fiogf49gjkf0d
New Page 2
16 Ashapura
Minechem Ltd. v.
ADIT
(2010) 5 Taxman.com 57 (Mum-ITAT)
Article 7, 12(4) of India-China DTAA
S. 9, S. 195 of Income-tax Act
Dated : 21-5-2010
Indian company
engaged Chinese company for testing of bauxite and providing test reports—
Testing done entirely in China—Issue of taxability of payment by Indian company
for services—Held : (i) After amendment to S. 9, irrespective of the place of
utilisation or rendition and territorial nexus, payment was chargeable as FTS
under Income-tax Act; and (ii) As per source rule under India-China DTAA, place
of rendition is not material and FTS is deemed to accrue in country where payer
is resident.
Facts :
The taxpayer
was an Indian company (‘IndCo’), in the process of building an alumina refinery.
It engaged a Chinese company (‘ChinaCo’) for testing of bauxite to be mined by
IndCo in India. ChinaCo was to test bauxite in its laboratories in China and
prepare test reports so that IndCo could define the process parameters for
processing of bauxite. The test reports were to provide complete chemical
composition of bauxite, performance tests, etc. IndCo agreed to pay certain
payment to ChinaCo for these services.
According to
IndCo : testing charges were in the nature of business profits subject to
Article 7 of India-China DTAA; ChinaCo did not have any PE in India; and hence,
no taxes were required to be withheld u/s.195. Accordingly, it applied for
certificate for no withholding of tax.
According to
the tax authorities, the payments were for services and were taxable as ‘Fees
for Technical Services’ (FTS).
The CIT(A)
upheld the order of the tax authority.
The Tribunal
referred to and relied on its earlier order in case of Hindalco Industries Ltd
v. ACIT, (2005) 94 ITD 242 (Mum.) which laid down certain principles of
interpretation of tax treaties, stating that the language used in a tax treaty
need not be examined in literal sense and a departure from plain meaning is
permissible where the context so requires.
Held :
The Tribunal held that :
-
As regards taxability
under the Income-tax Act :
-
Payments received by
ChinaCo were covered within the definition of FTS under the Income-tax Act.
-
In light of the amendment
to S. 9 by the Finance Act, 2010, the legal proposition regarding utilisation,
rendition and territorial nexus is no longer good in law. Income of ChinaCo
for services rendered to IndCo is taxable as FTS under the Income-tax Act.
-
As
regards taxability under India-China DTAA :
-
The definition of FTS
covers payments for provision of managerial, technical or consultancy
services by a resident of one country in the other country. The expression
‘provision of services’ is not defined or elaborated anywhere in the tax
treaty.
-
As per the source rule,
FTS will be deemed to have accrued in the country where the payer is a
resident and place of rendition of technical services is not material.
-
Literal interpretation
of definition of FTS to mean rendition of service would render the source
rule meaningless.
-
Literal 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.
-
he payments made to
ChinaCo were taxable as FTS under India-China DTAA as well as under the
Income-tax Act and hence, IndiaCo was liable to deduct tax from these
payments.
