The main legal point established in the judgment is that the payments made to UAE concerns did not constitute technical services as defined in the Income Tax Act, and the Double Taxation Avoidance Treaty with UAE was applicable, leading to the conclusion that no TDS was required to be deducted.

S. Ravindra Bhat, J.

1. The following questions of law were framed by this Court at the time of admission of this appeal under Section 260A of the Income Tax Act, 1961 (“the Act”):

(1) Did the ITAT fall into error in holding that the payment incurred by the assessee to the extent of Rs.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 fall into error in holding that Article 14 of the Double Taxation Avoidance Treaty applied to the UAE concerns in the circumstances of the case?

2. During the course of assessment proceedings, for AY 2004-05, the Assessing Officer (AO) noticed that 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. Accordingly, AO required the assesse to show cause why the said expenditure should not be disallowed under Section 40(a)(i) of the Act. The assessee contended that the payments were made towards commission and that neither of these concerns had any business in India nor had they filed any Income Tax Return in India. The copies of accounts of these two concerns filed by 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. 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.

3. Before the CIT (A), the assessee contended that what was paid to the two foreign concerns was not consultancy fee. 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. Marble Arts & Crafts was to be paid a fee of 5% of gross amount paid by Works Department to the appellant. In addition, the assessee agreed to pay one time fee of US$ 50000 to Marble Arts & Crafts for identification and selection of UAE national as a partner for the appellant in connection with supply of marble to the Works Department in UAE. 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. CGS International was to be paid in terms of the agreement a fee equivalent to 15% of the gross value of the contract. Clause 7 of the agreement dated 05.04.03 with Marble Arts & Crafts provided for payment of US$ 50000 as fees towards identification and selection of UAE national as a partner for the appellant and subsequent assistance in framing legal documentation. The copies of agreements which formed the basis for payment to Marble Arts & Crafts and CGS International were furnished.

4. The CIT (A) took into consideration the facts and noticed that the assessee was awarded project management consultancy by the Works Department of the Emirate of Abu Dhabi. It was to act as a consultant for project management of marble works