2015 (6) TMI 10 - HC - Income Tax

Technical service in terms of Second Explanation to Section 9 (1) (vii) read with Section 194J - payment incurred by the assessee to the UAE concerns - whether the non-resident was providing consultancy services? - Held that - In the transaction between the assessee and Marble Arts & Crafts, the former (non-resident) acted as an agent of the assessee for the purposes of the latter s dealings with the Works Department, Abu Dhabi, which included coordinating with the authorities in the said department and handling invoices for the assessee. As far as CGS International is concerned, it acts as a liaisoning agent for the assessee, and receives its remuneration from each client that it successfully solicits for the assessee. Facially, such services cannot be said to be included within the meaning of consultancy services , as that would amount to unduly expanding the scope of the term consultancy . Therefore, this Court does not accept the revenue s contention that the services provided were in the nature of consultancy services . Consequently, the remittances made by the assessee would not come within the scope of the phrase fees for technical services as employed in Section 9(1)(vii) of the Act. - Decided in favour of the assesse. Whether the services provided by the UAE entities are in the nature of independent personal services defined in Article 14 of the DTAA? - Held that - The two requirements for the applicability of Article 14, as applied in this case, are a) income must be of a resident of the Contracting State (herein, UAE); and b) income must be in respect of professional services or other independent activities of a similar character. Article 4(1)(b) of the DTAA defines resident of a contracting state in the context of UAE to mean any person who under the laws of that State is liable to tax therein. Article 3(e) defines person to include a company. Therefore, the CIT(A) rightly rejected the revenue s contention that Article 14 is inapplicable for the reason that the services in question were provided by companies, as opposed to individuals - Decided in favour of the assessee

Summary

Issues Involved:

1. Whether the ITAT erred in holding that the payment of Rs. 94,31,826 to UAE concerns was not technical service under Section 9(1)(vii) read with Section 194J of the Income Tax Act, 1961.
2. Whether the ITAT erred in holding that Article 14 of the Double Taxation Avoidance Treaty (DTAA) applied to the UAE concerns in the circumstances of the case.

Detailed Analysis:

Issue 1: Classification of Services as Technical Services

The primary contention was whether the payments made by the assessee to CGS International and Marble Arts & Crafts, both UAE entities, constituted "fees for technical services" under Section 9(1)(vii) of the Income Tax Act, 1961. According to the revenue, these payments should be classified as consultancy services, thus attracting TDS under Section 194J.

The CIT(A) and ITAT both concluded that the payments did not fall under "technical services" as defined in Explanation 2 to Section 9(1)(vii). The agreements between the assessee and the UAE entities detailed the nature of services provided, which included soliciting business and providing liaison services rather than consultancy or technical services. The CIT(A) noted that the services provided by CGS International involved identifying potential clients and soliciting business, while Marble Arts & Crafts provided assistance with procedural aspects and documentation for the Works Department in Abu Dhabi.

The court upheld these findings, stating that the services rendered did not fit within the definition of "consultancy services" as they did not involve advisory services requiring deliberation or professional advice. Instead, the services were more akin to agency services, which do not qualify as technical services under the Act.

Issue 2: Applicability of Article 14 of the DTAA

The second issue concerned whether Article 14 of the DTAA between India and UAE applied to the payments made to the UAE entities. Article 14 pertains to "independent personal services" and states that income derived from professional services or other independent activities by a resident of a contracting state shall be taxable only in that state.

The CIT(A) and ITAT found that the payments to CGS International and Marble Arts & Crafts fell under Article 14 of the DTAA, as these entities were residents of UAE and the services provided were independent in nature. The CIT(A) further clarified that even if the services did not qualify under Article 14, they would fall under Article 22 ("Other Income") of the DTAA, which also stipulates that such income is taxable only in the state of residence, i.e., UAE.

The court agreed with this interpretation, noting that the DTAA did not have a specific article for "technical services," unlike other treaties. Therefore, the payments were not subject to tax in India, and the assessee was not required to deduct TDS on these remittances.

Conclusion:

Both questions of law were answered against the revenue and in favor of the assessee. The court concluded that the payments made to the UAE entities did not constitute "fees for technical services" under Section 9(1)(vii) of the Income Tax Act and that Article 14 of the DTAA applied, making the income taxable only in UAE. Consequently, the appeal was dismissed.