Section 9(1)(vii)

Section 9(1)(vii) — the law in short

What the courts have decided on section 9(1)(vii), in one screen. Read this first; open an entry when you need the facts, the reasoning and the source.

• DIT v A.P. Moller Maersk A/S Supreme CourtHelps taxpayerValidity unconfirmed
  Our Indian agents pay the foreign principal a pro-rata share of the cost of its global booking and communication system — is that fees for technical services taxable in India?
  No. The Supreme Court held that the payments the Indian agents made to a Danish shipping line for using its Maersk Net system were reimbursement of a proportionate share of cost, not fees for technical services. The system was an integral part of the shipping business and was a common facility available to all agents worldwide, not a service catering to any agent's special needs. Once the character of a payment is reimbursement of expenses, it cannot be income chargeable to tax; and since freight income was exempt under the India-Denmark treaty shipping article, the expenses of earning it could not be split off. The Revenue's appeals were dismissed.
• CIT v Kotak Securities Ltd Supreme CourtHelps taxpayer
  We paid stock exchange transaction charges without TDS. Are those fees for technical services under 194J?
  No. The exchange's trading platform is a standard facility available to every member on identical terms, with no customisation for the payer, so the transaction charges are not fees for technical services under s.194J — and the s.40(a)(ia) disallowance built on that premise falls away.
• CIT v Bharti Cellular Ltd Supreme CourtCuts both waysValidity unconfirmed
  We pay interconnect and port charges to another telecom operator — is that fees for technical services on which we must deduct tax under section 194J?
  Unresolved, and the Supreme Court sent it back for evidence. On 12 August 2010 it held that the question turns on whether human intervention is involved in the technical operations by which one operator gives another interconnection, and that this cannot be decided without technical assistance on the record. Since 1979 the courts have read technical services narrowly, applying noscitur a sociis, because the words sit between managerial and consultancy services in Explanation 2 to section 9(1)(vii). The department had led no expert evidence. The matters were remitted to the Assessing Officer (TDS) to examine an expert, and no interest or penalty was to be levied for the past.
• Ishikawajima-Harima Heavy Industries Ltd v DIT Supreme CourtHelps taxpayerSuperseded by amendment
  Our turnkey contract has offshore supply and offshore services alongside Indian work. Is the whole contract taxable in India?
  No — a composite turnkey contract can be split. Profits on equipment supplied and paid for outside India, where title passes outside India, are outside the Indian charge, because the contract being signed in India is immaterial and there must be a sufficient territorial nexus. On offshore services the Court read s.9(1)(vii) as requiring the services to be both utilised in India and rendered in India; that second requirement has since been removed retrospectively by statute, so only the offshore supply holding survives on the domestic law side.
• CIT v Media World Wide P Ltd High CourtHelps taxpayerValidity unconfirmed
  I pay uplinking and bandwidth charges for my channel. Is that 194C work or 194J technical services?
  S.194C. The Court held first that no technical service was rendered at all: a standard, automated facility that anyone may use on payment of the prescribed fee is not a service rendered to the payer, whatever equipment is involved. Only then did it turn to s.194C, whose inclusive definition of 'work' specifically includes broadcasting and telecasting. Tax was rightly deducted under s.194C and there was no short deduction.
• Pr CIT v Bharat Heavy Electricals Ltd High CourtHelps taxpayer
  Our erection and commissioning contractor uses its own engineers. Should we deduct under 194J, not 194C?
  No. Payments for construction, erection and commissioning of a plant do not become fees for technical services merely because the contractor deploys technical personnel to perform its contract; deduction under s.194C is correct.
• Centrica India Offshore P Ltd v CIT High CourtHelps departmentValidity unconfirmed
  We have people seconded to us from our overseas group companies, they work under our control, and we only reimburse their salary cost — do we still have to withhold tax under section 195?
  Yes. The Delhi High Court held on 25 April 2014 that the overseas group companies remained the real employers of the secondees, so what they supplied was the service of trained personnel, not a bare loan of staff. The payment was fees for technical services under Article 13 of the India-UK DTAA and, because the secondees passed their quality-control know-how on to the Indian staff, made-available services under Article 12 of the India-Canada DTAA. The overseas entities also had a service permanent establishment. Calling the payment a reimbursement, and charging no mark-up, made no difference. Section 195 applied and the writ petition was dismissed.
