2025 (6) TMI 1395 - AT - Income Tax

Foreign company's technical service fees exempt from Indian tax under India-UAE DTAA without permanent establishment

M/s. Castlewick FZE Versus The ACIT, International Taxation, Circle 1 (1), Chennai.

ITAT Chennai held that fees for technical services received by a foreign company cannot be taxed in India under the India-UAE DTAA. The tribunal found no ... Income taxable in India - Amount received as ‘fees for technical services’ falling within the ambit of Section 9(1)(vii) - India-UAE DTAA - PE in India or not? - HELD THAT:- We are of the view that in absence of PE in India and also for the admitted fact there is absence of provision in DTAA to tax the FTS, the amount received by the assessee company would be taxed as per the provisions of Article 7 of the DTAA. Accordingly, the said amount received by the assessee is not chargeable to tax in India and we delete the addition made by the AO in the final assessment order. Appeal filed by the assessee is allowed. The core legal questions considered in this appeal revolve around the taxability in India of income received by a non-resident company incorporated in UAE, specifically whether the amount received constitutes Fees for Technical Services (FTS) taxable under Indian domestic law and the India-UAE Double Taxation Avoidance Agreement (DTAA), or whether it qualifies as business income exempt from Indian tax due to the absence of a Permanent Establishment (PE) in India and lack of an FTS clause in the DTAA.Key issues presented and considered include:Whether the Rs. 90 lakhs received by the non-resident assessee from an Indian customer for reviewing design and drawings qualifies as Fees for Technical Services under section 9(1)(vii) of the Income Tax Act, 1961.Whether the absence of a specific FTS clause in the India-UAE DTAA precludes taxing the said income as FTS in India, and if so, whether the income should be treated as business profits under Article 7 of the DTAA.The applicability of the residual clause (Article 22) of the India-UAE DTAA for taxing the income as 'other income' in India or in the resident country.Whether in the absence of a PE in India, the business income of the non-resident is taxable in India.The impact of the order passed under section 201(1) of the Act against the Indian payer and its reversal by the CIT(A), and whether such reversal affects the reassessment proceedings against the non-resident payee.The relevance and applicability of judicial precedents interpreting similar issues under other DTAAs lacking an FTS clause.The principle under section 90(2) of the Act that DTAA provisions prevail over domestic law to the extent beneficial to the assessee.Detailed analysis of these issues is as follows:1. Taxability of the Income as Fees for Technical Services (FTS) under Domestic Law and DTAAThe Income Tax Officer (AO) treated the Rs. 90 lakhs received by the assessee as FTS under section 9(1)(vii) of the Income Tax Act, 1961, thereby making it taxable in India. The AO relied on the domestic law provisions to classify the income as FTS and imposed tax accordingly, including interest for delay.The assessee contested this view, arguing that the India-UAE DTAA does not contain a specific clause dealing with FTS, and therefore the income cannot be taxed as FTS in India. The assessee contended that the income should be classified as business profits under Article 7 of the DTAA, which are taxable only in the resident country in the absence of a PE in India.The AO and the Dispute Resolution Panel (DRP) rejected the assessee's submissions and upheld the taxability under domestic law.2. Interpretation of the India-UAE DTAA and Absence of FTS ClauseThe Tribunal examined the India-UAE DTAA and noted the absence of any article specifically dealing with Fees for Technical Services. The Tribunal referred extensively to judicial precedents from various benches and High Courts interpreting similar situations under other DTAAs (such as India-Philippines, India-Thailand, India-Mauritius) where the FTS clause was absent.It was held that in the absence of a specific FTS article, the income must be classified under Article 7 (Business Profits) of the DTAA, which restricts taxation to the country of residence unless there is a PE in the source country.The Tribunal emphasized that the omission of an FTS clause in the DTAA is a deliberate mutual agreement between contracting states not to tax such income as FTS in the source country.3. Applicability and Scope of Article 22 (Other Income) and Article 24 (Elimination of Double Taxation)The assessee relied on Article 22 of the India-UAE DTAA, which deals with residual income not covered by other articles, to argue that such income is taxable only in the resident country. The Revenue contended that in the absence of an FTS clause, domestic law should apply under Article 24(1), which allows laws in force in contracting states to govern taxation except where the treaty provides otherwise.The Tribunal analyzed the interplay between Articles 22 and 24 and judicial pronouncements to conclude that Article 24 deals with elimination of double taxation and does not confer a right to tax income not covered by other articles. Article 22 remains the residual clause for income not expressly covered, and since business profits are covered by Article 7, Article 22 does not apply.The Tribunal