In the case of CIT vs. M/s Group ISM P. Ltd. : ITA No. 325/2014 (Del), the assessee had made payments to two UAE based companies, namely, CGS International, UAE (“CGS”) and M/s Marble Arts & Crafts LLC, UAE (“MAC”), without any deduction of tax at source. The assessing officer disallowed the said expenditure under section 40(a) (i) of the IT Act as the assessee failed to deduct tax at source. On appeal before CIT (A), it was noted that assessee was awarded project management consultancy by the Works Department of the Emirate of Abu Dhabi pursuant to which assessee was required to act as consultant for project management of marble works for Shaekh Zayed Bin Sultan Al Nahyan mosque at Abu Dhabi. The contract required the assesse to organize procurement of marble from India and supervise the processing at Abu Dhabi.
On analysis of the agreements, the CIT(A) noted that MAC received consideration for assistance in documentation, guidance and liaison with various departments towards assisting assessee in its work in UAE and thus were in nature of “liaison services in Abu Dhabi", while payments to CGS International were made to procure clients and market assessee’s services as “agent in UAE work" and thus, held that the payments made by assessee to the two UAE entities would not fall within the purview of “technical services”, as defined in Explanation 2 to Section 9(1)(vii). The CIT(A) agreed with assessee’s contention that Article 14 of DTAA with UAE relating to Independent Personal Services was applicable and that the benefit available under the said treaty cannot be denied on the sole premise that the two UAE entities were companies. The CIT(A) further held that since such remittances to non-resident entities was liable to be taxed in UAE, therefore, no TDS was required therefrom.
On appeal by the Revenue, the Tribunal upheld CIT(A)’s order. Aggrieved by the order of Tribunal, Revenue preferred an appeal before the High Court. Before the High Court, the primary issue raised for consideration was regarding interpretation of the phrase “fees for technical services” as defined in Explanation 2 to Section 9(1) (vii) which defined the same as managerial, technical or consultancy services and whether the so called “consultancy services” rendered by CGS and MAC would fall under the ambit of the said phrase or not. The High Court noted that CGS and MAC, being UAE entities, were not having PE in India, and accordingly, the payments to said entities could only be taxed under section 9 of the Act. The High Court further observed that actual nature of services rendered by CGS and MAC needs to be examined for determination of the requirement of withholding tax. The High Court held that since CGS and MAC acted as agents of assessee for liaison services and/or soliciting business for assessee, 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””.
In so far as the applicability of Article 14 of DTAA with UAE relating to Independent personal Services was concerned, the High Court noted that the said Article applied to resident of a contracting state and that “resident of a contracting state” as per UAE Treaty is any person under the laws of that state who is liable to tax therein. It was noted that Article 3(e) of the India–UAE Treaty included a company and that the payee companies were liable to tax under Article 14 or Article 22 of the DTAA in respect of amounts paid by the assessee. It was thus held that Article 14 of the DTAA was applicable.