Taxation of Fees for Technical Services (FTS) has assumed great significance in the Indian context. In this Article, we wish to highlight and discuss the issues concerning the exclusions provided in section 9(1)(vii) (b), which are of very practical utility and relevance.
It is important to note that in this article we have not dealt with the exclusions contained in the definition of the term ‘Fees for Technical Services’ given in Explanation 2 to section 9(1)(vii), relating to noninclusion of consideration for any construction, assembly, mining or like project undertaken by the recipient of such consideration.
We invite the readers to provide their useful comments and feedback in respect of the same.
1. Introduction
1.1 Section 5 of the Act dealing with scope of total income provides that both in the case of a resident as well as non-resident, total income would include all income from whatever source derived which accrues or arises or is deemed to accrue or arise to him in India during such year.
1.2 Section 9 of the Act contains the provisions relating to income deemed to accrue or arise in India.
Section 9(1)(vii)(b) of the Act reads as under:
“(1) The following income shall be deemed to accrue or arise in India:
(vii) income by way of fees for technical services payable by —
(b) a person who is 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”
Thus the exclusionary part of clause (b) makes it clear that in order to be eligible for the benefit provided, the following conditions needs to be fulfilled:
(a) amount is paid as fees for technical services.
(b) such services are utilised:
(i) in a business or profession carried on by such person outside India, or
(ii) for the purpose of making or earning any income from any source outside India.
1.3 The language of the second limb of the exclusionary part of section 9(1)(vi)(b) of the Act providing source rule for royalties, is almost identical and accordingly, the discussion in respect of second limb of the exclusionary part of section 9(1)(vii)(b) relating to FTS would equally apply to royalties also.
1.4 From the plain reading of the provisions of section 9(1)(vii)(b), it is evident that if any payment of fees falls within the exclusionary portion of the clause (b), then the payment of such fees made by a person who is resident, would not be deemed to accrue or arise in India and accordingly would not be taxable in India.
1.5 The exclusionary portion of the clause (b) contains two important limbs which are as follows:
(a) where the fees are payable in respect of services utilised in a business or profession carried on by such person outside India, or
(b) for the purposes of making or earning any income from any source outside India.
1.6 In the first limb of exclusionary part of clause (b) mentioned above would apply in a case where the FTS are payable by a resident in respect of services utilised in a business or profession carried on by such person outside India.
Thus, for example, A Ltd., an Indian company, has a branch in Dubai and makes payment of FTS to a third party in London for the services which are utilised in the business carried by the Dubai branch of the Indian company. Such payment would be covered by the first limb of exclusionary clause (b) mentioned above and the same would not be deemed to accrue or arise in India.
It is important to note that the services have to be utilised in a business or profession carried on by such a person outside India. In this connection, two important questions arise which are as follows:
(a) The first question in this context would be as to when can a resident be said to be ‘carrying on a business or profession outside India’?
In the view of the authors, if the business is carried on outside India by a branch, liaison office, project office or Permanent Establishment (PE) in any form of the person resident in India, then it could be assumed that the resident is ‘carrying on a business or profession outside India’. It is difficult to think of a situation where without a branch, liaison office, project office or PE, a resident could be said to be ‘carrying on a business or profession outside India’.
It is an open question whether business carried on by a person resident in India through the means of e-commerce can be considered to be carried on outside India for the purposes of the first limb of the exclusionary part of clause (b)?
(b) The second question arises which is very relevant is: What is the meaning of the words ‘such person’ appearing in the first limb of exclusionary clause (b)? Does the same refer to the payer of the fees or the recipient of the fees?
On a plain reading of the opening part of the clause (b) along with the first limb of the of exclusionary clause (b), it would be apparent that the words ‘such person’ should refer to the payer of the fees.
However, the Bombay High Court in the case of Grasim Industries Ltd. v. S. M. Mishra, CIT (Bombay High Court), (2011) 332 ITR 276, while disposing of the writ petition, has held that the words ‘such person’ would mean the recipient of the fees and not the payer of the fees. The aforesaid case is discussed below.
