It has been a big win for the tax department in the Income Tax Appellate Tribunal as a Mumbai bench of ITAT has held that a payment to a foreigner is taxable even if the service is not rendered in India.

The ruling has been delivered in the case of Ashapura Minichem Limited, which entered into an agreement with a Chinese company, under which Ashapura was to pay the Chinese company $1mn in return for bauxite testing services.

Ashapura contended before the ITAT that since no part of testing services was rendered in India, the Chinese company did not have any tax liability in India and hence there was no withholding tax obligation in this case.

Ashapura also contended that Article 12 (4) of the India – China tax treaty required the service to be performed in India for it to be taxed as 'Fees for technical services.'

The ITAT however was not impressed. It held that the arguments put forward by the assessee no longer held well in view of retrospective amendment in Sec 9 (carried out by Finance Act, 2010).

The ITAT ruled that “It is no longer necessary that, in order to attract taxability in India, the services must also be rendered in India…As the law stands now, utilization of these services in India is enough to attract taxability in India.” 

And in an important observation, the ITAT held that “The concept of territorial nexus, for the purpose of determining the tax liability, is relevant only for a territorial tax system in which taxability in a tax jurisdiction is confined to the income earned within its borders.”

The ITAT further ruled that the payment was taxable under Article 12 of India – China treaty as the words ‘ Provision for Services ‘ mentioned in the treaty had a wider scope. The ruling was delivered by a 2 member bench of Pramod Kumar and RS Padvekar.