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Facts
The assessee, a UAE company, undertook construction activities in Dubai for ONGC Ltd., converting an oil rig into a Mobile Offshore Production Unit (MOPU). The Assessing Officer treated the revenue derived from these activities as Fee for Technical Services (FTS) taxable in India under Section 9(1)(vii) of the Income Tax Act, 1961.
Held
The Tribunal held that since the assessee did not have a Permanent Establishment (PE) in India and all services were rendered in UAE, the income could not be taxed as FTS. It referenced a co-ordinate bench order stating that even without a DTAA clause for FTS, a PE in India is required for such taxation.
Key Issues
The key legal issue was whether revenue from construction activities performed in UAE for an Indian company could be taxed in India as Fee for Technical Services, especially in the absence of a Permanent Establishment in India and a specific FTS clause in the India-UAE DTAA.
Sections Cited
Section 9(1)(vii), Section 143(3), Section 144C(13), Section 195, Section 40(a)(i), Section 5, Section 9, Section 90(2)
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Income Tax Appellate Tribunal, DEHRADUN BENCH, DEHRADUN
Before: Sh. Satbeer Singh Godara & Sh. S. Rifaur Rahman
ORDER
Per Satbeer Singh Godara, Judicial Member:
These assessee’s three appeals & 81/DDN/2024 for A.Ys. 2020-21 and 2021-22 arise against the Assessing Officer’s assessment order dated 11.11.2022 and 24.08.2023 and for A.Y. 2022-23, is directed against the Assessing Officer’s assessment order dated 23.12.2024, in proceedings u/s 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961 (in short “the Act”), respectively.
Heard both the parties at length. Case files perused.
Gulf Piping Company WLL 3. It transpires during the course of hearing that the assessee raises it’s identical sole substantive grievance in the former twin assessment years 2020-21 and 2021-22 seeking to reverse the learned lower authorities’ action holding it’s revenue derived from M/s ONGC Ltd. for undertaking construction activities for converting the latter’s oil rig namely “Sagar Samrat” into a Mobile Offshore Production Unit (MOPU) in Dubai, involving varying sums as fee for technical services (“FTS”) and taxable in India u/s 9(1)(vii) of the Act.
Both the parties vehemently reiterate their respective stand against and in support of the foregoing assessment of the assessee’s revenue derived from M/s ONGC Ltd. The assessee/appellant is admittedly is a company incorporated under the United Arab Emirates (“UAE”) laws and stated to be a tax resident thereof. It is engaged in the business of providing services to oil and gas industry with respect to fabrication and construction solutions for small and medium, larger scale products. And that the learned Assessing Officer is himself very fair in his assessment(s) framed in assessment year 2020-21 is not rebutting the assessee’s claim that it was required to convert the above oil rig “Sagar Samrat” for established Gulf Piping Company WLL utilization and conversion thereof to an “MOPU” for the purpose of rendering it a highly specialized rig. And that the same had been towed to UAE way back in 2011-12 for the very purposes. It is the assessee’s revenue received from all these construction and conversion operation revenue of the ONGC rig in UAE which have been held as taxable in India since attributable to a source in India under the head fee for technical services in section 9(1)(vii) of the Act.
The Revenue vehemently argues in this factual backdrop that although there is double tax avoidance between India and UAE “DTAA”, but, at the same time, it does not cover such fees for technical services assessment there under. It’s case accordingly is that the learned lower authorities have rightly assessed the assessee for it’s impugned revenue as fee for technical services.
