Chinese companies providing overseas services to Indian subsidiaries may escape tax: ITAT

Mumbai: Chinese companies that provide management, technical and consultancy services to Indian subsidiaries from overseas are exempt from Indian taxation, the Delhi income tax appellate tribunal (ITAT) has held. The ruling, however, differs from that of the Mumbai bench of the tribunal in 2010, and cannot yet be considered settled law, said tax experts.

In a recent case involving Benteler Automotive (China) Investment, the Delhi ITAT ruled that payments for services rendered entirely in China would not qualify as fees for technical services (FTS) under Article 12(4) of the India-China tax treaty only because they were used in India.

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The latest ruling may help Chinese corporations that offer centralised management, engineering and technical assistance to Indian operations. Tax experts pointed out that it was limited to the text of the India-China treaty and did not offer a general exemption for international service providers. They also cited the ambiguity created by the conflicting rulings of the two benches.

Benteler, a Chinese tax resident, provided management, consultancy and technical services to its Indian group company. It was undisputed that the services were rendered from China and that the company had no permanent establishment (PE) in India.

The tribunal held that Article 12(4) required such services to be rendered in India to qualify as FTS. Since these services were performed outside the country, the condition was not met, the tribunal ruled, and allowed Benteler's appeals for assessment years 2015-16 to 2017-18.

"Delhi tribunal's ruling is an important development for Chinese companies providing services to India, particularly in today's digital environment, where services are increasingly delivered remotely across jurisdictions," said Hitesh Sawhney, partner, Price Waterhouse & Co LLP. "The ruling draws an important distinction between where services are performed and where they are utilised, and indicates that the mere utilisation of services in India may not, by itself, result in taxation under the India-China tax treaty."

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Under Section 9(1)(vii) of the income-tax Act, FTS can be deemed to accrue in India even when services are performed overseas, if they are used in India. However, a more beneficial tax treaty provision can prevail under section 90.

The ruling differs from the Mumbai ITAT's 2010 decision in a case involving Ashapura Minichem. The appellate tribunal held that payments to a Chinese company for services performed abroad but used in India could be taxed as FTS. It relied on Article 12(6) of India-China tax treaty, which deems such income to arise in India if the payer is an Indian resident or the payment is borne by an Indian PE or fixed base.

The interplay between Article 12(4), which defines FTS, and article 12(6), which determines where the income is deemed to arise, is central to the dispute. The Delhi tribunal's order interprets Article 12(4) but does not separately analyse Article 12(6).