UAE–India DTAA: No Withholding on Payments for Technical Services

In a recent ruling (DCIT vs. Kalpataru Power Transmission Ltd., A.Y. 2018–19), the ITAT Ahmedabad addressed the taxability of payments made by an Indian company to a UAE-based service provider for tower design services. The decision sheds important light on how the UAE–India Double Taxation Avoidance Agreement (DTAA) operates in cases involving cross-border service contracts.

The Core Issue

Kalpataru Power engaged Oilstone Technologies DMCC (UAE) to design transmission towers for a power project in Uganda. The Indian tax authorities classified the payment as royalty, triggering withholding obligations under Section 195 of the Income Tax Act.

Kalpataru, however, argued that:

• The payment was for services (technical design), not for the use of existing intellectual property.
• The services were rendered and utilized outside India.
• Under the UAE–India DTAA, the amount was not taxable in India absent a Permanent Establishment (PE) of Oilstone in India.

Tribunal’s Ruling

1. Not Royalty
   • Oilstone UAE created new, project-specific designs.
   • Ownership of these designs vested with the Ugandan customer, not Kalpataru.
   • Hence, the payment was for services, not use of intellectual property.
2. Treatment under UAE–India DTAA
   • The UAE–India DTAA does not contain a specific Fees for Technical Services (FTS) article.
   • In such situations, payments for services fall under Article 7 – Business Profits.
   • Business profits are taxable in India only if the foreign enterprise has a PE in India.
3. No PE in India
   • Oilstone UAE had no permanent establishment in India.
   • Therefore, under the DTAA, the payments were not taxable in India.
4. Withholding Not Required
   • Since the payment was not chargeable to tax in India under the treaty, Kalpataru had no obligation to deduct tax at source under Section 195.

Key UAE–India DTAA Insights

• Absence of FTS Clause: The UAE–India DTAA does not allow India to tax payments for technical services unless linked to a PE. This makes the treaty particularly favorable for UAE-based service providers.
• PE Threshold as Gatekeeper: The existence (or absence) of a Permanent Establishment in India becomes the critical test for taxability.
• Documentation as Defence: Tax Residency Certificates (TRC) and no-PE declarations were instrumental in protecting Kalpataru’s position.

Practical Takeaways for Businesses

• When engaging UAE-based consultants or technical service providers, always test payments against the DTAA, not just domestic law.
• Ensure agreements reflect the creation of new deliverables rather than licensing of existing IP to avoid royalty classification.
• Collect and maintain TRCs and PE declarations as part of compliance.
• The UAE–India DTAA can significantly reduce withholding tax exposure, but only if contracts and documentation are structured correctly.

Sen & Ray’s Perspective

This ruling reinforces the value of the UAE–India DTAA as a strategic tool for businesses. Companies leveraging UAE entities for cross-border projects can achieve both tax efficiency and certainty, provided they structure arrangements with PE risk and treaty benefits in mind.