1.7 The second limb of exclusionary part of clause (b) mentioned above would apply in a case where the FTS is payable by a resident in respect of services utilised for the purposes of making or earning any income from any source outside India. In this connection also, two important questions arise as follows:
(a) Firstly, for the purposes of second limb of exclusionary clause (b), it is extremely important to determine the true meaning of the words ‘source outside India’. For this purposes it is very important to determine: What is meant by the word ‘source’ and when can a ‘source’ be said to be ‘outside India’? Can the ‘export of goods and services’ to customers out side India be said to be ‘source outside India’?
(b) The second question which arises for consideration is: Whether the ‘source’ has to be an ‘existing source’ or it could be even for a ‘future source’ of income?
(c) Various judicial pronouncements in this regard are discussed in the paragraphs given below.
2. Judicial pronouncements
A. Judicial pronouncements relating to first limb of exclusionary part of clause (b)
2.1 332 ITR 276 — Grasim Industries Ltd. v. S. M. Mishra, CIT (Bombay High Court)
(a) Nature of payment
Receipt of Fees for Technical services rendered by a non-resident outside India
(b) Brief facts
The assessee company was a company incorporated in India in which public was substantially interested and had its principal place of business at Mumbai. The petitioner No. 2 was a company incorporated under the laws of Delaware and had its principal place of business in Pennsylvania, USA. The U.S. company did not have any office or place of business in India and was not resident in India.
The Indian company being desirous of setting up a sponge-iron plant approached the U.S. company for technical assistance. By a basic engineering and training agreement the U.S. company agreed to render to the Indian company outside India certain engineering and other related services in relation to the sponge-iron plant.
By another agreement (the supervisory agreement), the U.S. company agreed to provide certain supervisory services to the Indian company in India. By the basic engineering and training agreement, the U.S. company was to prepare basic engineering drawings specifications, calculations and other documents and design and also prepare monthly schedule of non-Indian activities outside India.
The U.S. company was to deliver to the authorised representative of the Indian company the designs, drawings and data outside India. The U.S. company also agreed to train outside India a certain number of employees of the Indian company in order to make available to such employees scientific knowledge, technical information, expertise and technology necessary for commissioning, operation and maintenance of the sponge-iron plant.
As a consideration, the Indian company agreed to pay to the U.S. company a sum of US $ 16,231,000, net of Indian income-tax, if any, leviable. In accordance with the basic engineering and training agreement, the U.S. company delivered the total basic engineering package to the representative of the Indian company in Pennsylvania (USA) between November 1989 and August 1990. The U.S. company also imparted training to 22 key personnel of the Indian company at the plant in Mexico as provided in the basic engineering and training agreement.
The Assessing Officer charged the consideration received by the U.S. company to tax. The U.S. company did not dispute that the services under supervisory services were rendered in India and as such the income received therefrom was liable to income-tax. The dispute related only to the amount paid by the Indian company to the U.S. company under the basic engineering and training agreement dated October 22, 1989.
c) Key issue in relation to section 9(1)(vii)(b)
Does the expression ‘by such person’ appearing in section 9(1)(vii)(b) refers to the recipient of income and not to the person making the payment?
d) Decision
The Bombay High Court held in the assessee’s favour as follows:
“Section 9(1)(vii) of the Act says that the income by way of fees for technical services payable by three classes of persons shall be deemed to have accrued or arisen to the recipient in India. The three classes of payees are described in three sub-clauses, viz. (a), (b) and (c) of clause (vii). Sub-clause (a) is in respect of an income received by way of fees payable by the Government. Sub-clause (b) is regarding the income by way of fees payable by a person who is a resident in India and sub-clause (c) is in respect of an income by way of fees payable by a person who is a non-resident.
So far as sub-clause (a) is concerned, it admits of no exception and every rupee received as an income by way of fees for technical services paid by the Government to him is deemed to have accrued or arisen to the recipient in India.
So far as sub-clause (b) is concerned, income by way of fees for technical services payable by a person who is a non-resident (should be read as ‘Resident’) is deemed to have accrued or arisen to the recipient in India ‘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 purpose of making or earning any income from any source outside India.’
