2015 (6) TMI 10 - HC - Income Tax

Court rules payments to UAE entities not 'fees for technical services' under Income Tax Act

Commissioner of Income Tax-IV Versus M/s. Grupism P. Ltd.

Commissioner of Income Tax-IV Versus M/s. Grupism P. Ltd. - [2015] 378 ITR 205 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 ServicesThe 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 DTAAThe 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.