• DIT v OHM Ltd High CourtHelps taxpayer
  I am a foreign company providing survey and data services to an offshore oil exploration block in India. Am I taxed at 10% of gross under section 44BB, or must I go under section 44DA?
  Section 44BB applies. The Delhi High Court upheld the Authority for Advance Rulings and held that where a non-resident provides services in connection with prospecting for or extraction or production of mineral oils, section 44BB governs the computation, not section 44DA. Section 44BB is the special provision and section 44DA the general one, so generalia specialibus non derogant applies. Reading section 44DA as covering everything would reduce section 44BB to a dead letter. The provisos inserted by the Finance Act 2010 in both sections are clarificatory on computation and do not change either section's sphere of operation.
• DIT v Guy Carpenter & Co Ltd High CourtHelps taxpayerValidity unconfirmed
  We pay reinsurance brokerage to an overseas broker who places our risk in the Lloyd's market — is that fees for technical services under the India-UK treaty?
  No, on these facts. The Delhi High Court dismissed the Revenue's appeal on 23 April 2012, holding that no substantial question of law arose. The Tribunal had found on the evidence that the overseas reinsurance broker was doing no more than acting as an intermediary — obtaining competitive proposals from Lloyd's syndicates, passing communications, submitting the slip to the market for signing and administering claims — and that nothing was made available to the Indian insurer within Article 13(4)(c) of the India-UK DTAA. The High Court held those to be findings of fact, and counsel for the Revenue could point to no perversity in them, so section 260A gave no scope to interfere.
• CIT v De Beers India Minerals P Ltd High CourtHelps taxpayerValidity unconfirmed
  We paid for technical services but learnt nothing from them. Is it still fees for technical services?
  No, where the treaty carries a make available condition. The service must be aimed at and result in transmitting the technical knowledge, skill or process, so that it stays with the recipient after the contract ends and can be used independently. Delivering the fruit of the expertise, here survey data and maps, is not enough.
• DIT v Sheraton International Inc High CourtHelps taxpayerValidity unconfirmed
  My foreign company runs worldwide advertising, publicity and reservations for Indian hotels using my brand. Is my fee royalty or fees for included services, or is it business profits?
  Business profits, and not taxable here for want of a permanent establishment. The Delhi High Court dismissed the Revenue's appeals and upheld the Tribunal. The main service was advertisement, publicity and sales promotion for the hotels worldwide; the use of the trademark, trade name and stylised S mark, the reservation interface and the loyalty programmes were all incidental to that integrated business arrangement, not separate services. So the fee was neither royalty under section 9(1)(vi) with Explanation 2 nor fees for technical services under section 9(1)(vii) with Explanation 2, nor taxable under Article 12 of the India-USA treaty. With no permanent establishment, Article 7 kept it out of the Indian net.
• Clifford Chance v DCIT High CourtHelps taxpayerValidity unconfirmed
  My UK firm advised on Indian projects, partly from London and partly on visits to India, and our partners were here more than 90 days. Is the whole fee taxable in India?
  No. The Bombay High Court held that only the income attributable to services actually performed in India is chargeable, measured on the firm's hourly billing for work done in India. Article 15 of the India-UK treaty taxes an individual, including a member of a partnership, in the other State only if he performs services there and is present 90 days or more, and then only so much of the income as is attributable to those services. Under section 9(1)(vii)(c) the services must be both rendered in India and utilised in India, and territorial nexus does not permit the whole of a composite fee to be treated as arising in every jurisdiction touched.
• Skycell Communications Ltd v DCIT High CourtHelps taxpayerValidity unconfirmed
  My company pays mobile phone bills. The department says these are fees for technical services and we must deduct tax under section 194J. Must we?
  No. The Madras High Court quashed the department's direction and allowed the writ petitions with costs. Collecting a fee for the use of a standard facility offered to everyone willing to pay for it is not a fee received for technical services, even though the facility runs on sophisticated equipment. A subscriber contracts for airtime, not for a technical service, and is not concerned with the equipment in the exchange or the location of the base station. What is not a technical service when the subscriber is an individual does not become one when the subscriber is a firm or a company, because the facility is the same.