The expression ‘by such person’ appearing in section 9(1)(vii)(b), in our opinion, refer to the recipient of the income and not to the person making the payment. This would be clear if one looks to the opening words of s.s (1) of section 9 which reads ‘the following income shall be deemed to accrue or arise in India’. Section 9(1) refers to the income which is deemed to have accrued or arisen in India by the recipient of the income. The expression ‘such person’ appearing in sub-clause of section 9(1)(vii) therefore refer to the recipient, because one has to consider whether the income received by him (the recipient) is deemed to have accrued or arisen in India. Section 9 does not contemplate taxing the payer but contemplates taxing the recipient for the income received by him. In our considered view, the expression ‘such person’ appearing in sub-clause of section 9(1)(vii) refers to the recipient of the income and not to the payer. If we were to construe the expression ‘such person’ appearing in section 9(1)(vii)(b) as to the person who makes the payment for technical services it would give rise to a startling results.
We would demonstrate this by means of an illustration. Take a case where a resident Indian goes abroad, falls sick, and avails services of a pathological laboratory for testing his blood and pays the fees to the laboratory for the technical services of blood analysis performed by it. Obviously, the payment made by the Indian resident for the technical services payable to the owner of the laboratory who is a non-resident would fall in the first part of sub-clause (b) of section 9(1)(vii) of the Act and the fee received by the owner of the laboratory would be subject to the Indian income-tax unless it falls within the exception provided under sub-clause (b) itself. If we were to read the expression ‘such person’ in sub-clause (b) to refer the person making the payment i.e., the resident Indian, then obviously the case would not fall within the exception, because the fees were not payable in respect of any business or profession carried on by ‘such resident Indian’ outside India. Consequently, the income received by the owner of the pathology laboratory would be subject to Indian income-tax. By no stretch of imagination, the owner of the pathology laboratory who is a non-resident Indian can be subjected to income-tax because Parliament obviously would have no legislative competence to tax him in respect of services rendered by him (who is a non-resident and non-citizen) outside Indian territory. However, if the expression ‘such person’ appearing in sub-clause (b) of section 9(1)(vii) is construed to refer to the recipient of the fees, then he would be covered by the exception and not liable to pay Indian income-tax.
If we apply sub-clause (b) of section 9(1)(vii) of the Act so construed to the facts of the case at hand, the fees received by petitioner No. 2 for technical services from petitioner No. 1 would fall within the exception carried out by sub-clause (b) of section 9(1)(vii) of the Act and not taxable in India.”
Thus, the Bombay High Court has provided a completely new perspective to the interpretation of the words ‘such person’ appearing in section 9(1) (vii)(b). In the authors’ humble opinion, on a holistic view of the purpose and intention of insertion of section 9 and also of the exclusionary provisions contained in section 9(1)(vii)(b), the view taken by the Bombay High Court appears to be erroneous and the same may have to be tested in the Supreme Court.
Further, it is important to note that while disposing of the writ petition, the Bombay High Court did not consider the implications of the Explanation inserted by the Finance Act, 2010 at the end of section 9.
B. Judicial pronouncements relating to second limb of exclusionary part of clause (b)
2.2 (2002) 125 Taxman 928 (Mad.) — CIT v. Aktiengesellschaft Kuhnle Kopp and Kausch W. Germany by BHEL
a) Nature of payment
Royalty paid to a non-resident in respect of export sales.
b) Brief facts
Pursuant to a collaboration agreement with an Indian company the assessee, a non-resident company, received payment on account of royalty. The Tribunal held that the royalty payable on export sales could not be regarded as deemed to have accrued in India within the meaning of section 9(1) (vi).
c) Key issue in relation to section 9(1)(vii)(b)
Whether royalty could not be said to be deemed to have accrued or arisen in India u/s.9(1)(vi) as the same was paid out of ‘exports sales’ and hence the source for royalty was the sales outside India?
d) Decision
The Madras High Court held that as far as royalty on export sales is concerned, that amount is also exempt u/s.9(1)(vi). Though the royalty was paid by a resident in India, it cannot be said that it was deemed to have accrued or arisen in India as the royalty was paid out of the export sales and hence, the source for royalty is the sales outside India. Since the source for royalty is from the source situated outside India, the royalty paid on export sales is not taxable. The Appellate Tribunal was therefore correct in holding that the royalty on export sales is not taxable within the meaning of section 9(1)(vi).
