Where consultancy charges were paid by ICO to non-resident consultants rendering services on ICO’s offshore projects, source rule exclusion carved out u/s.9(1)(vii)(b) is applicable even though the payments are made from India.

Where consultancy charges were paid by ICO to non-resident consultants rendering services on ICO’s offshore projects, source rule exclusion carved out u/s.9(1)(vii)(b) is applicable even though the payments are made from India.

• The taxpayer an Indian company (ICO) is engaged in the business of rendering technical consultancy services for oil exploration industries in India and abroad. For the purposes of carrying out an oil and gas exploration project in Nigeria, ICO paid fees for technical services to non-residents working for ICO in Nigeria.
•  ICO did not deduct tax at source while making payments to consultants on the basis of specific exclusion in section 9(1)(vii)(b) of the Incometax Act viz. amount paid for FTS which is utilised for ICO’s business outside India could not be considered as income accruing or arising in India.
• Rejecting the claim, the Tax Department had disallowed the claim for deduction of FTS by holding that there was non-deduction of tax at source.
• The CIT(A) held that though ICO had shown that payments were directly related to the Nigerian project, the fact that the payments were made from India and not from Nigeria left some ambiguity in determining whether the exception provided u/s.9(1)(vii)(b) directly applied to the said consultants and whether the income can be regarded as accrued in India.

ITAT Ruling:

•  Technical fees paid to non-resident consultants on ICO’s projects in Nigeria have to be considered as fees paid for services utilised in the business of the taxpayer outside India. This proposition prevails even though the payment is made from India and not from Nigeria. The exclusion u/s.9(1) (vii)(b) is clearly applicable and income earned by non-residents is not taxable in India.
•  ICO is justified in holding a bona fide belief that no part of payment had any element of income which was chargeable to tax in India. ICO cannot therefore be fastened with any liability associated with non-deduction of tax at source and consequently the payments cannot be disallowed u/s.40(a)(i) of the Income-tax Act.