Treaty protection for consultancy income overrides significant economic presence where DTAA professional services article applies

A non-resident's consultancy and management advisory income from an Indian payer was examined under the domestic deeming rule of significant economic presence in section 9(1)(i), but the Tribunal held that the applicable India-UAE DTAA governed the tax treatment. The services were treated as falling within Article 14's inclusive definition of professional services, and section 90(2) entitled the assessee to the more beneficial treaty position. In the absence of a fixed base in India or other treaty conditions for source taxation, the income could not be taxed in India, and the addition was held unsustainable.

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Issues: Whether the consultancy income received by a non-resident from an Indian payer was taxable in India on the basis of significant economic presence under section 9(1)(i) of the Income-tax Act, 1961, or was protected by Article 14 of the India-UAE DTAA read with section 90(2) of the Income-tax Act, 1961.

Analysis: The income was examined under the domestic deeming provision relating to business connection and significant economic presence, and the Tribunal noted that such income could be treated as accruing or arising in India where the statutory threshold for significant economic presence is crossed. However, the decisive question was whether the nature of the services rendered fell within Article 14 of the India-UAE DTAA. The definition of professional services in Article 14 was treated as inclusive, and the consultancy / management advisory services were held to be covered by that expression. Once the treaty applied, section 90(2) entitled the assessee to the more beneficial treaty treatment, and in the absence of a fixed base in India or other treaty conditions for taxation, the income could not be brought to tax in India.

Conclusion: The income was held to be covered by Article 14 of the India-UAE DTAA, and the assessee was entitled to treaty protection under section 90(2); the addition was therefore not sustainable.

Ratio Decidendi: Where a non-resident's services are covered by an applicable DTAA provision granting exclusive taxation to the state of residence, section 90(2) overrides the domestic deeming fiction of significant economic presence to the extent of the treaty benefit.

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