rejected the Revenue's contention that domestic law provisions for FTS could be imported via Article 24(1) in the absence of an FTS article in the DTAA.4. Absence of Permanent Establishment (PE) and Its Impact on TaxabilityThe assessee submitted that it does not have a PE in India and that the services were rendered entirely outside India. The Tribunal noted that the CIT(A) in the case of the Indian payer had reversed the order under section 201(1) of the Act, holding that no tax was deductible at source as the payments were not taxable in India due to absence of PE.The Tribunal held that the absence of PE is critical under Article 7, which restricts taxation of business profits to the resident country unless there is a PE in the source country. Since the assessee lacked a PE in India, the income is not taxable in India under the DTAA.5. Effect of Reversal of Section 201(1) Proceedings Against the PayerThe reopening of assessment against the assessee was triggered by the section 201(1) proceedings against the Indian payer for failure to deduct tax at source. However, the CIT(A) had reversed the demand against the payer, holding the payments not taxable in India.The Tribunal observed that the reversal of the payer's liability under section 201(1) logically extends to the payee's taxability, and the reopening of assessment against the payee on this basis was unjustified.6. Reliance on Judicial PrecedentsThe Tribunal extensively relied on binding judicial precedents from various benches and High Courts, including decisions in cases such as Christiani & Nielsen Copenhagen, Tekniskil (Sendirian) Berhard, Parsons Brinckerhoff India, Golf in Dubai, Channel Guide India Ltd., PT McKinsey Indonesia, and the Madras High Court judgment in Bangkok Glass Industry Co. Ltd.These precedents uniformly held that in the absence of a specific FTS clause in the DTAA, income characterized as FTS under domestic law should be treated as business profits under Article 7, and in the absence of PE, such income is not taxable in India.The Tribunal also distinguished contrary decisions relied upon by the Revenue, noting factual and legal differences, and declined to follow them.7. Principle Under Section 90(2) of the Income Tax ActThe Tribunal reiterated the settled principle from the Supreme Court decision in Azadi Bachao Andolan that where a DTAA applies, its provisions override domestic law to the extent they are more beneficial to the assessee. Since the DTAA does not provide for taxing FTS in India, the domestic law provisions cannot be invoked to tax such income.8. Application of Law to Facts and Final ConclusionApplying the above legal framework and precedents to the facts, the Tribunal found that:The income received by the assessee was for services rendered outside India without any physical presence or PE in India.The India-UAE DTAA does not contain an FTS clause; hence, the income falls under business profits under Article 7.In the absence of PE, such business profits are taxable only in the country of residence (UAE), not in India.The reopening of assessment based on the payer's section 201(1) order, which was subsequently reversed, was not justified.The addition made by the AO treating the income as taxable FTS under domestic law was unsustainable.Consequently, the Tribunal set aside the orders of the authorities below and deleted the addition made by the AO.Significant Holdings and Core Principles EstablishedThe Tribunal's key legal reasoning includes the following verbatim excerpts and principles:'In absence of any PE in India and also for the admitted fact there is absence of provision in DTAA to tax the FTS, the amount received by the assessee company would be taxed as per the provisions of Article 7 of the DTAA. Accordingly, the said amount received by the assessee amounting to Rs.90,00,000/- is not chargeable to tax in India and we delete the addition made by the AO in the final assessment order.''The absence of the provision in the DTAA is not an omission but is a deliberate mutual agreement between the contracting states not to recognize/classify any income as Fees for Technical Services for taxation. Therefore the intention for not incorporating any provision in the DTAA is not to tax an income under the category of Fees for Technical Services.''Where the provisions of the DTAA and the Income Tax Act are in conflict, the provisions of the DTAA shall prevail to the extent they are more beneficial to the assessee.''Article 24(1) of the DTAA, which deals with elimination of double taxation, does not confer a right to invoke the provisions of domestic laws for classification or taxability of income which is governed by Articles 6 to 23 of the DTAA.''In the absence of a Permanent Establishment in India, business profits arising from services rendered outside India are taxable only in the country of residence under Article 7 of the DTAA.'The Tribunal conclusively determined that the income received by the non-resident UAE company for technical services rendered outside India does not constitute taxable FTS under Indian law due to the absence of an FTS clause in the India-UAE DTAA and lack of PE in India, and thus is not taxable in India. The reopening of assessment on the basis of the payer's section 201(1) order, subsequently reversed, was invalid. The addition of Rs. 90 lakhs as taxable income was deleted, and the appeal was allowed.