INCOME TAX ACT, 1961

Section 9(1)(vii)(b)

Income deemed to accrue or arise in India - Under section 9(1)(vii) - Fee for technical services - Service of foreign law firm availed of for acquiring insurance business in Indonesia--Assessee pleading for benefit under exception to section 9(1)(vii)(b)

Assessee engaged service of a law firm based at Indonesia for acquiring an insurance business there. It filed application under section 195 before AO for exemption from deducting tax from payment to be made to foreign law firm for service to be rendered by said firm in Indonesia. AO rejected assessee's application on the ground that'consultancy services' rendered by Nonresident company fell under the category Technical Services' and fees payable for such Technical services, though rendered outside India would be deemed as accruing or arising in India as per section 9(1)(vii)(b) read with Explanation to section 9(1)(vii), substituted by Finance Act, 2010 with effect from 1-6-1976. Assessee challenged this by way of writ petition contending that transaction consideration fell within exception to of section 9(1)(vii)(b) since, fees payable was in respect of services utilised in a business or profession carried by assessee outside India and for the purpose of making or earning any income from any source outside India. Assessee submitted that amount which was paid by engaging services of law firm was for the purpose of 'making or earning any income from any source outside India' within the meaning of section 9(1)(vii)(b). The expenditure incurred was for service procured for a future business to be carried on by assessee in Indonesia. Therefore, assessee could not be made liable to deduct tax under the IT Act. Held: The expression 'fees' for 'technical service' has been defined in Explanation 2 to section 9(1)(vii)(b). Any payment by way of fees and technical service to a non-resident by resident is an income deemed to have accrued or arisen in India and is thus liable to tax. To attract exception under section 9(1)(vii)(b), service should be utilized in India. In assessee's case, Indonesian firm provided 'consultancy service'. Therfore, it was not open for assessee to state that said service fell within exception provided in section 9(1)(vii)(b) or outside Explanation 2 to said section. If service utilized by assessee abroad was for pre-existing busienss in Indonesia, assessee could have legitiamtely stated that service service provided was utilized for a business of profession carried out outside India or for the purpose of making or earning any income from any source from outside India. There was no source that was existing in Indonesia. There was a mere proposal for acquiring insurance business in privately or Indonesian Insurance Policy. Service of law firm was sought for a range of service which were approval consultancy services. Accordingly, writ petition was not maintainable, the issue as to whether assessee was entitled to benefit of any clause in DTAA, was left open.

REFERRED :

FAVOUR : Against the assessee.

A.Y. :

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