• ITO v Right Florists P Ltd ITATHelps taxpayer
  I pay Google Ireland and Yahoo for online search advertising. Must I deduct tax at source, or will the expense be disallowed?
  No tax was deductible, so no disallowance. The Kolkata Tribunal held that payments for online search advertising to Google Ireland and Yahoo USA were not taxable in India. Neither had a permanent establishment here, and a website by itself is not a PE. The service is fully automated with no human intervention, so it is not fees for technical services under section 9(1)(vii) or under the India-Ireland treaty; and under the India-USA treaty nothing was made available. With no primary liability on the recipient there was no withholding obligation under section 195 and no disallowance under section 40(a)(i).
• eBay International AG v ADIT ITATHelps taxpayer
  We charge Indian sellers a fee for listing on our overseas marketplace. Is that fees for technical services, and do our Indian support companies make us taxable here?
  No on both, and note how the second answer is reached. Providing a platform on which others transact is not the rendering of managerial, technical or consultancy services, so the user fees are not fees for technical services. On the treaty the Tribunal accepted that the Indian group companies, working exclusively for the Swiss company, were dependent agents - the assessee lost that limb - but held that a dependent agent becomes a permanent establishment only if it performs one of the functions listed in Article 5(5), and marketing and collection work is not among them. They were not a place of management either. Without a permanent establishment the business profits article keeps the income out of the Indian charge.
• Herbalife International India (P) Ltd v ACIT ITATCuts both waysValidity unconfirmed
  I did not withhold tax on an administrative fee paid to my US parent. Can the Assessing Officer disallow the whole expense under section 40(a)(i) when a payment to an Indian party would not be disallowed?
  No, where the India-USA treaty applies. The Delhi Tribunal held that Article 26(3) of that treaty forbids exactly this discrimination: a disbursement to a resident of the other State must be deductible on the same conditions as a payment to a resident. As section 40(a)(i) then stood, non-deduction of tax led to disallowance only for payments to non-residents, so an Indian payer would prefer a resident supplier. Article 26(3) neutralises that, and by section 90(2) the more beneficial treaty provision prevails. The Tribunal therefore held section 40(a)(i) could not be invoked, even assuming the sum was chargeable in India, and left the chargeability question open.
• Raymond Ltd v DCIT ITATCuts both ways
  We paid a UK merchant bank commission for managing our GDR issue. Does 'fees for technical services' in the treaty catch it, so that we had to deduct tax under section 195?
  No, on the Tribunal's reading of the treaty. The Mumbai Tribunal held that Article 13.4(c) of the India-UK treaty is not satisfied by merely rendering technical or consultancy services. The services must also make available technical knowledge, experience, skill, know-how or processes, meaning the recipient must be able to apply them himself afterwards without going back to the provider. The lead manager's work on the GDR issue left Raymond with nothing of that kind once the issue closed. The Tribunal also rejected the argument that the managers had bought the GDRs and resold them, and held that the UK treaty applied.
• WorleyParsons Services Pty Ltd v DIT (International Taxation) Advance RulingCuts both waysValidity unconfirmed
  Our Australian firm monitors a pipeline project in India for the owner - schedules, reporting, coordinating contractors. Is our fee a royalty, or business profits we are taxed on only if we have a permanent establishment?
  It depends, and the applicant won half. The Authority ruled that WorleyParsons's receipts under its project monitoring contract with GAIL were not royalties under article 12 of the India-Australia agreement, because merely rendering services is not enough - the services must result in technical knowledge being made available. But it held that the applicant had a permanent establishment under article 5(2)(k), its supervisory activity in connection with the project having continued more than six months, with employees present in India for 165 days in 2003-04 and 90 to 95 per cent of the work done here. The receipts were therefore taxable as business profits under article 7, but only so far as attributable to the permanent establishment.
• KnoWerX Education (India) P Ltd v DIT Advance RulingHelps taxpayer
  We collect examination fees in India for two American professional bodies and send the money on. Is that taxable here, and must we deduct tax before we remit?
