Conundrum of Taxability of FTS: Services rendered in India

Introduction

Generally, the Fees for Technical Services (‘FTS’) are taxable at the place where the services are rendered. However, many of India’s tax treaties, do not follow the source rule of place of performance of service but link the taxability of FTS with the residential status / situs of the payer. If the payer is resident in India or has a Permanent Establishment (‘PE’) in India in connection with which the liability to pay FTS was incurred, the FTS is deemed to arise in India and is taxable at the applicable treaty rate. In many such treaties, neither the FTS definition nor the source rule, attaches taxability with the place of performance of services. This is seen, for example, in India’s double tax treaties with Germany, Japan, the UK, Singapore, Korea, Austria and Belgium. However, there are three treaties which depart from the standard source rule of payer-residence or PE model. These are, India-China, India-Israel and India-Finland. Therein, taxability of FTS is conditioned not on who pays, but on where the services are performed. If services are performed entirely outside India, the payment may fall outside the scope of FTS under the treaty altogether, and no withholding may be required.

That question has been discussed in a recent case[1] before the Bombay High Court. In this case, a Chinese entity was providing management and technical services to its Indian subsidiary entirely from China. With respect to payments receivable from the Indian subsidiary, the Chinese Company sought a NIL withholding tax certificate. This was on the ground that the services were not performed in India and therefore fell outside the FTS definition in Article 12(4) of the India-China DTAA. The Court inter-alia held that services delivered virtually from China, by email, video conference and the like, do not amount to services rendered or provided in India. However, the Court did not conclusively lay down the circumstances in which services would be considered as rendered in India. However, in another decision with respect to the India-Finland DTAA, the Kolkata Tribunal in Metso Outotec OYJ v. ACIT[2] held that IT services performed entirely from offices in Finland were nonetheless ‘performed’ in India because their results were used by the Indian affiliate here.

The question that arises is - what does it mean to render a service in India? This article examines the domestic law history, India’s own treaty practice, and international jurisprudence on the subject.

The three Treaties and why they stand apart

Under most of India’s DTAAs, the definition of FTS by itself contains no condition pertaining to the place of performance of the services. The source rule then deems the income to arise in India if the payer is an Indian resident or has a PE in India. However, Article 12(4) of the India-China DTAA defines FTS as payments for ‘the provision of services …… by a resident of a Contracting State in the other Contracting State.’ The place of performance test is provided in the definition of FTS itself. A payment for services performed in China, arguably falls outside the FTS definition entirely and is not taxable under Article 12 at all.

Similarly, Article 13(5) of the India-Israel DTAA provides that FTS is deemed to arise in India ‘when the services are rendered in that State and the payer is a resident of that State.’ 

Article 12(5) of the India-Finland DTAA provides that where FTS relates to services ‘performed, within a Contracting State,’ it is deemed to arise in the state in which the services are performed, regardless of the payer’s residency. 

The practical consequence of these provisions, as compared with the payer-source / PE rule, can be understood through examples.

Example 1 - A German entity advises its Indian subsidiary on group strategy from Frankfurt. No employee visits India. Under the India-Germany DTAA, FTS is taxable in India because the payer is an Indian resident. Place of performance is irrelevant. 

Example 2 - A Chinese entity provides IT support to its Indian subsidiary entirely by remote access from Shanghai. Under Article 12(4) of the India-China DTAA, the payment arguably falls outside the FTS definition because the services are not provided in India. If that position is correct, no withholding applies. 

Example 3 - An Israeli entity conducts training sessions for an Indian subsidiary’s employees entirely over video conference from Tel Aviv. Under Article 13(5) of the India-Israel DTAA, FTS arises in India only when the services are rendered in India and the payer is a resident. Since the services are rendered from Israel, the cumulative condition is not satisfied, and the income may not be taxable in India.

This difference reflects choices India made in negotiating with particular treaty partners, keeping in mind its negotiations with other countries wherein similar conditions do not exist.

Meaning of the word ‘render’

It is necessary to understand what the words ‘rendered,’ ‘provided’ and ‘performed’ actually mean. K.J. Aiyar’s Judicial Dictionary[3] describes ‘render’ as a word which ‘in one sense would undoubtedly include or imply the rendering of service or labour,’ tracing its primary meaning to ‘to give on demand,’ ‘to give,’ and ‘to assign.’ P. Ramanatha Aiyar’s Advanced Law Lexicon[4] defines it as ‘to furnish; to state; to deliver’ and separately as ‘to bestow or provide; furnish; give in answer to requirement of duty or demand.’ Each meaning centres on actively performing a task, and not on the experience of receiving its output. Each of these definitions thus points to the locus of performance i.e. where the service is executed.

Considering this definition, in the context of the aforementioned three treaties, it can very well be contended that if the services are not performed in India by the Chinese / Israeli / Finnish service provider, then the payment for such services shall not be taxable in India. 

The domestic law history

Under the Income-tax Act, 1961 prior to the amendments, the place of performance was the operative criterion for source-based taxation of technical service. CBDT Circular No. 21 dated 9 July 1969 stated that amounts paid to a foreign participant for services rendered entirely outside India would not be taxable in India.[5] In CIT v. Tata Chemicals Ltd.,[6] a German resident supplied information to an Indian company in Germany. The entire operation was done outside India. The Bombay High Court held that the income in respect of such services cannot be taxed in India as deemed to accrue or arise in India, and the place of utilisation of the services was irrelevant. The Supreme Court affirmed this in Carborandum Co. v. CIT[7], holding that an American company rendering services wholly within its own territory had no taxable activity in India.