We find no merit in the Revenue’s foregoing contentions. This is for the precise reason that although the assessee is not entitle for relief under “DTAA” clause, it is hereby noticed that it has nowhere been held as having a permanent establishment (“PE”) in India since having rendered all it’s construction and conversion services on “Sagar Samrat” in UAE only. Coupled with this, this tribunal recent learned co-ordinate bench order in DCIT Vs. Campus Eai India Pvt. Ltd. decided on 20.102023 holds in very terms that even in absence of DTAA, such an assessment of a UAE based entity requires its PE in India, as under: “5. The Ld. DR strongly supported the order of the Ld. AO who by recording his observations and findings in para 6.1.2, 6.1.3, 6.1.4, 6.1.6 his order of assessment held that the payment made to Dubai Leading Technologies, UAE is in the nature of FTS for the following reasons:- i) The payments have been made to Dubai Leading Technologies for development of an android app with features such as integration with calendar, event management and notifications, appointment management with teacher and principal, able to connect to schools other sub systems like attendance marking, assignment submission, geo tagging, school news and help button for calling for help at designated number in case of emergency. The above specifications makes it amply clear that the software has been custom made for the assessee with specific on demand features and requires integration with the other sub-systems of the school. ii) By referring to certain clauses of the agreement between Dubai Leading Technologies and the assessee (at pages 11 to 13 of the assessment order), the Ld. AO arrived at a conclusion that services of technical nature are being provided for the development of an android app which when becomes the property of the assessee which in turn sells the solution to its clients. iii) The payment schedule is linked milestones in development of the software, which once develop using the technical services of Dubai Leading Technologies, is owned by the assessee as the agreement does not mention of any licence being given by Dubai Leading Technologies to the assessee or any ownership rights or copyright being retained with itself. iv) The India-UAE Double Taxation Avoidance Agreement (“India-UAE DTAA”) does not have a clause on FTS and relying on the decision of the Chennai Tribunal in the case of DCIT vs. TVS Electronics Limited (TS-421ITAT-2012) wherein the Tribunal has observed that in the absence of any specific clause for FTS in the India-UAE Treaty, the taxability will not be determined as per the residuary clause 22 of the Treaty but by the Income Tax Act.
6. The Ld. AR supported the order of the Ld. CIT(A) and reiterated the submissions made before him. He submitted that the assessee has submitted the relevant documents such as TRC, Form 15CA and 15CB before the lower authorities and that the payee/ recipient/ remittee did not have a permanent establishment (“PE”) in India and the activities were utilized for the purpose of making or earning income from a source outside India. Since the provisions under the India-UAE DTAA are more beneficial to the assessee, the same should be applied. He further submitted that the decision of the Chennai Tribunal in the case of TVS Electronics (supra) which has been relied upon by the Ld. AO has been overruled by the Hon’ble Madras High Court in the case of Bankok Glass Industry Ltd. vs. ACIT 34 taxmann.com 77 and by Bangalore Tribunal in the case of Kingfisher Airlines Ltd. vs. DDIT 179 ITD 364.
7. We have heard the Ld. Representatives of the parties and perused the records. The Ld. CIT(A) has recorded his findings and observations on the impugned issue in his appellate order as under:- “5. During the course of appellate proceedings, the appellant has made the following submissions:- That the amounts remitted were not chargeable to tax, and hence, there was no obligation to deduct u/s 195 of the Act; The appellant during the course of the assessment proceedings has drawn attention to the following documents / submissions:: (i) Tax Residency Certificate, issued by respective countries; (ii) Form 15CA and Form 15CB, evidencing that the payments needed to be remitted without payment of TDS. (iii) That the appellant did not have a Permanent Enterprise (PE); The activity was utilized for the purpose of making or earning income from a source outside India. The appellant has relied on Section 90(2) of the Act. It is argued that the provisions which are more beneficial - i.e. Treaty provisions or Income-tax Act, i.e. either of the two should be applied; Further, the appellant has also drawn attention to the fact that the decision of Hon'ble ITAT Chennai in the case of DCIT vs. TVS Electronics (Supra) has been overruled by Hon'ble High Court of Madras in Bangkok Glass Industry Ltd. Vs. ACIT [34 taxmann.com 77, 2013] and by the Banagalore ITAT in Kingfisher vs. DDIT (179 ITD 364).
6. In the context of the above submissions of the appellant needs to be evaluated in the context of findings given by the AO. The deductibility of TDS will depend on the provisions of DTAA and other relevant factors.
