajima-harima Heavy Industries Ltd. Vs. Director of Income-tax, Mumbai (2007) 288ITR408. The Apex Court further held that the section requires two conditions to be met-the
services which are the source of the income that is sought to be taxed, has to
be rendered in India, as well as utilized in India, to be taxable in India. It held that both these conditions have to be satisfied simultaneously. More particularly the Apex Court focussed on sufficient territorial nexus with India as a necessary factor taxation of overseas services. The following words need special reference:
“The global income of a resident although is subjected to tax, the global
income of a non-resident may not be. The answer to the question would
depend upon the nature of the contract and the provisions of the DTAA. What is relevant is receipt or accrual of income, as would be evident from a plain reading of section 5(2) of the Act. The legal fiction created although in a given case may be held to be of wide import, but it is trite
that the terms of a contract are required to be construed having regard to
the international covenants and conventions. In a case of this nature, interpretation with reference to the nexus to tax territories will also assume significance. Territorial nexus for the purpose of determining the tax liability is
an internationally accepted principle. An endeavour should, thus, be made
to construe the taxability of a non-resident in respect of income derived by
it. Having regard to the internationally accepted principle and DTAA, it
may not be possible to give an extended meaning to the words “income
deemed to accrue or arise in India” as expressed in section 9 of the Act.
Section 9 incorporates various heads of income on which tax is sought to
be levied by the Republic of India. Whatever is payable by a resident to a
non-resident by way of fees for technical services, thus, would not always
come within the purview of section 9(1)(vii) of the Act. It must have sufficient territorial nexus with India so as to furnish a basis for imposition of
tax. Whereas a resident would come within the purview of section 9(1)(vii)
of the Act, a non-resident would not, as services of a non-resident to a resident utilized in India may not have much relevance in determining
whether the income of the non-resident accrues or arises in India. It must
have a direct live link between the services rendered in India. When such a
link is established, the same may again be subjected to any relief under the
DTAA. A distinction may also be made between rendition of services and
utilization thereof.”
Section 5 (2) (g) of the yet to be tabled direct tax code read as under :
“ Income deemed to accrue in India
- (2) Without prejudice to the generality of the provisions of sub-section (1) , the following income shall be deemed to accrue in India :-
( a) to (f) ————
(g) fees for technical services accrued from the Government or any resident.” (Unquote)
Yet further in sub-section (5) it is provided as under :
“ (5) The provisions of sub-section (2) shall be applicable regardless of the fact that :-
- The payment is made outside India;
- The services are rendered outside India ; or
- The income has otherwise not accrued in India.” (Unquote)
In other words hereinafter any and every payment made to a non resident for services that are falling within the definition of fees for technical services would desire tax withholding no matter they are utilised in any business in India or not or for that matter whether rendered in India or not. For instance payment for off shore telephony services obtained for network connectivity, overseas services such as retainer, advisor, consultant, testing etc. would suffer tax deduction at source. This would perhaps necessitate reset of existing contracts for withholding tax repercussions.
The direct tax code looks to be more of a negative exercise rather than a constructive effort. It destroys the well laid down law and in fact it is devoid of any new thinking. Most of it is an effort in the direction to obliterate what is otherwise held to be more rational and legal perception. In fact over a period of time the new code would gain more complexity as new thinking would emerge out of its practice. It is not untrue that every time you make an amendment the law get more complex. Changes in laws should not be made just that you find it complex. What is important is that the procedures should be more users friendly. Hence what needs amendment is the rules and not the Act provisions.
Gopal Nathani
FCA