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Wednesday, May 18, 2011

India 2010 Finance Bill Seeks to Clarify Source Rule

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India's 2010 finance bill, released Feb. 26, seeks to raise additional revenue by broadening the number of technical services transactions by nonresidents subject to tax in previous hitIndianext hit, and proposes the changes retroactive to 1976.

In the new budget, the explanation to Section 9 of the Income Tax Act would be changed to provide that services rendered by a nonresident will be taxable in previous hitIndianext hit if the payment for the services is made by an Indian resident or made by a nonresident but used in previous hitIndianext hit. The rule will apply regardless of whether the services are actually performed in previous hitIndianext hit.
Section 9 deems fees for technical services to accrue or arise in previous hitIndianext hit when the fee is paid by a resident, except when the payment is for services used in a business of the payer outside previous hitIndianext hit or for earning any income from a source outside previous hitIndianext hit.
Supreme Court Decision
According to the finance bill, the clarification is aimed at two court cases that narrowed the scope of nonresident taxation in previous hitIndianext hit: the Supreme Court's 2007 ruling in Ishikawajima-Harima Heavy Industries Ltd. v. Dept. of Income Tax, and a 2009 case, Jindal Thermal Power Co. Ltd. vs. DCIT.
In Ishikawajima, the Japan-based taxpayer entered into a turnkey contract to supply equipment and design and engineering services to an Indian joint venture for a natural gas facility. The services were rendered offshore, in the Indian Ocean. The Supreme Court held that in order for fees for technical services paid to the nonresident to be taxed in previous hitIndianext hit, there must be a sufficient territorial nexus—the services must be both rendered and utilized in previous hitIndianext hit.
In an attempt to remedy the Ishikawajima ruling, the government amended the explanation to Section 9 in 2007 to state that where income is deemed to accrue or arise in previous hitIndianext hit under Section 9, it shall be included in the total income of the nonresident, regardless of whether the nonresident had a residence or place of business or business connection in previous hitIndianext hit.
However, the Karnataka High Court in 2009 held in Jindal Thermal that a plain reading of the amendment did not do away with the ruling in Ishikawajima.
Practitioner Reaction
Vispi T. Patel of Vispi T. Patel & Associates in Mumbai said that the amendment “could lead to litigation as it is silent on the territorial nexus of the services being rendered by the non-resident and the Indian state.” He further said that the amendment is not clear regarding applicability to interest or royalty income earned by a nonresident outside of previous hitIndianext hit where there is no nexus between the interest or royalties and the state.
India's 2010 finance bill provisions can be accessed at http://indiabudget.nic.in/.
For the latest in international changes to law and regulation, try BNA's DailyTax Report for 15 days for free at: http://www.bnatax.com/Daily-Tax-Report-p7889/
For the latest transfer pricing news and analysis, try BNA Tax & Accounting's Transfer Pricing Report for 15 days for free at: http://www.bnatax.com/Transfer-Pricing-Report-p7899/.

 

 

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