The term "fees for technical services" is defined in section 9 of the Indian Income-tax Act. The said term is also generally defined in the Agreements for Avoidance of Double Taxation signed by India with other countries.

As per Indian law, fees for technical services are taxed on the gross amount of the fees. In other words, no expenses are allowed against the said fees.

Section 9 of the IT  Act seeks to tax income by way of fee for technical services rendered by the non-residents if they are payable by the Government; or a person, who is a resident, except where the fees are payable in respect of services utilised in a business or profession carried on by such person outside India or, for the purposes of making or earning any income from any source outside India; or, a person who is  a non-resident, where the fees are payable in respect of services utilised in a business or  profession carried on by such person in India or for the purposes of making or earning any income from any source in India.

The problem often arises when a foreign company provides technical services to an Indian company entirely from outside India.

In such cases, a plea is taken that the foreign company is not involved in any business activities in India; it renders the services from outside India and it receives payment in foreign currency outside India.

Therefore, there is no nexus between the foreign company and its income in India. In such a situation how can any income accrue or arise to the foreign company in India?

In the above context, it will be useful to refer to a recent decision in case of Wallace Pharmaceuticals P. Ltd.[2005] 278 ITR 97 (AAR).

In the said case an Indian company entered into an agreement with a US company under which the US company was to provide various kinds of services which would be useful in expanding the market of the Indian company.

However, the services were to be provided wholly outside India.

It was contended on behalf of the Indian company that no part of the fees paid by it accrued or arose in the hands of the foreign company in India.

The Authority however observed that the benefit of consultancy services provided by the US company is utilised in India by the Indian company.

It was held that the foreign company is liable to pay tax in India by observing as follows: "From the above discussion it is clear that though Penser is a tax resident of USA, it has rendered consultancy services in India and as the consultancy fee payable in respect of services utilized is not in connection with a business or profession carried on by the applicant outside India for the purposes of making or earning any income from any source outside India, the consultancy fee would be deemed income of Penser in India."

A similar view was expressed by the Authority for Advance Rulings in an earlier case reported in 230 ITR 206. It now appears to be a settled position that fees for technical services are taxable in India even if rendered wholly outside India provided the services are utilized in India.