  No. The Authority ruled that the examination fees collected for APICS and AST&L and remitted to them were not taxable in India, that the income was business income in nature, and that the applicant need neither deduct tax nor pay any. The fees were received in India by the applicant on the American bodies' behalf, so section 5(2)(a) was in play; but both bodies were residents of the United States for the agreement notwithstanding their exemption under section 501(c)(6) of the Internal Revenue Code, and the applicant was not their permanent establishment. With no permanent establishment, article 7 left the profits taxable only in the United States, and section 195 had nothing to bite on.
• In re Airports Authority of India (Raytheon contracts) Advance RulingCuts both waysSuperseded by amendment
  We send faulty equipment abroad for repair by a US supplier and separately pay it to maintain the software. Do we deduct tax on either, and at what rate?
  It depends on which contract. The Authority ruled that the payment to Raytheon for hardware repair support was not taxable in India and that the applicant was not required to deduct tax on it: the repairs were done outside India, delivery was taken outside India and Raytheon had no permanent establishment here, so article 7 left those business profits to the United States. The software maintenance contract went the other way. The deputation of an engineer created no permanent establishment, but the payments were fees for included services under article 12, the applicant having a conditional right to use the software rather than an outright purchase. Tax was to be withheld at 10 per cent apart from surcharge.
• In re Cargo Community Network Pte. Ltd. Advance RulingHelps departmentValidity unconfirmed
  Indian cargo agents pay our Singapore company a subscription for a password to use our air-cargo booking portal, which sits on our servers in Singapore. Is that taxable in India?
  Yes. The Authority ruled that the payments made by Indian subscribers to Cargo Community Network Pte. Ltd. for a password to access and use its Ezycargo portal, hosted on servers in Singapore, were taxable in India and subject to deduction of tax at source. The portal and the server together were held to be integrated commercial-cum-scientific equipment which the Indian agents used in India, so the subscription was royalty under article 12(3)(b) of the India-Singapore agreement. The training and help-desk support supplied through the applicant's Chennai liaison office were fees for technical services under article 12(4), being ancillary to the enjoyment of the equipment. The ruling binds only that applicant.
• In re International Hotel Licensing Company S.A.R.L. Advance RulingHelps departmentSuperseded by amendment
  Our Luxembourg company collects a share of an Indian hotel's revenue to fund worldwide marketing, all of it done abroad. Is that money taxable in India?
  Yes. The Authority ruled that the contributions were taxable in India. It refused to treat them as reimbursements: the 1.5 per cent of gross hotel revenue and the 3.4 per cent of Marriott Rewards room charges were contractual charges with no direct nexus to the applicant's actual costs, the programmes benefited the whole chain, and any excess was retained. There was a business connection under section 9(1)(i), the twenty-five year participation agreement showing a real and intimate relation with the owner's Indian hotel and continuity rather than an isolated dealing. The services were also managerial and consultancy services within Explanation 2 to section 9(1)(vii), and the exception for services used outside India did not apply.
• In re A.T. and S. India P. Ltd Advance RulingHelps department
  Our Austrian parent seconds its technical staff to us and we repay it exactly what their salaries cost. The staff work under our control. Must we withhold tax under section 195 on that repayment?
  Yes. The Authority ruled that the payments A.T. and S. India made to AT&S Austria under a secondment agreement, described as reimbursement of the salary cost of seconded personnel, were subject to withholding under section 195. AT&S Austria remained the real employer: it could recall and replace the personnel, they would return to it after the assignment, and the Indian company could not exceed the salaries it fixed. The payments were consideration for the provision of services of technical or other personnel and so were fees for technical services within Explanation 2 to section 9(1)(vii) and article 12(4) of the India-Austria agreement. The ruling binds only that applicant.
• In re Timken India Ltd Advance RulingHelps departmentSuperseded by amendment
  Our US parent charges us only its actual cost for services it performs in America, with no mark-up. Must we still withhold tax under section 195?
