In what could have wide-reaching implications for cross-border service providers, the Chennai bench of the Income Tax Appellate Tribunal (ITAT) has held that a UAE-based company’s income from design review services provided to an Indian firm is not taxable in India, in the absence of a “Fees for Technical Services” (FTS) clause in the India-UAE tax treaty and without a Permanent Establishment (PE) in India.The ruling underscores a crucial principle for international taxpayers: services provided by non-residents cannot be taxed in India unless the Double Taxation Avoidance Agreement (DTAA) explicitly permits it, or the non-resident has a business presence (PE) in the country.
Case highlights:
The UAE company had reviewed engineering designs for an Indian turnkey project and received a service fee for the same.
The Indian Revenue sought to tax this income, classifying it as FTS under domestic law.
The Assessee argued, and the ITAT agreed, that under the India-UAE DTAA, there is no clause permitting India to tax FTS received by a UAE resident.
Moreover, the Assessee had no PE in India, a pre-condition under Article 7 of the DTAA for India to tax business profits.
Tribunal’s reasoning:The ITAT stressed that treaty provisions override domestic tax law, and since the DTAA lacks a clause enabling taxation of FTS, India cannot tax such income unless it arises from a PE in India. The Tribunal relied on the precedent set by the Bangalore ITAT in the ABB FZ LLC case, which laid down that in absence of FTS provisions in a DTAA, technical fees are taxed under Article 7 as business income — and only if there’s a PE.Further strengthening the Assessee’s case, the ITAT noted that the Assessing Officer had re-opened the case based on a Section 201 order in the hands of the Indian payer. However, the CIT(A) had already deleted the demand in the payer’s case, ruling the income was not taxable. The ITAT pointed out that the Revenue had not appealed that CIT(A) order, and therefore it should apply “in equal force” to the Assessee.“In absence of PE in India and also for the admitted fact there is absence of provision in DTAA to tax the FTS, the amount received by the Assessee company would be taxed as per the provisions of Article 7 of the DTAA,” the Tribunal held.Why this matters for other taxpayers?This ruling is a significant precedent for foreign service providers, especially from the UAE, who render consultancy, design, or technical services to Indian clients. With no FTS clause in the India-UAE DTAA, such payments cannot be taxed in India unless the provider has a PE here.Importantly, the decision reinforces the position that treaty benefits must be honored, and domestic provisions cannot override treaty limitations. It also highlights the legal risk for Indian companies deducting tax on such payments under Section 195, which could lead to unnecessary litigation or denial of tax credit to foreign vendors.The ruling brings clarity for:
UAE-based consulting, engineering, and service firms working with Indian companies;
Indian payers unsure about withholding obligations on cross-border payments; and
Tax advisors navigating DTAA benefits in absence of explicit clauses.
With international tax disputes on the rise, especially around characterisation of payments and source rules, this decision may serve as a useful shield for taxpayers relying on treaty provisions to argue that not all technical service payments are automatically taxable in India.Bottom LineThis ITAT ruling is a relief for many UAE-based entities and their Indian counterparts, reaffirming that in the absence of a PE and an FTS clause, India cannot impose tax on business income of non-resident service providers. It sets a clear judicial tone on the primacy of treaty terms over domestic law — a critical takeaway for cross-border tax planning.Also Read: Musk’s xAI in talks to raise $4.3 billion in equity funding
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