Retroactive Withholding Requirement Cannot Be Basis For Expense Disallowance

• Leather
• testing services are technical services if they involve human intervention.
• Technical service fees paid even by a 100% export oriented unit would be India sourced.
• For technical services, nexus is determined by the situs of the taxpayer and where services are utilized and not by where services are rendered.
• Payment for services are deductible from gross income even though tax was not withheld based on a retroactive tax amendment.

The Income Tax Appellate Tribunal ("Tribunal") at Agra recently held in the case of Metro and Metro¹ that expenditure incurred for leather testing services by Metro & Metro ("M&M"), a 100% Export Oriented Unit ("EOU") to a German certifying entity ("Service Provider") is taxable as Fees for Technical Services ("FTS") if human intervention is involved in the provision of such services. However, it was held that the expenditure incurred would be deductible from gross income even if tax was not withheld based on a