2.3 Lufthansa Cargo India (P.) Ltd. v. DCIT, (2004) 91 ITD 133 (Delhi)
a) Nature of payment
Payments to a non-resident for aircrafts overhauling and repairs
b) Brief facts
The assessee, a domestic company, had acquired four boeing cargo aircrafts from a foreign company and obtained licence from licensing authority to operate those aircrafts on international routes only. It also engaged crew, technical personnel, engineers and other ground staff and wet-leased aircrafts to a foreign cargo company. Under wet-lease agreement, responsibility for maintaining crew and aircrafts in airworthy condition was that of the assessee and the lessee was to pay rental on basis of number of flying hours during period subject to minimum guarantee. The assessee periodically made payments to a non-resident company on account of overhaul, repairs of its aircrafts, engines sub-assemblies and rotables (components) in workshops abroad. The assessee did not deduct tax at source on such payments.
c) Key issue in relation to section 9(1)(vii)(b)
Whether the payments for repairs and maintenance charges would not be chargeable to tax in India as they were made for earning income outside India and therefore the would fall within the purview of exclusionary part of section 9(1)(vii)(b)?
d) Decision
The ITAT held that the sources from which the assessee has earned income are outside India as the income-earning activity is situated outside India. It is towards this income-earning activity that the payments for repairs have been made outside India. The payments therefore fall within the purview of the exclusionary clause of section 9(1)(vii)(b).
Thus, even assuming that the payments for such maintenance repairs were in the nature of fees for technical services, it would not be chargeable to tax.
These payments are not taxable for the reason that they have been made for earning income from sources outside India and therefore fall within exclusionary clause of section 9(1)(vii)(b).
2.4 Titan Industries Ltd. v. ITO, (2007) 11 SOT 206 (Bang.)
a) Nature of payment
Payment of Professional Fees in Hongkong for patent registration
b) Brief facts
The assessee-company was engaged in the manufacture of watches and was selling the same under its patent name ‘Titan’. An associate company of the assessee, incorporated in Singapore, was engaged in promoting the sales of ‘Titan’ watches in the Asia Pacific region. The assessee from the business point of view got its patent name registered in Hongkong through ‘C’ , a firm of professionals of Hongkong and paid to ‘C’ certain fees for technical services rendered by it. The assessee claimed that since the services had been utilised in its business abroad, the payment made to ‘C’ was covered in exception provided in section 9(1)(vii)(b) and, hence, it was not required to deduct tax at source in respect of the payment made to ‘C’.
c) Key issue in relation to section 9(1)(vii)(b)
Can the payment made for registration of a patent outside India for the purposes of exports, be considered as for the purposes of making or earning income from a ‘Source outside India’?
d) Decision
The Tribunal held that carrying on business means having an interest in a business at that place, a voice in what is done, a share in the gain or loss and some control, if not over the actual method of working, at any ratio, upon the existence of business.
The carrying on of a business is a bundle of activities and marketing is one of such activity. If the products are marketed outside India, then it cannot be said that there is no business activity.
Patent was registered outside the country for making an income from a source outside the country. The amounts paid are covered in exception provided in section 9(1)(vii)(b).
