1996 (2) TMI 180 - AT - Income Tax

Summary

Issues:
- Addition made on account of fee for services rendered in Canada for assessment years 1985-86, 1986-87 & 1987-88.

Analysis:

1. Common Issue in Appeals:
The main contention raised by the assessee pertains to the addition made on account of fee for services rendered in Canada for assessment years 1985-86, 1986-87 & 1987-88. The assessee claimed exemption for the fees for services rendered in Canada, arguing that there was no nexus between the Indian territory and the income accruing outside India. The Assessing Officer and the CIT(A) held otherwise, bringing the amounts to tax in all three assessment years.

2. Interpretation of Sec. 9 of the Income-tax Act:
The provisions of sec. 9(1)(i) and 9(1)(vii) of the Income-tax Act were crucial in determining whether the fees for technical services rendered in Canada were taxable in India. The clause (vii) of sub-sec. (1) of sec. 9 of the Act, inserted by the Finance Act, 1976, covers income by way of fees for technical services payable by non-residents. The Tribunal interpreted that such fees paid by an Indian resident for services rendered anywhere, including abroad, would be deemed to accrue in India, irrespective of a business connection.

3. Business Connection and Territorial Nexus:
The term 'business connection' was analyzed in light of the Supreme Court's interpretation, emphasizing a relation between a business carried on by a non-resident and activities in taxable territories contributing to the profits. The Tribunal found that the activities carried out in Canada were integral to those undertaken in India, establishing a business connection for tax purposes. The issue of territorial nexus was referred to a Constitutional Bench for clarification on whether a nexus with something in India was necessary for extra-territorial laws to apply.

4. Decision and Conclusion:
The Tribunal dismissed all appeals, upholding the revenue authorities' decision to tax the fees for technical services rendered in Canada for the assessment years in question. The specific provision of sec. 9(1)(vii) was deemed to exclude the general provision of clause (i) of sub-sec. (1) of sec. 9, leading to the conclusion that the fees were taxable in India despite being for services rendered outside the country.