The Kolkata Bench of the Income Tax Appellate Tribunal (ITAT) has held that payments made by an Indian company to a UAE-based consultant for advisory and supervisory services cannot be treated as Fees for Technical Services (FTS) in the absence of any transfer of technical knowledge or know-how. 

The bench of Shripradip Kumar Choubey (Judicial Member) and Rajesh Kumar (Accountant Member) deleted a demand of ₹35.57 lakh raised against the assessee for alleged failure to deduct tax at source (TDS) under Section 195 of the Income Tax Act.

The appellant/assessee, engaged in real estate development, was constructing the iconic residential tower “The 42” in Kolkata. To assist in the project, it entered into a Technical Consultancy Agreement dated May 1, 2016, with Arabian Construction Co. WLL (ACCWLL), UAE.

Under the agreement, ACCWLL provided advisory services relating to construction techniques, review of working drawings, scaffolding and staging design, safety measures, and quality control. The services were limited to review, comments, and recommendations and did not involve any transfer of technical processes, methodologies, or proprietary know-how. During the financial year 2017-18, the assessee remitted consultancy fees to the UAE entity after filing Forms 15CA and 15CB, treating the payments as business profits under Article 7 of the India-UAE Double Taxation Avoidance Agreement (DTAA), on the ground that ACCWLL had no Permanent Establishment (PE) in India.

The Assessing Officer held that the consultancy payments constituted Fees for Technical Services under Section 9(1)(vii) of the Income Tax Act and were taxable in India. According to the department, the assessee ought to have deducted tax at source under Section 195 while making the remittances.

Treating the company as an assessee in default under Section 201(1), the Assessing Officer raised a demand of ₹28.39 lakh towards TDS and ₹7.18 lakh towards interest under Section 201(1A), aggregating to ₹35.57 lakh. The CIT(A) subsequently affirmed the demand through an ex parte order.

Allowing the appeal, the Tribunal observed that the consultancy agreement merely involved advisory and consultative services. It found that the UAE company had not transferred any technical knowledge, skill, process, or methodology that would enable the assessee to independently apply such expertise in the future.

The Bench emphasized that the decisive factor is not whether technical expertise is used by the service provider while rendering services, but whether such expertise is “made available” to the recipient. Unless the recipient acquires an enduring technical capability enabling independent future use without further assistance, the consideration cannot be characterized as Fees for Technical Services under treaty principles.

The Tribunal further noted that the India-UAE DTAA does not contain a specific article dealing with Fees for Technical Services.

It held that where a treaty deliberately omits an FTS provision, the domestic definition contained in Section 9(1)(vii) cannot be imported into the treaty framework. According to the Bench, the DTAA is a self-contained code governing taxation of cross-border income, and domestic law can operate only to the extent that it is consistent with the treaty provisions.

The Tribunal observed that business profits of a UAE enterprise are taxable in India only if the enterprise has a Permanent Establishment in India under Article 7 of the DTAA. Since ACCWLL admittedly had no PE in India, the consultancy receipts were not taxable in India.

The Revenue had also relied upon CBDT Circular No. 33 dated April 2, 1982. Rejecting this argument, the Tribunal held that CBDT circulars cannot enlarge the scope of taxability or create a liability where the DTAA itself does not authorize taxation.

The Bench observed that while departmental circulars are binding on tax authorities, they cannot override or rewrite the provisions of an applicable tax treaty.

Setting aside the order of the CIT(A), the Kolkata ITAT directed the Assessing Officer to delete the entire demand of ₹35.57 lakh, holding that the payments made to the UAE consultant were not taxable in India and, therefore, no obligation to deduct tax at source arose under Section 195 of the Income Tax Act.

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