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Budget 2007-08 a blow to non-residents
March, 26th 2007

Under the existing provisions, non-residents' income from interests, royalties or fees for technical services is taxable in India; but, there must be sufficient territorial nexus between such income and the territory of India. 
 
The judicial opinion has been, that despite the fiction in the IT Act, for any such deemed income to be taxable in India, there must be sufficient territorial nexus between such income and the territorial limits. 
 
It has been held that, where any sum is payable to a non-resident by a resident, the deeming sweep of the said section cannot bring to tax any income of a non-resident received outside India from Indian concerns for services rendered abroad. In regard to fees for technical services, it has been specifically held that for the fees to be taxable in India, the services have not only to be utilised in a business in India, but also have to be rendered in India. 
 
The Finance Bill, 2007 proposes to insert an Explanation in Section 9 providing as under: 
 
"For the removal of doubts, it is hereby declared that for the purposes of this section, where income is deemed to accrue or arise in India under Clauses (v), (vi) and (vii) of Sub-Section 1, such income shall be included in the total income of the non-resident whether or not the non-resident has a residence or place of business or business connection in India" 
 
After the amendment, income by way of interest, royalties or fees for technical services shall be taxable in India regardless of whether the non-resident has a residence or place of business or business connection in India. 
 
The above amendment will take effect retrospectively from 6 June 1976, that is, from the very inception when the provisions were introduced under the Income-Tax Act 
 
In the context of the aforesaid proposed amendment, it will be recalled that the Indian judiciary has been warning the Government of India not to infringe the internationally accepted principle of territorial nexus. In the case of Electronics Corporation of India versus CIT, 183 ITR 43 (SC), the Supreme Court observed: "But the question is whether a nexus with something in India is necessary. 
 
It seems to us that, unless such nexus exists, Parliament will have no competence to make the law. It will be noted that Article 245(1) empowers Parliament to enact laws for the whole or any part of the territory of India. 
 
The provocation for the law must be found within India itself. Such a law may have extra-territorial operation in order to subserve the object and the object must be related to something in India. It is inconceivable that a law should be made by Parliament in India which has no relationship with anything in India. 
 
The only question then is, whether the ingredients, in terms of the impugned provision, indicate a nexus. The question is one of substantial importance, specially as it concerns collaboration agreements with foreign companies and other such arrangements for the better development of industry and commerce in India. In view of the great public importance of the question, we think it desirable to refer these cases to a Constitution Bench, and we do so order." 
 
Further, in a recent case of Ishikawajima Harima Heavy Industries, 288 ITR 408, the Supreme Court has held that: 
 
"Territorial nexus for the purpose of determining the tax liability is an internationally accepted principle... it must have sufficient territorial nexus with India so as to furnish a basis for imposition of tax." 
 
The proposed amendment is clearly an effort to nullify the judicial pronouncements, which by itself is questionable. This amendment will directly hit a large number of foreign enterprises doing business in India.

H P Aggarwal

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