Income from Technical Services by UAE Co. Without Indian PE Not Taxable in India Due to DTAA Absence of FTS Clause: ITAT Chennai - 2025-06-11

No Indian Tax on Technical Fees to UAE Firm Without a Permanent Establishment, Rules ITAT Chennai

CHENNAI — In a significant ruling on international taxation, the Chennai Bench of the Income Tax Appellate Tribunal (ITAT) has held that fees for technical services (FTS) earned by a UAE-based company from an Indian client are not taxable in India if the company does not have a Permanent Establishment (PE) in the country. The Tribunal emphasized that in the absence of a specific FTS clause in the India-UAE Double Taxation Avoidance Agreement (DTAA), such income must be treated as 'Business Profits' and is taxable only in the country of residence.

The decision was delivered by a bench comprising Vice President George George K and Accountant Member S.R. Raghunatha in an appeal filed by M/s. Castlewick FZE, a company incorporated in the UAE.

Case Background

The case pertains to the Assessment Year 2018-19, during which Castlewick FZE received Rs. 90 lakhs from an Indian company, M/s. Gannon Dunkerley and Company Ltd., for reviewing designs and drawings for a water supply project in Assam. The services were rendered entirely from outside India.

Believing it had no PE in India and thus no income accruing in the country, Castlewick FZE did not file an income tax return. However, the Income Tax Department initiated reassessment proceedings against the company after scrutinizing the payer, M/s. Gannon Dunkerley. The Assessing Officer (AO) contended that the payment constituted FTS under Section 9(1)(vii) of the Income Tax Act, 1961, and raised a tax demand of Rs. 18.62 lakhs. This view was subsequently upheld by the Dispute Resolution Panel (DRP).

Arguments of the Parties

Appellant's Contentions (Castlewick FZE): The primary argument put forth by the appellant was that the India-UAE DTAA should prevail over the domestic Income Tax Act. It was submitted that: -

The India-UAE treaty conspicuously lacks a specific article for the taxation of FTS. -

In the absence of such a clause, the income should be classified as 'Business Profits' under Article 7 of the DTAA. Since the company had no PE in India, these profits could not be taxed in India. -

Alternatively, the income would fall under the 'Other Income' clause (Article 22), which grants exclusive taxation rights to the country of residence (UAE). -

The very foundation for the reassessment—an order against the payer for non-deduction of tax at source (TDS)—had already been quashed by the Commissioner of Income Tax (Appeals), who found the payment was not taxable in India.

Respondent's Stance (Income Tax Department): The department argued that the silence of the DTAA on FTS meant that the provisions of the Indian Income Tax Act should apply, making the income taxable in India under Section 9(1)(vii).

Tribunal's Analysis and Precedents

The ITAT meticulously analyzed the structure of the India-UAE DTAA and sided with the appellant. The bench made two crucial observations:

1. Invalid Basis for Reassessment: The Tribunal noted that the reassessment proceedings were triggered by a TDS demand raised against the Indian payer. Since the CIT(A) had already ruled in the payer’s case that the payment was not taxable in India and no TDS was required, the fundamental basis for the current assessment against Castlewick FZE was invalid.

2. Application of DTAA Over Domestic Law: Citing a key decision by the Bangalore ITAT in ABB FZ LLC vs. ITO , the bench affirmed a settled legal principle: > "When a DTAA does not recognize any income as Fees for Technical Services... then the classification of the said income has to be as per the other provisions of the DTAA."

The judgment further elaborated on this point, stating:

"...in the absence of the provision in the DTAA to tax Fees for Technical Services the same would be taxed as per the Article 7 of the DTAA applicable for business profit and in the absence of PE in India, the said income is not chargeable to tax in India."

Final Verdict

Allowing the appeal, the ITAT set aside the orders of the lower tax authorities and deleted the addition of Rs. 90 lakhs. The Tribunal concluded that since the India-UAE treaty does not have a specific provision for taxing FTS and the appellant has no PE in India, the income received is not taxable in India.

This verdict reinforces the principle that the beneficial provisions of a DTAA will override the domestic tax law, providing clarity for foreign companies rendering services to Indian clients from abroad, especially from jurisdictions with similarly structured tax treaties.