  Yes. The Authority ruled against the applicant on every live question. Timken India paid its US parent USD 756,728.26 under an agreement of 2 August 2000 for management, system development, engineering and manufacturing services performed wholly in the United States, the compensation being confined to actual cost with no mark-up. The Authority held the sum was not a reimbursement of costs; that it was taxable as fees for technical services under article 12 of the India-US convention though the services were rendered abroad; that the absence of a profit element was irrelevant; and that no net-basis option could be read into section 44D. Withholding was required.
• In re Airports Authority of India (feasibility study) Advance RulingHelps taxpayer
  A US firm did a feasibility study for us, but it is paid directly out of a US government grant, not by us. Is the fee taxable in India, and must we deduct tax?
  No. The Authority ruled that the payments to Innovative Solutions International Inc of Virginia were not taxable in India, either under the Act or under the agreement with the United States. The study for the applicant's communication, navigation and surveillance and air traffic management project was prepared in the United States; the firm had no office or establishment in India and its work here was confined to some meetings with the applicant's officials and coordination with local vendors. Decisively, the money was payable only by the US Trade and Development Agency out of its grant of US$450,600, and the firm had no remedy against the applicant if the Agency did not pay.
• In re Danfoss Industries P Ltd Advance RulingHelps department
  We pay our Singapore group company a share of its regional costs for market research and management advice. If there is no profit in it, must we still deduct tax under section 195?
  Yes. The Authority ruled that the payments to Danfoss Singapore would be subject to withholding under section 195. It accepted the common ground that section 195 applies only where the amount is income of the payee and not a mere reimbursement of cost, but held that these payments were not reimbursements. The fee was worked out by an allocation key based on each group company's budgeted turnover, weighted for growth rate and market maturity, so there was no direct nexus between what Danfoss Singapore actually spent in serving the applicant and what the applicant paid. Even if the total matched the cost, that would be a quid pro quo for the service fees and not a reimbursement of expenses.
• In re Ind Telesoft (P) Ltd Advance RulingHelps taxpayerSuperseded by amendment
  We pay commission and a retainer to agents in France, Canada and the USA who find export orders for our software. None of them sets foot in India. Do we deduct tax?
  No, as the law stood. The Authority ruled that no tax was deductible at source under section 195 on the commission and retainer fees payable to the three non-resident agents. All three operated outside India and had no office or operations here; the applicant earned its foreign exchange by exporting software, and after the receipts came into India the agents were paid their fees and commission abroad. The Commissioner himself relied on the Board's Circular No. 23 of 23 July 1969, under which no part of the income would arise in India where the non-resident agency operated outside the country, and on Circular No. 786 of 7 February 2000. The Authority adopted that reasoning and ruled accordingly.
• In re P. No. 30 of 1999 Advance RulingHelps departmentSuperseded by amendment
  Our Indian company pays its US group parent for time on the group's mainframe computers and for use of the group data network. Is that royalty taxable in India?
  Yes. The Authority ruled that the charges paid by the Indian company to its US group company for access to and use of the group's mainframe computers and consolidated data network were taxable in India, and fell within article 12(3)(a) of the India-US convention rather than article 12(3)(b). The Indian company was billed by reference to CPU utilisation time, email usage, bandwidth and network management. The Authority held the payment was for the use of a secret process - the embedded, customised, encrypted software through which the data was processed - and so was royalty on the first limb, not a payment for equipment. The ruling binds only that applicant.
• Steffen Robertson and Kirsten v CIT Advance RulingHelps departmentSuperseded by amendment
  Part of our consultancy work for an Indian client is done in our own office abroad, and the contract puts every Indian tax on the client. Is the offshore part of the fee still taxable in India - and can we even ask the Authority when the tax is not ours to bear?
  Yes to both. The Authority held that the whole of the US $ 203,090 payable by TISCO to a South African engineering consultancy - the part for work done at Johannesburg, the part for work done in India, and the part described as daily allowances and travelling costs - was deemed to accrue or arise in India under s.9(1)(vi) and s.9(1)(vii), because the statutory test is where the services are utilised, not where they are rendered. TISCO had to deduct at 55 per cent for payments in financial year 1996-97 and 48 per cent for 1997-98, or at 30 per cent if both conditions in s.115A(1)(b) were shown to be met. The Authority also held the application maintainable despite a clause making TISCO bear all Indian taxes, because the non-resident still carries its own advance-tax and return obligations. The ruling binds only SRK.
