CIT v GRUP ISM P. LTD. (ITA 325/2014 dated 29.05.2015) Delhi High Court
The assessee Company made payment of Rs 56,54,963/- to M/s. CGS International, UAE (“CGS International”) and Rs 37,76,863/- to M/s. Marble Arts & Crafts LLC, UAE (“Marble Arts & Crafts”) (aggregating to Rs 94,31,826/-). The AO noted that no TDS had been deducted by the assessee while making the payment to the said two foreign concerns and asked the assessee to justify the same. The assessee stated that the payments were made towards commission and that neither of these concerns had any business in India and therefore, it was not required to deduct TDS. However, the AO disallowed the amounts stating that the payment made was towards consultancy services and therefore, liable to TDS.
On appeal before the CIT(A), 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. The CIT(A) also held that Article 14 of the DTAA with UAE is applicable in the facts of the case and that the AO could not have denied the applicability of the said Article 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. The ITAT dismissed Revenue’s appeal and confirmed CIT(A)’s order.
Nature of services rendered by the parties:
- As regards Marble Arts & Crafts, the services included guiding the assessee about the procedural aspect of obtaining payment, checking the format and documentation of invoice and other papers to be submitted for approval to the Works Department, Abu Dhabi; checking invoices, submission of invoices to respective authorities and obtaining their approval, follow up with Works Department, Finance Department, Banks and other authorities for approval of invoices, and obtain staff approval and letters of credits.
- As regards CGS International, the services included soliciting business for the assessee in various parts of the world except India, identifying, introducing and providing details of industries, companies, individuals and investors etc.
- ‘Consultancy service’ would mean something akin to advisory services provided by the non-resident, pursuant to deliberation between parties. Ordinarily, it would not involve instances where the non-resident is acting as a link between the resident and another party, facilitating the transaction between them, or where the non-resident is directly soliciting business for the resident and generating income out of such solicitation.
- The mere fact that CGS International confirmed that it received consultancy charges from the assessee would not be determinative of the issue.
- 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.
- 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‟.
- Further in relation to the Article 14 – ‘Independent Personal Services’ of the treaty, 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.
- 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.