The Ahmedabad Income Tax Appellate Tribunal (ITAT) recently issued a ruling in a case involving an Indian company, Kalpataru Power Transmission Ltd., and a UAE-based service provider, Oilstone UAE. The case centered on whether payments made by the Indian company to the UAE service provider for design services were subject to Indian taxation. The ITAT ultimately found in favor of the Indian company, holding that the payments were not taxable under the India-UAE Double Taxation Avoidance Agreement (DTAA).
The Indian company, which is engaged in engineering, procurement, and construction (EPC) contracts related to power transmission and distribution lines, had procured services from Oilstone UAE for the design of towers, including the design of their foundation and structural drawing in relation to an EPC project executed by its branch in Uganda. The Indian company did not deduct tax at source under Section 195 from the payment made for these services. The Indian tax authorities claimed that the payment was in the nature of royalty under Section 9(1)(vi) and that the Indian company was in default for failing to deduct tax, making it liable under Section 201(1)/(1A).
However, the ITAT held that the contract in question was for the provision of services, not royalty, and that the services were provided by Oilstone UAE to the Indian company outside of India and utilized for the Indian company’s business outside of India. The ITAT noted that no existing tower structure design or data had been supplied to the Indian company by Oilstone UAE, and that the services were actually rendered by creating a new design based on the Indian company’s specifications. Therefore, the ITAT concluded that the payments were for the rendering of technical services and not royalty.
The ITAT also observed that there was no Foreign Technical Services (FTS) clause in the India-UAE DTAA, which meant that the payments could only be subject to tax in India if the UAE service provider had a permanent establishment (PE) in India. The ITAT cited several previous rulings, including those from the Bangalore ITAT, the Visakhapatnam ITAT, and the Mumbai ITAT, to support this conclusion. CA in gurgaon These rulings held that FTS received by a UAE company from an Indian company was business income in the hands of the UAE company as per the India-UAE DTAA, and that in the absence of a PE in India, the business income could not be taxed in India.
The ITAT found that it was an undisputed fact that Oilstone UAE had no PE or business connection in India, so the services provided could not be taxed in India under Article 7 of the India-UAE DTAA. As a result, the ITAT concluded that the Indian company was under no obligation to withhold taxes on the payments made to Oilstone UAE. The Indian company had also furnished a declaration stating that Oilstone UAE had no permanent establishment in India and a Tax Residency Certificate (TRC) to the effect that Oilstone UAE was a tax resident of the UAE. The ITAT therefore upheld the CIT(A) order deleting the demand raised under Section 201(1)/(1A).
In summary, the Ahmedabad ITAT held that payments made by an Indian company to a UAE-based service provider for design services were not taxable under the India-UAE DTAA due to the absence of an FTS clause and a PE of the service provider in India. The ITAT ruled that the payments were for the rendering of technical services and that the Indian company was not required to withhold taxes on such payments. CA in gurgaon The ruling is significant as it clarifies the tax treatment of cross-border payments for technical services in the absence of an FTS clause and a PE in India.