Analysis of payment made to Dubai Leading Technologies (UAE):- The nature of transaction is with respect to payment made towards an 'application software'. The nature of the agreement is described as under:- 7.1. Nature of agreement:- PROVIDER shall perform the services within the scope listed below. Following services shall be comprised within the scope of work (the "Services"). Development of mobile app for school process automaton focused on school and other academic
provide mobile app developing services for use by contractor its clients. Phase 1: Mobile App will be developed on Android. It will be having following functionality: - Integration with calendar. -Event Management and Notifications -Appointment management with teacher and principal -Able to connect to school's other sub-systems like attendance marking, assignment submission -Geo Tagging. -School News -Help button for calling for help at designated number in case of emergency 7.2 The issue is in respect of remittances to Dubai Leading Technologies who is resident of UAE, whether will be subject to TDS u/s 195 of the Act. The appellant has made payment for development of mobile application software. In the impugned assessment order on consideration of the Double Taxation Avoidance Agreement (hereinafter referred to as "DTAA") between India and UAE in the context of remittances to Dubai Leading Technologies held that payments are in the nature of fees for technical services and therefore section 40(a)(i) of the Act is applicable. Though apparently from the order of assessment that the learned Officer has not disputed that there is no specific clause of fees for technical services in the DTAA between India and UAE. In this context it would be pertinent to refer to the decision of the Bangalore Bench of Hon'ble Tribunal in the case of Kingfisher Airlines Ltd. v. DDIT reported in 179 ITD 364 has held as under: “45. As far as payment to M/s. CAE Aviation Dubai, is concerned, the CIT(A) held that the payment is not in the nature of Royalty. The question whether it is FTS does not arise because of the absence of a clause relating to FTS in the DTAA regarding FTS and the settled position of law that in the absence of a clause in a treaty not dealing with a particular item of income, the same should not be regarded as residuary income but income from business and in the absence of Permanent Establishment in India (PE) of the non- resident in India, the same cannot be taxed. We have already made a reference to the decision of the ITAT Bangalore in the case of ABB FZ-LLC which was a case rendered in the context of DTAA between India and UAE. The decision of the CIT(A) is in line with the decision referred to above and is a correct interpretation of the treaty. We find no grounds to interfere with the decision of the CIT(A) on this issue. 7.3 In view of the ratio of decision as enumerated Kingfisher Airlines Ltd. v. DDIT (supra), there is no denying that the said remittance cannot be brought within the ambit of FTS'. Whether the same can be treated as payment towards 'royalty' is a matter which needs to be looked into. The payment for development of mobile application is akin to payment for development / purchase of computer software- it would be relevant to look at the basis for treatment of payment for development of computer Software'. In order to treat the payment for development of mobile application which is akin to payment for development / purchase of computer software as "royalty", the said payment must refer to payments of any kind received as a consideration for the use of, or the right to use any 'copyright of literary, artistic or scientific work including cinematograph films, or films or tapes used for radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for the use of, or the right to use, industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience but do not include royalties or other payments in respect of the operation of mines or quarries or exploitation of petroleum or other natural resources. 7.5 It is evident from the assessment order that the AO has not disputed that there is no specific clause for fees for technical services in the DTAA between India and UAE. The judicial precedents discussed hereinabove establishes the fact that payment made y towards mobile app will not be treated as payment in the nature of royalty. 7.6 As submitted by the appellant, the payment made in the above case is in the nature of business income , as the same is essentially sale of the ‘App’ to the resident-appellant. Article 7 of the DTAA provides for taxation of business income. It is not in dispute that the appellant does not have a PE in India. Hence, payment made on account of the 'App' is outside the ambit of the said Article. 7.7 The scope and ambit of Section 195 of the Act has been explained by the Hon'ble Supreme Court in GE India Technology Centre (P) Ltd. vs. CIT (2010) 327 ITR 456. In the said case the expression "any other sum chargeable under the provisions of the Act" in Section 195 of the Act was elucidated and explained. It was held that if payment is made in respect of the amount which is not chargeable to tax under the provisions of Act, tax at source (TDS, for short) is not liable to be deducted. Further, the provisions of section 195 needs to be read with the provisions of sections 5 and 9 of the Act. A combined reading would suggest that the payment made not chargeable to tax under the provisions of Act, tax at source was not liable to be deducted. From the discussion hereinabove, it is concluded that the payment cannot be brought within the ambit of FTS, in the absence of an enabling Article in the DTAA with UAE. The payment cannot be classified as 'Royalty', in view of judicial pronouncements enumerated, in the context of facts of the case. This has to be accepted as a business income covered under Article-7 of DTAA. In the absence of a PE, the same is not chargeable to tax in India. Hence, the action of the AO is disallowing the amount u/s 40(a)(i) of the Act is erroneous.”