• Horizontal Drilling International SA v CIT Advance RulingHelps taxpayer
  Our French company drilled a pipeline crossing under a river in India for a public sector customer. The whole job took three months. Can the Revenue tax the contract price as fees for technical services even though we have no permanent establishment?
  No. The Authority ruled that Horizontal Drilling International SA was not liable to Indian tax on the proceeds of its contract with GAIL. The job - laying gas pipeline under the Yamuna by horizontal drilling - ran about three months, well short of the six months that article 5(3) of the India-France agreement requires before a construction or installation project becomes a permanent establishment. Without a permanent establishment article 7 gave India nothing. The Authority refused to let the Revenue reach the same money through article 13 instead, holding that the price of executing a project is not consideration for services rendered while executing it. The ruling binds only that applicant.
• Ericsson Telephone Corporation India AB v CIT Advance RulingCuts both waysSuperseded by amendment
  Indian operators are about to deduct 55 per cent from what they pay my Swedish company for installing a GSM network. Can they deduct on my thin net margin instead?
  No, not on the margin, though the rate came down. The Authority ruled that the Indian companies should not withhold at 55 per cent but at 30 per cent, the rate applicable to such payments under the Finance Act 1995. It refused the applicant's case that only its net profit from local operations, said to be not more than 10 per cent of receipts, could be taxed. The receipts being fees for technical services and the agreements having been made after 31 March 1976, section 44D(b) barred any deduction for expenditure or allowance, and the entire gross receipts fell to be taxed at 30 per cent under section 115A. The net profit question was left open.
• Decta v CIT Advance RulingHelps taxpayerValidity unconfirmed
  We are a UK development body. Indian companies pay us a share of the cost of export-promotion projects we run for them, and we make nothing on it. Is that a fee for technical services taxable in India?
  No. The Authority ruled that the contributions DECTA received from Indian companies were not income chargeable to tax in its hands at all, and so were not fees for technical services under section 9(1)(vii) or article 13(4) of the India-UK agreement. DECTA ran export promotion and technical assistance projects for Indian companies under a bilateral UK-India development programme. The projects were paid for by the UK Overseas Development Administration; the Indian companies put in roughly a quarter of project cost into a common account. The Authority treated that as a pooling of project expenses, not a price for services. The third question did not arise. The ruling binds only DECTA.
• Tekniskil (Sendirian) Berhard v CIT Advance RulingHelps taxpayerSuperseded by amendment
  We are a Malaysian company that recruits skilled workers abroad and supplies them to a Korean contractor working offshore India. We are paid outside India and we supervise nothing. Are we taxable here?
  No. The Authority ruled that Tekniskil, a Malaysian manpower company, was not taxable in India on sums received abroad and had no permanent establishment here. It supplied about a hundred skilled workers to Hyundai Heavy Industries for offshore installation work at Bombay High. It recruited them outside India, bore their mobilisation and personal costs, and handed them over; HHI directed and supervised them on its own barges. Supplying labour was a business activity, so article 7 of the India-Malaysia agreement applied, and with no fixed place at Tekniskil's disposal there was nothing for the profits to attach to. The ruling binds only Tekniskil.
• In re Advance Ruling P. No. 13 of 1995 Advance RulingCuts both waysSuperseded by amendment
  Our French engineering group will build a turnkey plant in India, with some work done here and a great deal done abroad. Can India tax the work done abroad, and are the payments royalties, technical fees or business profits?
  Mostly against the applicant. The Authority ruled that the French company's Indian project headquarters and site office together were a permanent establishment; that the payments under the seven agreements were royalties and fees for technical services within articles 13.3 and 13.4 of the India-France agreement; and that the outside activities were effectively connected with that permanent establishment, so the receipts fell to be taxed under article 7 read with article 13.6 as business profits. Only profits referable to operations carried out in India were taxable. Payments to head office for licensed technology and subcontracted services were not deductible reimbursements. The ruling binds only that applicant.

Listed strongest first: Supreme Court, then High Court, then Tribunal, then CBDT. Nothing here has yet been read in full by a chartered accountant — open an entry to see where it came from.