2.5 Income-tax Officer (IT) TDS-3 v. Bajaj Hindustan Ltd., (2011) 13 taxmann.com 13 (Mum.)
a) Nature of payment
Payment of Advisory Fees to a non-resident for acquisition of sugar mills/distilleries in Brazil
b) Brief facts
The assessee-company is engaged in the business of manufacturing of sugar. It engaged the services of KPMG, Brazil to advice and assist it in acquisition of sugar mills/distilleries in Brazil. In connection with the services rendered by KPMG for the said purpose, the assessee had made payment to KPMG. The Assessing Officer was of the view that the assessee ought to have deducted tax at source on the payment made to KPMG. According to him the amount received from the assessee by KPMG was in the nature of fees for technical services rendered. He was also of the view that in terms of section 9(1) income by way of Fees for Technical Services (FTS) payable by a person who is a resident shall be income deemed to accrue or arise in India.
c) Key issue in relation to section 9(1)(vii)(b)
Whether application of section 9(1)(vii)(b) is restricted only to an ‘existing source’ of income outside India or whether the same could be applied even in relation to a ‘future source’ of income?
d) Decision
The ITAT held that the payment in question made by the assessee to KPMG is in respect of services which otherwise fell within the definition of FTS as given in the Act. The dispute is whether the exceptions mentioned in clause (b) to section 9(1)(vii) would apply so that it can be said that the fees in the nature of FTS has not accrued or arisen to KPMG in India. As far as the first exception in section 9(1)(vii) clause is concerned viz., ‘where the fees are payable in respect of services utilised in a business or profession carried on by such person outside India’, it is found that the assessee carried on business in India and has utilised the services of KPMG in connection with such business. Therefore, the case of the assessee would not fall within the first exception, notwithstanding the fact that services were rendered only in Brazil. As far as the second exception mentioned in section 9(1)(vii) clause (b) is concerned viz., ‘for the purposes of earning any income from any source outside India’, the undisputed facts are that the assessee wanted to acquire sugar mills/distillery plants in Brazil and for that purpose also wanted to set up a subsidiary company. In fact, the assessee had set up a subsidiary company on 8-8-2006 in Brazil. Thus the assessee was contemplating to create a source for earning income outside India. It is no doubt true that the source of income had not come into existence. But there is nothing in section 9(1)(vii) clause (b) to show that the source of income should have come into existence so as to except the payment of fees for technical services. The expression used is ‘for the purpose of earning any income from any source outside India’. There is nothing in the language of section 9(1)(vii) clause (b), which would go to show that the same is restricted only to an existing source of income. It was held that the payment by the assessee of fees for technical services rendered by KPMG was outside the scope of section 9(1)(vii). Hence, it cannot be considered as income deemed to have accrued in India and not chargeable to tax in India and hence the assessee was not liable to deduct tax u/s.195.
2.6 Havells India Ltd. v. ADCIT, (2011) 13 taxmann. com 64 (Delhi)
a) Nature of payment
Payment to a non-resident for Testing & Certification Services used in relation to Export Sales
b) Brief facts
The assessee-company paid certain amount to a foreign company incorporated in the USA, namely, ‘C’, for getting testing and certification services and claimed deduction of the same as business expenditure. It had not deducted tax at source from payment made to ‘C’. The Assessing Officer referring to provisions of section 9(1)(vii)(b) and
further taking view that testing and certification services provided by ‘C’ were utilised in manufacture and sale of products by the assessee in India, held that section 195 was applicable to payment made to ‘C’. He, therefore, disallowed impugned payment invoking provisions of section 40(a)(i). The assessee contended before the Tribunal that in order to invoke provisions of section 40(a)(i) amount paid should be chargeable to tax under the Income-tax Act, and that fee for technical services paid by it to ‘C’ was not chargeable to tax in India, due to exception contained in section 9(1)(vii)(b).
c) Key issue in relation to section 9(1)(vii)(b)
Whether payments made for the testing and certification services provided by a non-resident and utilised by the assessee only for its ‘exports’ activities were not chargeable to tax in India in view of section 9(1)(vii)(b)?
d) Decision
The Tribunal held in the assessee’s favour as follows: “In order to fall within exception of section 9(1)(vii) (b), the technical services, for which, the fees have been paid, ought to have been utilised by a resident in a business outside India or for the purposes of making or earning any income from any source outside India.
