Case Law Details
Brief Facts of the Case and Question of law
Brief Facts: 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. AO required the assessee to show cause why the said expenditure should not be disallowed under Section 40(a)(i) of the Act.
The assessee did not deduct TDS on the sum of Rs. 94, 31,826/- remitted by it to CGS International and Marble Arts & Crafts. Therefore, this amount would be allowed as deduction for computing the assessee income only if it is held that the said remittances were not taxable under the Act, lest the provisions of Section 40(a)(i) be attracted and the deduction would have to be disallowed. This sum would constitute income for the two UAE entities – CGS International and Marble Arts & Crafts –which, admittedly, do not have a permanent establishment in India. Thus, for these non-residents, the provisions of Section 5(2) would be applicable, which provides that the total income of a non-resident includes, inter alia, income that is deemed to accrue or arise in India.
Question Raised:
(1) Did the ITAT believed that the payment incurred by the assessee to the extent of 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 believe that Article 14 of the Double Taxation Avoidance Treaty applied to the UAE concerns in the circumstances of the case?
Contention of the Assessee:
The assessee was not satisfied with the act of assessing officer, the assessee contended that the payments were made towards commission and that neither of these concerns did not have any business in India nor had they filed any Income Tax Return in India. The assessee Company made payment of ` 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 assessee revealed that the payment was 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 further 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.
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. Marble Arts & Crafts was to be paid a fee of 5% of gross amount paid by Works Department to the appellant
Contention of Revenue:
The Assessing Officer was not satisfied with the assessee’s submissions. AO required the assessee to show cause why the said expenditure should not be disallowed under Section 40(a)(i) of the Act.
The AO rejected the assessee’s contentions; he was also influenced by the fact that the assessee did not produce copies of the agreements with the two foreign concerns. Thus, the AO disallowed the amounts. the assessee failed to establish the authenticity and genuineness of the agreements on which reliance has been placed by the CIT(A) and ITAT. The learned counsel heavily relies on the fact that CGS International had independently confirmed that it received consultancy charges from the assessee during the year under consideration, as well as the assessee’s treatment of these charges as such. Lastly, it is submitted that the CIT(A) and ITAT erred in applying Article 14 of the DTAA.
Fees for technical services to mean managerial, technical or consultancy services. Revenue contends that the services for which the assessee remitted the sums to CGS International and Marble Arts & Crafts classify as „consultancy services. This Court does not accept the revenue submissions, and in light of the thorough determination carried out by the CIT(A), upheld by the ITAT, affirms their view
Held by Apex court:
After hearing the rival contentions, 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 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 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.
This Court agrees with the CIT(A) 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.
Analysed by Shruti Juneja
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