In a recent judgment, Delhi High Court has ruled that articles of DTAA are decisive and if they provide that the that the income of the payee shall be taxable in the State of residence then the question whether the services provided fall within the scope of “professional services‟ is irrelevant

Question before the Court:
(1) Did the ITAT fall into error in holding that the payment incurred by the assessee to the extent of Rs. 94,31,826 to the UAE concerns was not technical service in terms of Second Explanation to Section 9 (1) (vii) read with Section 194J?
(2) Did the ITAT fall into error in holding that Article 14 of the Double Taxation Avoidance Treaty applied to the UAE concerns in the circumstances of the case?

Case Details:
ITA 325/2014
Commissioner of Income-tax IV ….Appellant  vs. M/S. GRUP ISM P. LTD. ...Respondent
Date of Order: 29-05-2015
Coram: Hon'ble Mr. Justice S. Ravindra Bhat; Hon'ble Mr. Justice R.K. Gauba

Case Laws Referred:
Director of Income Tax v. Panalfa Autoelektrik Ltd. , (2014) 272 CTR 117 (Delhi HC)
GVK Industries Ltd. v. ITO , (2015) 371 ITR 453 (SC)

Facts of the Case:
The assessee was awarded project management consultancy by the Works Department of the Emirate of Abu Dhabi. The contract was for organizing procurement of Makrana marble from India and supervising its processing at Abu Dhabi. The first part of the contract was procurement of marble from India and the second was processing the marbles i.e. conversion thereof to the desired specification at Abu Dhabi. During the course of assessment proceedings, for AY 2004-05, the Assessing Officer (AO) noticed that the respondent assessee Company had made payments to two foreign companies of UAE namely, M/s. CGS International and M/s. Marble Arts & Crafts LLC. The AO noted that no TDS had been deducted by the assessee. The assessee’s  contention was that the payments were made towards commission and that neither of these concerns had any business in India nor had they filed any Income Tax Return in India. However, the copies of accounts of these two companies revealed that the payments were made on account of consultancy charges and it had debited the said sum under the head “consultancy charges”. Independent confirmation of CGS International also stated that it had received the payment towards consultancy services. The assessee also referred to Article 14 of Double Taxation Avoidance Agreement (DTAA) and contended that in view of such stipulation it was not required to deduct TDS. But the assessee did not produce copies of the agreements with these two foreign concerns. Accordingly, the AO rejected the assessee‟s contentions and disallowed the expenditure under Section 40(a)(i). Before CIT(Appeals) the assessee produced the agreements with those two companies. As per agreements, Marble Arts & Crafts contemplated 5% of the gross payments received from the Works Department in consideration for assistance in documentation, guidance and liaison with various departments towards assisting the assessee in its work in the UAE. The contract with CGS International contemplated assistance in procuring clients and market its services and for this, it was to receive 15% of the amounts received from the clients so introduced. . In the background of these facts, the CIT(A) held that the payment made by the assessee to the two UAE entities would not come within the purview of „technical services‟, as defined in Explanation 2 to Section 9(1)(vii) of the Act and consequently, the provisions of Section 9(1)(vii) were not attracted in the assessee’s case. Further, the CIT(A) held that Article 14 of the DTAA with UAE, dated 18.11.1993, is applicable in the facts of the case and that the AO could not have denied the applicability of the said on the sole premise that the two UAE entities are companies. Accordingly, since the remittances to such non-resident entities are liable to be taxed in the UAE, no TDS was required to be deducted. Later, The Income Tax Appellate Tribunal (ITAT) also dismissed the revenue’s appeal and affirmed the CIT(A)’s order

Excerpts from the Judgment:

18. In the case at hand, at the outset, this Court clarifies that the mere fact that CGS International confirmed that it received consultancy charges from the assessee would not be determinative of the issue. The actual nature of services rendered by CGS International and Marble Arts & Crafts needs to be examined for this purpose. It would be appropriate to note the details of services provided by the two entities, which were highlighted by the CIT(A):

“The agreement dated 5.4.2003 between the appellant and Marble Arts & Crafts provides that the latter will render guidance to the appellant about the procedural aspect of obtaining the payment and check the format and documents of the invoices that are to be submitted for approval to the Works Departments, Abu Dhabi, to receive and periodically check the invoices of the appellant, to submit the invoices to the respective authorities and obtaining their approval, to follow up with various authorities in the Works Department, finance department, banks and other authorities for obtaining the approval of the invoices raised by the appellant…

In so far as CGS International is concerned, the agreement dated 25.11.2002 between the appellant and CGS International provided for a consideration payable by the appellant for liaison or solicitation charges. On its part, CGS International will identify, introduce and provide details of industries, companies and individuals, where the appellant can utilize its expertise in the field of architecture, material procurement project management etc. In short, CGS International as per agreement would market the appellant and solicit project management and architectural work in UAE and also, in various parts of the world except India. The consideration is a fee equivalent to 15% of the gross value of the contract to be received from each client, who CGS International has solicited and has rendered services to procure the contract. The appellant has made the payment of Rs.45,31,044/- to CGS International being 15% of a total receipt of $665195 from the Works Department Abu Dhabi. Payments to CGS International are in terms of an earlier agreement entered into with the appellant. ”

19. It is evident 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. This question is answered against the revenue and in favour of the assessee.

Question No. 2
20. This question involves a determination of whether the services provided by the UAE entities are in the nature of „independent personal services‟ defined in Article 14 of the DTAA. Article 14, to the extent relevant here, reads as follows:

“1. Income derived by a resident of a Contracting State in respect of professional services or other independent activities of a similar character shall be taxable only in that State...
2. The term "professional services" includes independent scientific, literary, artistic, educational or teaching activities as well as the independent activities of physicians, surgeons, lawyers, engineers, architects, dentists and accountants.‖

21. 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. As to whether Article 14 applies to the nature of services provided by CGS International and Marble Arts & Crafts, the CIT(A) observed as follows:
“In the DTAA with UAE, there are Article (sic) to consider assessability of income from immovable property (Article 6), business profit (Article 7), shipping (Article 8), associated enterprise (Article 9), dividends (Article 10), interest (Article 11), royalties (Article 12), capital gains (Article 13), Independent personal services (Article 14), dependent personal services (Article 15) etc. There is no clause or Article governing payment for the so called technical services as in other DTAAs i.e. Article 13 of DTAA with UK or Article 12 of DTAA with Singapore. In view of the fact that the non residents do not have any permanent establishment within the meaning of Article 5 of DTAA in India, the remittances to them could only have been considered under Article 14 or Article 22 of DTAA. Under Article 14 of DTAA, the consideration paid to the non-resident is liable to be taxed in the contracting state i.e. UAE. In case remittances are considered as other income under Article 22 of the DTAA, it would also be taxable in the contracting state i.e. UAE.”

22. This Court agrees with the CIT(A)‟s approach, quoted above. Since the income of CGS International and Marble Arts & Crafts can only be classified under Article 14 or Article 22 of the DTAA – both of which provide that the income shall be taxable in the State of residence (UAE)–the issue as to whether the services provided by the two UAE entities fall within the scope of „professional services‟ under Article 14 is irrelevant to the outcome of this case. Their incomes would necessarily be taxable in UAE, whether by virtue of Article 14 or Article 22. For this reason as well, the assessee was not obligated to deduct tax on the remittances made to CGS International and Marble Arts & Crafts. The second question is answered accordingly.

23. Thus, both questions of law are answered against the revenue and in favour of the assessee. Consequently, the appeal is dismissed. No costs.

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