The Finance Act, 1976 then introduced Section 9(1)(vii)(b), deeming FTS payable by an Indian resident to accrue in India regardless of where services were performed. The Supreme Court in Ishikawajima-Harima Heavy Industries Ltd. v. DIT[8] read a performance requirement back into the provision, holding that rendition and utilisation in India were both required as cumulative conditions. The Parliament later inserted an Explanation to Section 9 with retrospective effect from 1 June 1976[9], declaring finally that income under Section 9(1)(vii) is taxable ‘whether or not the non-resident has rendered services in India.’[10]

Two things follow from that history. First, the Parliament had to legislate expressly to displace the plain meaning of ‘rendered in India.’ Second, those legislative overrides operated only as a matter of domestic law. The Explanation to Section 9 does not amend any treaty. Where a DTAA independently retains a performance criterion, the domestic law position is irrelevant, and the treaty must be applied on its own terms. 

The treaty context: A deliberate choice that must be given full effect

India’s treaty practice on FTS has not been uniform. The taxability of FTS in older treaties, with Japan (1960), Finland (1961), Austria (1965) and Belgium (1975), was made consciously dependent on the place of performance / rendition of services. Following the Finance Act, 1976 and India’s domestic shift to the payer-residence rule, subsequent bilateral agreements adopted the payer-source model. Against that background, the retention of a performance criterion in the India-China, India-Israel and India-Finland treaties is notable. Klaus Vogel, in his commentary on Double Taxation Conventions[11], observes that deviations from a state’s standard treaty formulations, once incorporated into a specific bilateral agreement, result from the specific demands of the treaty partner and must be given their full legal effect. India consciously chose to retain a performance criterion in three bilateral relationships while abandoning it in all others. That choice must be given its intended legal effect.

In our view, two ITAT decisions have reached a contrary conclusion. In Ashapura Minichem Ltd. v. ADIT[12], the Mumbai ITAT held that ‘provision of services’ in Article 12(4) of the India-China DTAA means utilisation of services in India, effectively reading the performance criterion out of the definition. In Metso Outotec OYJ, the Kolkata Tribunal held under the India-Finland DTAA, that IT services performed entirely from Finland were ‘performed’ in India because their results were used by the Indian affiliate. The Tribunal ruling is presently under challenge before the Calcutta High Court.

Virtual delivery does not satisfy the performance test

In Benteler, the Revenue’s argument was that services delivered by email, video conference or similar modes, though delivered from outside India, were ‘rendered’ or ‘performed’ in India, since virtual rendition was equivalent to physical rendition in India. If that argument was accepted, the performance requirement in all three treaties would be rendered meaningless.

Foreign jurisprudence on comparable facts also does not support the argument. In Commissioner of Internal Revenue v. Piedras Negras Broadcasting Co.[13], the United States Fifth Circuit considered whether a Mexican broadcaster derived income from sources within the United States on the basis that its advertising revenue came from American clients. The Court held that ‘the source of income is the situs of the income-producing service’ and that since all services were performed in Mexico, the income arose within Mexico, regardless of where the signals were heard or who paid for them. The Delhi High Court in CIT v. Clifford Chance Pte. Ltd[14] applied a similar reasoning. The India-Singapore DTAA required services to be ‘furnished within’ India through employees ‘present’ in India. The Court held that this condition could not be satisfied by virtual delivery, and that language not present in a treaty cannot be introduced through judicial construction. The digital economy may have changed how cross-border services are provided but it has not changed what the word ‘performed’ means.

Conclusion

In our view, the expressions ‘services rendered in India’ and ‘services performed’ or ‘provided’ in India is understood to mean services physically carried out in India by the service provider. That interpretation is especially of practical importance under the India-China, India-Israel and India-Finland tax treaties. Where a non-resident performs the services wholly from outside India, there is, in our opinion, a strong basis to contend that the payment does not fall within the definition of FTS by itself and is therefore not taxable in India.

[The authors are Partner, Principal Associate and Associate, respectively, in Direct Tax practice at Lakshmikumaran & Sridharan Attorneys]

[1] Benteler Automotive (China) Investment Limited v. ACIT [W.P. No. 11074 of 2025, decided 27 March 2026].

[2]Metso Outotec OYJ v. ACIT [2023] 153 taxmann.com 723 (Kolkata ITAT).

[3] K.J. Aiyar’s Judicial Dictionary (13th Edition, revised by P.M. Bakshi, Butterworths India), s.v. ‘Render.’

[4] P. Ramanatha Aiyar’s Advanced Law Lexicon (3rd Edition, Reprint 2007, Wadhwa Nagpur), s.v. ‘Render’ and ‘Furnish.’

[5] CBDT Circular No. 21 dated 09.07.1969, Para 9.

 [6] CIT v. Tata Chemicals Ltd. [[1974] 94 ITR 85 (Bom.)].

[7]Carborandum Co. v. CIT [[1977] 108 ITR 335 (SC)].

[8]Ishikawajima-Harima Heavy Industries Ltd. v. DIT [[2007] 288 ITR 408 (SC)], Paras 71 and 79.

[9] Finance Acts 2007 and 2010.

[10] CBDT Circular No. 01 of 2011 dated 06.04.2011, Para 5.2–5.3.

[11] Klaus Vogel, Commentary on Double Taxation Conventions (3rd ed.), pp. 240-241.

[12]Ashapura Minichem Ltd. v. ADIT [[40 SOT 220] (Mumbai ITAT)].

[13]Commissioner of Internal Revenue v. Piedras Negras Broadcasting Co. [127 F.2d 260] (5th Circuit, 1942).

[14]Commissioner of Income Tax (International Taxation)-1, New Delhi v. Clifford Chance Pte. Ltd. [ITA 353/2025 & ITA 354/2025, decided 04.12.2025] (2025:DHC:10838-DB).