Indian ITAT holds subcontracting charges paid by Infosys to Chinese subsidiary taxable as FTS

April 28, 2022 5 minute read

The Indian Income Tax Appellate Tribunal (ITAT) holds that subcontracting charges of INR 2390 million paid by Infosys to its Chinese subsidiary constitute Fees for Technical Services (FTS), which are liable for withholding of tax. 




However, the ITAT considers Infosys’s alternate claim that INR 167.4 million was paid on 1 May 2010 i.e. before enactment of the Indian Finance Act, 2010 (which received presidential assent on 8 May 2010), which provided that the services need not be rendered in India subsequent to the Indian Supreme Court’s ruling in Ishikawajima Harima and thus restores the issue of taxability of subcontracting charges paid on 1 May 2010 to the ITAT. 

Infosys entered into a subcontracting agreement with its Chinese subsidiary for certain overseas work in China and made payment for such subcontracting without withholding tax in assessment year 2011/12 (equivalent to financial year 2010/11). The ITAT passed order holding Infosys to be assessee-in-default, concluding that the subcontracting charges were in the nature of FTS by relying on another ITAT ruling in Ashapura Minichem. The ITAT rejects Infosys’s contention that the twin conditions laid down by the Indian Supreme Court in Ishikawajima Harima i.e. the services being (a) utilized in India, and (b) rendering in India, are not satisfied. It opines that the issue whether the impugned payment comes within the purview of section 9(1)(vii) is squarely covered by the Mumbai ITAT ruling in Ashapura Minichem (wherein it was held that the retrospective amendment to section 9, by the Indian Finance Act, 2010 by substitution of the Explanation negated the SC ruling in Ishikawajima Harima) and thus it is no longer necessary that, in order to invite taxability under section 9(1)(vii), the services must be rendered in India's tax jurisdiction. It also rejects Infosys’s submission of non-taxability in India due to treaty benefits under the India-China DTAA by relying on the ITAT ruling in Ashapura Minichem. 

As regards Infosys’s submission that the payment is covered by an exception under section 9(1)(vii)(b), the ITAT explains that for the purpose of taxation, Infosys is different from its subsidiary in China, pointing out that “Merely because the clients are outside India does not mean that the assessee is carrying on business outside India”. 

The ITAT also points out that Infosys has claimed benefit for the export of software from the specified units from India, hence, it is not for Infosys to contend that no services were rendered or utilized in India, and it states that the issue of claim of benefit of exception provided under section 9(1)(vii)(b) has been elaborately dealt with by Ishikawajima Harima, thus restoring the issue of taxability of subcontracting charges paid on 1 May 2010 to the ITAT.

Taxsutra Note:
The Indian Finance Act, 2010 amended the Explanation to section 9 with reference to 1 June 1976 to provide that the income of a non-resident shall be deemed to accrue or arise in India under clauses (v)/ (vi)/ (vii) of section 9(1) and shall be included in the total income of the non-resident, whether or not the non-resident has rendered services in India.