2025 (4) TMI 1359 - AT - Income Tax

Taxing consultancy income of the Appellant who is not having permanent establishment in India - treaty benefits as claimed under provisions of Article 7 of the India-UAE treaty - HELD THAT - The assessee has filed Tax Residency Certificate (TRC) valid from January 2018 to December 2018. It is not in dispute that the assessee earned marking commission during the year. Since the assessee do not have any PE the Article 7 is not applicable. The assessee is eligible for benefits under Article 22. The AO is hereby directed to recompute the tax liability. The assessee is eligible for benefits under Article 22of DTAA. AO is hereby directed to recompute the tax liability.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal are:

(a) Whether the adjustment made by the Assessing Officer (AO) through a rectification order under section 154 read with section 143(1) of the Income Tax Act was appropriate, particularly when the return filed by the assessee declared nil income and claimed treaty benefits.

(b) Whether the consultancy income earned by the assessee, a foreign company without a Permanent Establishment (PE) in India, is taxable in India or exempt under the provisions of Article 7 of the India-UAE Double Taxation Avoidance Agreement (DTAA).

(c) Whether the assessee is entitled to treaty benefits, including relief under Article 7 of the India-UAE DTAA, despite the rectification order taxing the income at the domestic rate of 40% plus surcharge and cess.

(d) Whether the tax domicile certificate (equivalent to Tax Residency Certificate) submitted by the assessee from UAE authorities should have been considered to grant treaty benefits.

(e) In the alternative, if the consultancy income is treated as fees for technical services under the head of other sources, whether the applicable tax rate should be 10% under Article 12 of the India-UAE DTAA rather than the higher domestic rate of 40%.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a): Legality and appropriateness of adjustment by AO through rectification order u/s 154 r.w.s 143(1)

The legal framework governing rectification under section 154 of the Income Tax Act allows correction of mistakes apparent from the record. The assessee challenged the rectification order that increased the taxable income and denied treaty benefits. The Tribunal examined whether such an adjustment was debatable and whether it should have been made at the processing stage.

The Court noted that the rectification order imposed tax at 40% on consultancy income, contrary to the return filed by the assessee which declared income at Rs. Nil after claiming treaty benefits. The Tribunal recognized the contention that the adjustment was debatable and should not have been made without considering treaty provisions. However, the Tribunal did not explicitly invalidate the rectification but proceeded to examine treaty applicability.

Issue (b) and (c): Applicability of Article 7 of the India-UAE DTAA and entitlement to treaty benefits

The relevant legal provision is Article 7 of the India-UAE DTAA, which deals with business profits and taxation rights. Article 7 generally provides that business profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise has a PE in the other State. The assessee claimed that it had no PE in India, and therefore, under Article 7, the consultancy income should be taxable only in UAE.

The Tribunal analyzed the facts and found that the assessee indeed did not have a PE in India. The Court further examined Article 22 of the DTAA which covers "Other Income" not dealt with in preceding articles. Article 22(1) states that such income shall be taxable only in the resident State, subject to paragraph (2) which provides exceptions if the income is effectively connected to a PE or fixed base in the other State.

Since the assessee had no PE or fixed base in India, Article 7 was not applicable, and the income fell under Article 22, making it taxable only in UAE. The Tribunal held that the AO erred in taxing the income in India under domestic law rates without granting treaty benefits.

The Tribunal emphasized that substance over form must be considered, and since the assessee furnished a valid Tax Residency Certificate (TRC) from UAE authorities, the treaty benefits should have been granted.

Issue (d): Consideration of Tax Residency Certificate (TRC) for granting treaty benefits

The assessee submitted a TRC valid for the relevant period, which was equivalent to a tax domicile certificate. The CIT(Appeals) had held that no further relief could be granted at the stage of rectification under section 154. The Tribunal disagreed with this approach, stating that the TRC is a crucial document evidencing the assessee's residence in UAE and entitlement to treaty benefits.

The Tribunal directed the AO to consider the TRC and recompute tax accordingly, thereby allowing treaty benefits under Article 22.

Issue (e): Alternative claim for taxation under Article 12 of DTAA at 10% rate if income is treated as fees for technical services

The assessee contended that if the consultancy income were treated as fees for technical services (FTS) under the head of other sources, the applicable tax rate should be 10% as per Article 12 of the India-UAE DTAA, rather than the domestic rate of 40% imposed by the AO.

The Tribunal did not explicitly rule on this alternative ground but implicitly recognized that the domestic tax rate of 40% was not applicable in the presence of DTAA provisions. The direction to grant treaty benefits and recompute tax would include consideration of the correct rate under relevant treaty articles.

3. SIGNIFICANT HOLDINGS

"Since the assessee do not have any PE, the Article 7 is not applicable."

"Article 22 of DTAA reads as under:- ... items of income of a resident of a Contracting State, wherever arising, which are not expressly dealt with in the foregoing articles of this Agreement, shall be taxable only in that Contracting State."

"In view of the facts on record, the assessee is eligible for benefits under Article 22. The Assessing Officer is hereby directed to recompute the tax liability."

The Tribunal established the core principle that in the absence of a Permanent Establishment in India, consultancy income earned by a foreign company resident in UAE is taxable only in UAE under Article 22 of the India-UAE DTAA, overriding domestic taxation at higher rates.

The Tribunal held that the rectification order under section 154 could not override treaty benefits and that the Tax Residency Certificate submitted by the assessee must be considered for granting relief.

The final determination was to allow the appeal for statistical purposes and direct the Assessing Officer to recompute the tax liability in accordance with the treaty provisions, thereby granting the assessee the benefit of the India-UAE DTAA and denying the imposition of tax at the domestic rate of 40% in India.