The KEMA certification obtained by the assessee from ‘C’ for enabling exports of its products was unassailed. The sole stand of the Department was that this service of testing and certification had been applied by the assessee for its manufacturing activity within India.
The initial onus u/s.9(1)(vii)(b) lay squarely on the assessee to prove that the exemption available thereunder was in fact available to it. The assessee had maintained throughout that the testing and certification services provided by ‘C’ were utilised only for its export activity and that the same were not utilised for its business activities of production in India. Thus, the assessee had discharged the onus, which lay on it u/s.9(1)(vii)(b). Therefore, the impugned payment made by the assessee to ‘C’ was not chargeable to tax in India.”
2.7 (2008) 305 ITR 37 — Dell International Services (India) P. Ltd., in re v. (AAR)
a) Nature of payment
Bandwidth charges paid to non-resident telecom service provider for use in relation to data processing and information technology support services provided to group companies abroad.
b) Brief facts
The applicant, a private company registered in India, was a part of the Dell group of companies. It was mainly engaged in the business of providing call centre, data processing and information technology support services to the Dell group companies. The applicant’s parent company had entered into an agreement with BT, a non-resident company formed and registered in the USA, under which BT, the non-resident company, provided the applicant with two-way transmission of voice and data through telecom bandwidth. While BT was to provide the international half-circuit from the USA/Ireland, the Indian half-circuit was provided by VSNL, an Indian telecom company. Apart from installation charges payable initially, fixed monthly recurring charges for the circuit between the USA and Ireland and for the circuit between Ireland and India were payable by the applicant to BT, and this was net of Indian taxes. BT raised its invoice directly on the applicant and the applicant made the payment directly to BT. The applicant was paying tax in India in relation to the recurring charges in accordance with section 195 of the Income-tax Act, 1961. There was no equipment of BT in the applicant’s premises and the applicant had no right over any equipment held by BT for providing the bandwidth. Fibre link cables and other equipment were used for all customers including the applicant. The bandwidth was provided through a huge network of optical fibre cables laid under seas across several countries of which BT used only a small fraction. There was no dedicated machinery or equipment identified or allowed to be used in the hands of the applicant; a common infrastructure was being utilised by various operators to provide service to various service recipients and the applicant was one among them receiving the service. The landing site was at Mumbai, and the Indian leg thereof to Bangalore, including the last mile connectivity to the premises of the applicant, was catered to by Bharti Telecom. On these facts the applicant sought the ruling of the Authority on questions relating to the tax liability of BT and the applicant’s duty to deduct tax at source.
c) Key issue in relation to section 9(1)(vii)(b)
What is the true meaning and ambit of the phrase ‘for the purposes of making or earning any income from any source outside India’ occurring in section 9(1)(vi)(b)/9(1)(vii)(b) of the Act?
d) Decision
The AAR observed and held as follows: “Sub-clause (b) of clause (vi) of section 9 carves out an ‘exception’ to the taxability of royalty paid by a resident. According to the ‘exception’, the royalty payable in respect of any right, property or information used or services utilised (a) for the purpose of business or profession carried out by such person outside India, or (b) for the purpose of making or earning any income from any source outside India is not an income that falls within the net of section 9. The applicant is relying on the second part of the exception i.e., ‘for the purposes of making or earning any income from any source outside India’. It is the case of the applicant that its business principally comprises of export revenue in the sense that it provides data processing and information technology support services to its group companies abroad and receives payment in foreign exchange against such exports. Therefore, although its business is carried out from India, the income it gets is from a source outside India and the payment it makes to BTA is for the purpose of earning income from a source outside India. Hence, according to the applicant, the benefit of exception envisaged by section 9(1)(vii)(b) will be available to it. In the context of this argument, it is pointed out by the learned counsel for the applicant that the two limbs of clauses (a) and (b) supra are distinct and the mere fact that the business is carried on in India and not outside India does not come in the way of invoking the exception provided by the latter limb, i.e., for the purpose of earning income from a source outside India.
