Fees for technical services (FTS) paid to nonresident company for assistance in relation to proposed expansion of taxpayer’s business outside India is not taxable under Income-tax Act. Having regard to specific source rule exception applicable to FTS taxation, FTS paid by resident for earning income from a source outside India is not taxable in India. The provision is wide enough to even cover any future source of income.

The taxpayer, an Indian resident (ICO), was engaged in the business of manufacturing of sugar. ICO proposed to acquire sugar mills/distillery plants in Brazil for expansion of its business operations.

For this purpose, ICO engaged the services of a financial advisor in Brazil (FCO) to assist and advise the proposed transaction. Payments were made to the FCO for services availed during the relevant year. The agreement between ICO and FCO was in the form of a proposal to study the possibility of expanding ICO’s operations in Brazil. ICO contended that payments were not taxable in India as payments were for a business or profession set up outside India or for the purpose of making or earning of source of income from outside India.

ICO contended that it had incorporated a subsidiary in Brazil to acquire the sugar mills/distillery plants. Hence, services of FCO would be utilised in the business which would be carried out outside India through the ICO’s subsidiary.

The Tax Authority sought to tax the above payments as FTS taxable in India and treated ICO as assessee in default for not withholding appropriate taxes u/s.195 of Income-tax Act.

ITAT Ruling

Payments made by ICO for services rendered by FCO fall within the meaning of FTS under the Income-tax Act. Hence, the real issue before ITAT was if such payment can be regarded as sourced from India in terms of Source rule of ITA.

 ICO carried on business in India and had utilised the services of FCO in connection with such business. Therefore, case of ICO would not fall within the first exception of the source rule which protected FTS if it was business carried on by a resident outside India.

 ICO wanted to acquire sugar mills/distillery plants in Brazil and for that purpose, had set up a subsidiary company in Brazil. Thus, ICO was contemplating creation of a source for earning income outside India. It is no doubt true that the source of income had not come into existence during the year. As a result, income was not sourced from India as it was making or earning of income from a source outside India. This applied also to payments for creating a future source of income.

There is nothing in the language of the exception of the source rule which would show that the same is restricted to an existing source of income only or when the source of income would have come into existence during the year.