Commensurate with generally accepted international tax practices, the Indian tax laws provide for taxation of interest, royalties and fees for technical services of non-residents in India, provided the source of such income is situated in India.
The question / dispute has been arising that where the Non-resident has rendered services from outside India whether the source of income shall be considered to be lying in India for the purpose of Section – 9. This dispute was settled by Hon'ble Supreme Court of India in the case of Ishikawajima-Harima Heavy Industries Ltd. vs. DIT  288 ITR 408. The Hon'ble Supreme court has held that to tax the income from fees for technical services, the services must be utilized in India as well as must be rendered in India.
The Department considered this decision and came up with a retrospective amendment (w.e.f. 1/06/1976) vide Finance Act, 2007 by introducing an explanation to section – 9. As per the said explanation it was clarified that the income from Interest, Royalty and Fees for technical services shall be chargeable to tax in India irrespective of the fact that the non-resident has no residence or place of business or business connection in India.
However even after the introduction of said explanation the question of taxability when services have been rendered outside India remained unanswered. Therefore the dispute remained unresolved. The Hon'ble Karnataka High Court in the case of Jindal Thermal Company Ltd. 182 Taxmann 252 recently held that the services provided off shore or outside India cannot be taxed in India.
The department again considered the decision of High court vide Finance Bill 2010 proposes to change the explanation to section – 9 in view to bring the income from services rendered outside India under the tax net. In view of the proposed change only requirement for taxing income from such services shall be the utilization of services in India and not place of rendering the services.
The change is proposed w.r.e.f 1st June 1976.
This amendment has far reaching impact and it can affect the taxability of several items, which hitherto were not chargeable to tax in India.