We find it difficult to accept the applicant’s contention. No doubt, the factum of the applicant carrying on business in India does not come in the way of getting the benefit of the exception. It is possible to visualise the situations in which the business is carried on principally in India, whereas a particular source of income is wholly outside India, but, that is not the situation here. The income which the applicant earns by data processing and other software export activities cannot be said to be from a source outside India. The ‘source’ of such income is very much within India and the entire business activities and operations triggering the exports take place within India. The source which generates income must necessarily be traced to India. Having regard to the fact that the entire operations are carried on by the applicant in India and the income is earned from such operations taking place in India, it would be futile to contend that the source of earning income is outside India i.e., in the country of the customer. Source is referable to the starting point or the origin or the spot where something springs into existence. The fact that the customer and the payer is a non-resident and the end product is made available to that foreign customer does not mean that the income is earned from a source outside India. As aptly said by Lord Atkin in Rhodesia Metals Ltd. v. Commissioner of Taxes, (1941) 9 ITR (Suppl.) 45 “‘source’ means not a legal concept, but something which a practical man would regard as a real source of income”.”
The applicant’s counsel placed reliance on the decision of the Income-tax Appellate Tribunal in Synopsis India (P.) Ltd. v. ITO, [IT Appeal No. 919 (Bang.) of 2002] and that of the Madras High Court in CIT v. Aktiengesellschaff Kuhnle Kopp & Kausch W. Germany by BHEL, (2002) 125 Taxman 928.
The AAR distinguished these decisions as follows:
“In the case of Synopsis India (P.) Ltd. (supra), the assessee made payments to a foreign company which provided down-linking service to the assessee in connection with the transmission of data through satellite communications. The Tribunal found that the entire turnover of the company was export of software devices/products for which international connectivity was provided by a US company Datacom-Inc. The Tribunal held that the assessee, though carried on business in India, earned income from the sources outside India and the payments made to Datacom-Inc. were to earn income from a source outside India. The Tribunal apparently relied on two factors (i) the entire turnover of the assessee-company is derived from export of software, and (ii) such export activity was undertaken after ‘obtaining the data from international connectivity’. There is no reasoned discussion on the point whether the source of income was located outside India. The Tribunal proceeded on the premise that in the given set of facts the income was derived from sources outside India. In the second case, the Madras High Court found that the royalty was paid out of export sales and therefore the source for royalty was the sales outside India. It was on such finding of facts that the conclusion was drawn. The ratio of this decision also cannot be applied to the present case.”
3. Conclusion
3.1 From the above discussion, it is evident that there is a divergence of judicial opinion on interpretation of the second limb of the exclusionary part of clause (b) of section 9(1)(vii).
3.2 In the opinion of the authors, technically, the interpretation of the AAR in Dell International’s case (supra) of the words ‘source outside India’ occurring in the said second limb of section 9(1)(vii)(b) in respect of export of goods and services, appears to represent a better view as compared to the view taken by the Madras high Court in the case of (2002) 125 Taxman 928 (Mad.) — CIT v. Aktiengesellschaft Kuhnle Kopp and Kausch, W. Germany by BHEL (supra) in the context of royalties in respect of exports sales.
3.3 In view of above, the moot question then arises is: What is the true scope and ambit of the words ‘source outside India’? Does it mean that it will apply only to sources of income outside India other than relating to business income, such as income from house property, capital gains and income from other sources?
3.4 The true intention of the Legislature in providing the exclusionary limbs of section 9(1)(vii)(b) is not clear form the Memorandum explaining the provisions of the Finance Bill, 1976 or the Notes on Clauses relating to the Finance Bill, 1976. Even the Circular No. 202, dated 5-7-1976 explaining the amendments made by the Finance Act, 1976 does not explain the true nature and purpose of the exclusionary limbs of section 9(1)(vii)(b).
3.5 In the interest of clarity, certainty and to avoid litigation and to effectively reduce cost of export of goods and services, it would be prudent for the Government/CBDT to make necessary amendments and/or clarify that the payment of FTS/royalties for the purposes of exports of goods and services is covered by the exclusionary limbs of section 9(1)(vi)(b)/9(1)(vii)(b).
