(B) Matters referred by ABC Professional Services: The partner of the firm have sought opinion in respect of the matters of their clients for filing reply with the tax authorities relating to the show cause notices issue

As per section 9(1)(i) of the Income tax Act, 1961 "income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India, or through the transfer of a capital asset situated in India are taxable in India". In the present case payments made were towards drawings and designs to non-resident foreign company are accruing in India and are thus taxable in India. Separate payments made towards drawings and designs as "Engineering Fees" are in the nature of fee for technical services and thus are subject to tax as per section 9(1)(vii)(b) of the Income tax Act, 1961, since paid by a resident to the non-resident for the purpose of execution of Electrical Work in India. Explanation-2 below section 9 defines "fees for technical services" to mean any consideration (including any lump sum consideration) for the rendering of any managerial, technical or consultancy services including the provisions of services of technical or other personnel. Accordingly, lump sum payment made towards drawings and designs as "Engineering Fees" is in the nature of fee for technical services. The facts in the problem are based upon the decision of the Karnataka High Court in case of Aeg Aktiengesllschaft vs. CIT (2004) 267 ITR 209.