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Commissioner of Income Tax-IV Versus M/s. Grupism P. Ltd.

[2015] 378 ITR 205 - Technical service in terms of Second Explanation to Section 9 (1) (vii) read with Section 194J - payment incurred by the assessee to the UAE concerns - whether the non-resident was providing consultancy services? - Held that:- In the transaction between the assessee and Marble Arts & Crafts, the former (non-resident) acted as an agent of the assessee for the purposes of the latter”s dealings with the Works Department, Abu Dhabi, which included coordinating with the authoriti .....

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services provided were in the nature of “consultancy services”. Consequently, the remittances made by the assessee would not come within the scope of the phrase “fees for technical services” as employed in Section 9(1)(vii) of the Act. - Decided in favour of the assesse.

Whether the services provided by the UAE entities are in the nature of “independent personal services” defined in Article 14 of the DTAA? - Held that:- The two requirements for the applicability of Article 14, as app .....

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Article 14 is inapplicable for the reason that the services in question were provided by companies, as opposed to individuals - Decided in favour of the assessee - ITA 325/2014 - Dated:- 29-5-2015 - Hon'ble Mr. Justice S. Ravindra bhat And Hon'ble Mr. Justice R. K. Gauba,JJ. For the Appellant : Sh. Rohit Madan, Sr. Standing Counsel with Sh. Ruchir Bhatia and Sh. Akash Vajpai, Advocates. For the Respondent : Sh. Kaanan Kapur and Sh. Bhushan Kapur, Advocates. ORDER Mr. Justice S. Ravindra .....

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nce 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 ₹ 56,54,963/- to M/s. CGS International, UAE ( CGS International ) and ₹ 37,76,863/- to M/s. Marble Arts & Crafts LLC, UAE ( Marble Arts & Crafts ) (aggregating to ₹ 94,31,826/-). The AO noted that no TDS had been deducted by the assessee while making the paym .....

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ad 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 .....

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ities 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 sup .....

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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 .....

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identify potential mines, and also supervise block quarrying and selection of blocks. Moreover it was required to supervise the loading of the blocks into containers, sealing of the containers and transporting the containers to the project site at Abu Dhabi. As regards the Abu Dhabi component of the agreement with the Works Department, the assessee was to act as consultant for procurement of marble, its processing, cutting etc. The CIT held that In short, the contract was for organizing procurem .....

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ity server, electrical plumbing and HVAC services, EDP services, acoustic services, research services, liaison services, stone services. All the payments barring two were made to concerns in India. However, in respect of CGS International, payments were made for 'agent in UAE work", and Marble Art & Crafts were paid for liaison services in Abu Dhabi". Before the CIT (A), when the assessee produced copies of the agreements with the UAE companies, the AO objected. However, the CI .....

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alized, the appellant incurred an expense of ₹ 15,12,613/- and a further amount of ₹ 22,64,240/- by way of charges for identifying a UAE national as its partner. The agreement dated 5.4.2003 between the assessee and Marble Arts & Crafts contemplated 5% of the gross payments received from the Works Department in terms of an agreement dated 12-1-2003. The linkage between the payment and the amounts received from the foreign client therefore was established. The records also showed .....

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ceive 15% of the amounts received from the clients so introduced. The assessee paid ₹ 45,31 ,044/- on this score. In the background of these facts, the CIT(A) held that the payment made by the assessee to the two UAE entities would not come within the purview of technical services , as defined in Explanation 2 to Section 9(1)(vii) of the Act and consequently, the provisions of Section 9(1)(vii) were not attracted in the assessee s case. Further, the CIT(A) held that Article 14 of the DTAA .....

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he instant appeal. Submissions of Parties 6. Mr. Rohit Madan, learned counsel for the revenue submits that the CIT(A) and the ITAT erred in their analysis of the payments made to the two UAE entities, and that the services provided by these entities clearly and unequivocally qualify as technical services as defined in Explanation 2 to Section 9(1)(vii) of the Act. Learned counsel states that the agreements dated 25.11.2002 and 05.04.2003, entered into with CGS International and Marble Arts & .....

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ed to establish the authenticity and genuineness of the agreements on which reliance has been placed by the CIT(A) and ITAT. The learned counsel heavily relies on the fact that CGS International had independently confirmed that it received consultancy charges from the assessee during the year under consideration, as well as the assessee s treatment of these charges as such. Lastly, it is submitted that the CIT(A) and ITAT erred in applying Article 14 of the DTAA, and endorsed the AO s determinat .....

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respect of consultancy charges , attracting the provisions of Section 9(1)(vii) of the Act. Thus, TDS was not required to be deducted on the foreign remittances made by the assessee and the disallowance of amount by the AO on account of the non-deduction of TDS was incorrect.Further, the assessee submits that the CIT(A) correctly interpreted Article 14 of the DTAA in light of the definition of person in Article 3 of the Treaty, and held it to be applicable. Thus, the assessee submits that the f .....

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for the two UAE entities - CGS International and Marble Arts & Crafts -which, admittedly, do not have a permanent establishment in India. Thus, for these non-residents, the provisions of Section 5(2) would be applicable, which provides that the total income of a non-resident includes, inter alia, income that is deemed to accrue or arise in India. Section 9 enumerates several instances where income shall be deemed to accrue or arise in India. 10. The revenue had sought to bring this sum to t .....

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India:- … (vii) income by way of fees for technical services payable by- … (b) a person who is a resident, except where the fees are payable in respect of services utilised in a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India; or … Explanation 2.-For the purposes of this clause, "fees for technical services" means any consideration (including any lump sum consideration .....