It is an undisputed fact that the payee/ remittee do not have a PE in India. We observe that the Ld. CIT(A) has analysed the impugned issue in great detail in para 7.1 to para 7.4 of his appellate order qua the nature of service agreement dated 3.10.2016 entered into between the assessee and Dubai Leading Technologies for development of mobile app on Android and various judicial precedents (extracted above) inter-alia including therein the decision in the case of Kingfisher Airlines Ltd. (supra). In Kingfisher Airlines Ltd.’s case (supra) the Bangalore Tribunal held that the remittance cannot be brought within the ambit of FTS in view of the absence of a specific clause relating to FTS in the DTAA and the settled position of law that in the absence of a clause in DTAA not dealing with a particular item of income, the payment should not be regarded as residuary income but as business income which is not chargeable to tax in India in the absence of a PE of the non-resident in India. The Ld. CIT(A) relying on this decision in para 7.3 (extracted above) of his appellate order held that the impugned remittances/ payments by the assessee to Dubai Leading Technologies cannot be brought within the ambit of FTS. 8.1 The Ld. AO relied on the decision of Chennai Tribunal in TVS Electronics Ltd. (supra) wherein the Tribunal has observed that in the absence of any specific clause for FTS in the India-UAE Treaty, the taxability will not be determined as per the residuary clause 22 of the Treaty but by the Income Tax Act, 1961. It has been brought to our notice that this decision of the Chennai Tribunal has been reversed by the Hon’ble Madras High Court in the case of Bankok Glass Industry Ltd. (supra). The brief facts in this case are that the assessee, a non-resident company of Thailand, entered into technical assistance know-how agreement with MBDL in India for transfer of glass technology know-how. The assessee received technical know-how fees for five years, which was treated as not taxable as per article 12 of DTAA between India and Thailand. The Assessing Officer took a view that what was transferred was sharing of knowledge and not know-how, and therefore, consideration received was not covered by definition of royalty under Article 12 of DTAA. He also opined that since there was no direct nexus between the income and activities of business of the assessee, it could also not be treated as business profit under article 7. Therefore, he held that consideration could be taxed only or in the contracting State where the income arose under the residual clause i.e. Article 22 of DTAA. Thus, the income received by the assessee was held to be taxable in India under sections 9(1)(vii) and 115(a)(iii) at 40 per cent of gross amount. On appeal, the Commissioner (Appeals) held part amount to be taxable as royalty under Article 12 and remaining amount representing additional attendance fee was held taxable under Article 7, subject to the condition that assessee had a permanent establishment in India. The Tribunal held that the portion of fees for technical services was not taxable under Article 7 but under Article 22, as per section 9(1)(vii). On further appeal, the Hon’ble Madras High Court held as under:
“19. Even though the Revenue canvassed this issue before the Tribunal, in the absence of any material to read the clauses otherwise rightly the Tribunal came to the conclusion that a sum of 4,79,640 USD alone would fall for consideration under art 12 as royalty income and the other to be assessed as by way of technical services. As already pointed out even herein, with the finding of the assessing authority on the remand order that the assessee had no PE, the said amount cannot be brought under art.7. In the light of the above, we have no hesitation in confirming the order of the Tribunal.
As far as the order in art. 22 is concerned, we do not find any justifiable ground to uphold this portion of the order after the discussion on the extent of income falling for consideration under royalty as defined under art. 12 and the amount paid as towards technical services falling for consideration under art.
7. Since the said income does not fall as miscellaneous income, the same cannot be brought under art. 22.
Even though learned standing counsel made a submission that the fee paid towards technical services cannot be brought towards business income, yet in the absence of any material to show that the same is not related to the business of the assessee. We have no hesitation in rejecting the said contention. Even assuming for a moment that the assessee is an Indian company given the nature of business of the assessee, if the income earned would qualify for consideration on the normal computation as business income, we do not find that the said character would undergo a change merely on the score that the assessee is not an Indian company.
