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 India if the payment for the services is made by an Indian resident or made by a nonresident but used in India. The rule will apply regardless of whether the services are actually performed in India.

Section 9 deems fees for technical services to accrue or arise in India when the fee is paid by a resident, except when the payment is for services used in a business of the payer outside India or for earning any income from a source outside India.

According to the finance bill, the clarification is aimed at two court cases that narrowed the scope of nonresident taxation in India: 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 India, there must be a sufficient territorial nexus—the services must be both rendered and utilized in India.

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 India 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 India.

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.

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 India where there is no nexus between the interest or royalties and the state.

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