[2016] 68 taxmann.com 336 (Chennai – Trib.) DCIT vs. Alstom T & D India Ltd A.Ys.: 2001-02, 2003-04 and 2004-05, Date of Order: 31st March, 2016

The Taxpayer, an Indian company, was engaged in the business of manufacture of heavy electrical equipment. The Taxpayer had developed prototypes of certain equipment. As per the standards prescribed by the industry regulatory body, prototype development could be complete only after performance of certain design tests on the equipment. These tests were to be performed by an accredited international testing laboratory. The Taxpayer could not have exported the equipment to the international market unless these tests were completed and the results were benchmarked to the standards prescribed. Accordingly, the Taxpayer engaged an international testing laboratory for testing the prototypes and paid testing charges.

The Taxpayer remitted the testing charges to the laboratory without withholding tax.

In the course of the assessment, the AO invoked provisions of section 40(a)(i) of the Act and disallowed the payment. In appeal, CIT(A) relied on decisions in Havells India Ltd v ACIT 47 SOT 61 (URO) (Del) and held that the payment was covered by the second exception in section 9(1)(vii)(b) of the Act and hence, income accrued or arose in India. Consequently, tax was not required to be withheld from the payment. The tax department filed further appeal to the ITAT.

Held

• Section 9(1)(vii)(b) provides for two exceptions. First exception is where the payment is made is respect of services utilized for business or profession carried on outside India. Second exception requires utilization of services for earning any income from source outside India.
• For falling within the first exception, it is not sufficient to prove that the services are not utilised for business activities of production in India, but it is furthernecessary for to show that the technical services are utilised in a business carried on outside India. Nothing was brought on record to support this.
• Without prejudice, the Taxpayer was concluding the export contracts in India. The products were manufactured in India and exported from India in fulfillment of the export contracts. Therefore, the Source of income was created when the export contracts were concluded.
• Though the importer of the products was situated outside India, the importer was merely the source of money received.
• The second exception in section 9(1)(vii)(b) requires the source of income, and not the receipt, to be outside India.
• Since this condition was not satisfied, the payment was taxable in India.