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the scope of Section 9(1)(vii)(b).It is not in dispute that the two exceptions to the applicability of Section 9(1)(vii)(b), enumerated in the said sub-clause itself, do not apply in this case. The only dispute between the assessee and revenue concerns the interpretation of the phrase fees for technical services , as defined in Explanation 2 to Section 9(1)(vii). 13. Explanation 2 defines fees for technical services to mean managerial, technical or consultancy services. Revenue contends that the .....

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roduced before the CIT(A) and were duly taken on record under Rule 46A. The AO made its submissions on these agreements and sought to highlight various infirmities in these agreements. In furtherance of that contention, the revenue submits that the agreements are not authentic in nature and that it cannot be concluded that the remittances made were in pursuance of those agreements. The CIT(A) took note of the fact that the assessee entered into the two agreements with CGS International and Marbl .....

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bi. Whereas Marble Art & Craft was paid $50000 for identifying the suitable partner for the project at Abu Dhabi, and a consideration at 5% of the gross remittances receivable from the Works Department, Abu Dhabi for assisting the appellant in the day to day work towards checking the documentation and formats for invoices etc., CGS International was paid 15% of the sum received by the appellant from the Works Department, Abu Dhabi towards soliciting business for the appellant. There is nothi .....

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ment of stamp duty, non certification by the Notary Public and concludes that there is no legal validity of such agreements. Facts on record show that the agreement with CGS International dated 25.11.02 was prior to the agreement dated 12.01.03 entered into by the appellant with the Works Department, Abu Dhabi. The agreement with Marble Arts & Crafts dated 05.04.03 were subsequent to the agreement with the Works Department, Abu Dhabi. Both the agreements with CGS International and Marble Art .....

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lities have accrued and acknowledged by the parties to the agreements. The question of legal enforceability of the agreements will not have as much implication for deciding the revenue implications of the payments made as much as a finding that the parties to the agreements did not render the service mentioned in the agreements or that the payments made are in excess of the agreements. In so far as both the agreements with CGS International and Marble Arts & Crafts relate to the main contrac .....

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show any material factual error. This Court, in this appeal under Section 260A of the Act, cannot interfere with these findings, to the extent that they conclude that the remittances were made pursuant to the two agreements entered into with CGS International and Marble Arts & Crafts. Further, this Court does not find any merit in the revenue s contention that the ITAT s and CIT(A) s sole reliance on the two agreements to establish the authenticity of the transaction was erroneous. The CIT(A .....

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ssue is whether the non-resident was providing consultancy services. In other words, what do you mean by the term "consultancy services"? This Court in Bharti Cellular Limited and Others (supra) had referred to the term "consultancy services" in the following words:- "14. Similarly, the word "consultancy" has been defined in the said Dictionary as "the work or position of a consultant; a department of consultants." "Consultant" itself has be .....

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val from for a proposed action". It is obvious that the service of consultancy also necessarily entails human intervention. The consultant, who provides the consultancy service, has to be a human being. A machine cannot be regarded as a consultant." The AAR in the case of In Re: P.No. 28 of 1999, reported as [1999] 242 ITR 208 had observed:- "By technical services, we mean in this context services requiring expertise in technology. By consultancy services, we mean in this context .....

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;consultation' has been defined as an act of asking the advice or opinion of someone (such as a lawyer). It may mean a meeting in which parties consult or confer. For consultation service under Explanation 2, there should be a provision of service by the non-resident, who undertakes to perform it, which the acquirer may use. The service must be rendered in the form of an advice or consultation given by the non-resident to the resident Indian payer. (emphasis supplied) Subsequent to the decis .....

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action between them, or where the non-resident is directly soliciting business for the resident and generating income out of such solicitation. Indeed, as held by this Court in Panalfa Autoelektrik (supra), since Section 9 is a deeming provision, the interpretation cannot be overly broad in nature. 18. In the case at hand, at the outset, this Court clarifies that the mere fact that CGS International confirmed that it received consultancy charges from the assessee would not be determinative of th .....

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nvoices that are to be submitted for approval to the Works Departments, Abu Dhabi, to receive and periodically check the invoices of the appellant, to submit the invoices to the respective authorities and obtaining their approval, to follow up with various authorities in the Works Department, finance department, banks and other authorities for obtaining the approval of the invoices raised by the appellant… In so far as CGS International is concerned, the agreement dated 25.11.2002 between .....

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and also, in various parts of the world except India. The consideration is a fee equivalent to 15% of the gross value of the contract to be received from each client, who CGS International has solicited and has rendered services to procure the contract. The appellant has made the payment of ₹ 45,31,044/- to CGS International being 15% of a total receipt of $665195 from the Works Department Abu Dhabi. Payments to CGS International are in terms of an earlier agreement entered into with the a .....

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successfully solicits for the assessee. Facially, such services cannot be said to be included within the meaning of consultancy services , as that would amount to unduly expanding the scope of the term consultancy . Therefore, this Court does not accept the revenue s contention that the services provided were in the nature of consultancy services . Consequently, the remittances made by the assessee would not come within the scope of the phrase fees for technical services as employed in Section 9 .....

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shall be taxable only in that State... 2. The term "professional services" includes independent scientific, literary, artistic, educational or teaching activities as well as the independent activities of physicians, surgeons, lawyers, engineers, architects, dentists and accountants. 21. The two requirements for the applicability of Article 14, as applied in this case, are: a) income must be of a resident of the Contracting State (herein, UAE); and b) income must be in respect of profes .....

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Article 14 applies to the nature of services provided by CGS International and Marble Arts & Crafts, the CIT(A) observed as follows: In the DTAA with UAE, there are Article (sic) to consider assessability of income from immovable property (Article 6), business profit (Article 7), shipping (Article 8), associated enterprise (Article 9), dividends (Article 10), interest (Article 11), royalties (Article 12), capital gains (Article 13), Independent personal services (Article 14), dependent perso .....

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