In the light of the above, we allow the assessee's appeals viz, Tax Case (Appeal) Nos. 1187, 1307 and 1342 of 2005, 34 of 2006 and 743 of 2007 and reject the Revenue's appeals viz, Tax Case (Appeal) Nos. 1460 to 1464 of 2005 and set aside the order of the Tribunal as far as its consideration on art. 22 of DTAA is concerned. No costs.” 8.2 In ACIT vs. M/s. Chadha Power (ITA No. 3055/Del/2018), the Co-ordinate Bench of the Delhi Tribunal observed and held as under:-
“8. Thereafter, the ld. CIT (A) has referred to the principles laid down by Hon'ble Supreme Court in the case of SA Builders Ltd. reported in 288 ITR 1. As regards the applicability of section 40(a)(i), Id. CIT(A) observed that first of all, expenses claimed in computing the income chargeable under the head 'profits and gains of business or profession' towards royalty, fee for technical services or other sum chargeable under the Act which is payable outside India or in India to a non- resident on which TDS is applicable, is not applicable in the present case for the reason that even if these services are taken as technical services, the DTAA with UAE did not mention anything regarding f fee for technical services, therefore, Article 22 for other income would be applicable and, therefore, no tax is required to be withheld because Article 22 provides that income of a resident of a contracting state wherever arising which is not expressly dealt within the DTAA shall be taxable only in the resident state. Accordingly, he deleted the expenses of Rs. 1,30,51,568/--.
Insofar as the disallowance made u/s 40(a)(i) of the Act is concerned, the AO held that the said payment of reimbursement of expenses is in the nature of fee for technical services. As noted by the Id. CIT (A), there is no FTS clause in the India UAE DTAA regarding fee of technical services and, therefore, there cannot be any question of withholding of tax. Accordingly, disallowance u/s 40(a)(i) cannot be made. The aforesaid finding of ld. CIT (A) is accordingly confirmed.”
9. We also observe that the Ld. CIT(A) has also considered whether the impugned payments can be characterized as ‘royalty’ in the hands of the payee. The Ld. CIT(A) arrived at the conclusion that the payments made by the assessee for development of mobile application software is akin to payments for development/purchase of computer software and hence cannot be taxed as royalty payments placing reliance on number of judicial pronouncement on this subject which are mentioned in para 7.4 of his appellate order. Since the Revenue has not disputed the aforesaid finding of the Ld. CIT(A), we have not considered the submissions of the assessee on this aspect of the matter.
Gulf Piping Company WLL 10. In the light of the above factual matrix of the case and the legal position set-out above, we do not find any infirmity in the order of the Ld. CIT(A) and uphold his finding that the payments made to Dubai Leading Technologies cannot be brought to tax under Article 22 in the absence of a specific clause for FTS in the India-UAE DTAA. The impugned payments are in the nature of business income which are not chargeable to tax in India in the absence of a PE of the payee/remittee in India. We further uphold the finding of the Ld. CIT(A) that there is no obligation to deduct tax at source under section 195 of the Act as the impugned payments are not chargeable to tax in India as held by the Hon’ble Apex Court in GE India Technology Centre (P) Ltd. (supra) and hence the disallowance made by the Ld. AO under section 40(a)(i) of the Act is erroneous. Accordingly, ground No. 1 of the Revenue is dismissed.”
7. We conclude in this factual backdrop that both the learned lower authorities have erred in law and on facts in treating the assessee’s ONGC revenues’ for all it’s above services rendered in UAE as taxable in India in the impugned three assessment years 2020-21 to 2022-23 in very terms. The assessee succeeds in it’s former twin appeals & 81/DDN/2024 as well in former substantive ground in therefore.
8. Both the parties next invite our attention to the assessee’s latter substantive ground in it’s appeal in assessment year 2022-23 that the learned lower authorities have erred in law and on facts in assessing it @ 12.5% +/ higher education cess/surcharge regarding it’s interest income.
Gulf Piping Company WLL The Revenue could hardly dispute that the learned DRP’s directions dated 29.11.2024 in assessment year 2022-23 in the assessee’s case have already upheld it’s corresponding contentions at page 11 para (vii) thereof. We thus direct the learned Assessing Officer to finalize his consequential computation as per law in very terms.
We further make it clear before parting there arises a very glaring legal issue in the assessee’s favour and against the department. We notice from a perusal of the case records that the Assessing Officer appears to have framed his final assessment on 11.11.2022 whereas the learned DRP issued it’s directions on 01.06.2023. Meaning thereby that the Assessing Officer had wrongly proceeded further in finalizing his assessment that the assessee hadn’t preferred any objections against his draft assessment order dated 27.09.2022. We thus quash the impugned assessment dated 11.11.2022 in assessment year 2020-21 framed in the assessee’s case in very terms as well.
No other ground or argument has been pressed before us.