Taxability of Consultancy Income under India–UAE DTAA vis-à-vis Significant Economic Presence (SEP)

 

Vijay Mariappan Austin Prakash v. ACIT International Taxation Income Tax Office Visakhapatnam

 

ITAT Visakhapatnam – ITA No. 89/VIZ/2025 | Order dated: 05 December 2025

 

Core Issue:-Whether consultancy services rendered by a UAE tax resident to an Indian company fall within “professional services” under Article 14 of the India–UAE DTAA, thereby granting exclusive taxing rights to the UAE, notwithstanding the domestic law deeming fiction of “Significant Economic Presence (SEP)” under section 9(1)(i) of the Income-tax Act, 1961?

 

II. Relevant Statutory & Treaty Framework

1. Domestic Law – Section 9(1)(i) & Explanation 2A (SEP)

   •    Section 9(1)(i) deems income to accrue/arise in India if it arises through a business connection in India.

   •    Explanation 2A (inserted by Finance Act, 2018) expands “business connection” to include Significant Economic Presence (SEP).

   •    Rule 11UD prescribes thresholds (₹2 crore during the relevant period) for transactions in respect of services.

   •    Crucial Proviso (Explanation 2A): Only so much of income as is attributable to transactions/activities in India can be deemed to accrue in India.

 

2. Treaty Override – Section 90(2)

Where a DTAA applies, the assessee is entitled to the more beneficial provisions of the Act or the DTAA.

 

3. India–UAE DTAA – Article 14 (Independent Personal / Professional Services)

   •    Income from professional services or other independent activities is taxable only in the State of residence unless:

(a) the individual has a fixed base in the source State, or

(b) stay in the source State exceeds 183 days.

   •    Article 14(2) provides an inclusive definition of professional services.

 

 

III. Facts of the Case

Assessee: Non-Resident Individual, UAE tax resident (TRC furnished).

 

Engagement: Consultant to Zerodha Broking Limited, providing business advisory and business development services.

 

Fees received: ₹8.28 crore (TDS deducted u/s 195).

 

Stay in India: Less than 60 days during AY 2022–23.

 

No fixed base or PE in India.

 

Income claimed exempt under India–UAE DTAA.

 

IV. Findings of the Assessing Officer (AO)

   1.    Re-characterisation Allegation

AO alleged that consultancy arrangement post-01.10.2020 was a colourable device, as functions remained similar to prior salaried employment.

 

   2.    Invocation of SEP

Held that payment exceeded Rule 11UD threshold, constituting SEP, hence business connection in India under section 9(1)(i).

 

   3.    Denial of DTAA Benefit

AO concluded that services did not qualify as “professional services” under Article 14.

 

   4.    Assessment

Entire consultancy fee taxed as business income in India.

 

V. Proceedings before DRP

Objections filed beyond limitation.

 

DRP rejected objections as invalid, citing lack of power to condone delay.

 

AO passed final order u/s 144C(13).

 

VI. Issues before ITAT

   1.    Limitation & validity of final assessment order.

   2.    Applicability of Article 14 of India–UAE DTAA.

   3.    Interaction between SEP provisions and DTAA protection.

 

VII. ITAT’s Detailed Analysis

A. On Significant Economic Presence (Paras 11–12)

Tribunal acknowledged that SEP threshold was crossed, and therefore, domestic law deeming fiction under section 9(1)(i) stood attracted.

 

However, relying on the second proviso to Explanation 2A, ITAT emphasized:

   Even in SEP cases, only income attributable to Indian operations can be taxed.

  

In the assessee’s case, no operations were carried out in India.

 

Key Ratio: SEP creates nexus, not automatic taxation of entire receipts.

 

B. On Article 14 – “Professional Services” (Paras 13–14)

ITAT rejected AO’s narrow interpretation.

  

Held that Article 14(2) is inclusive, not exhaustive.

 

Management consultancy / business advisory services fall within “other independent activities of a similar character”.

  

Assessee:

   •    Had no fixed base in India, and

   •    Stayed well below 183 days.

 

Result: Exclusive taxing right vests with UAE, not India.

 

C. Treaty Override over SEP

ITAT reaffirmed that SEP is a domestic law concept.

 

In absence of a corresponding treaty provision, SEP cannot override DTAA protections.

 

By virtue of section 90(2), DTAA prevails.

 

D. On Alleged Colourable Device

Tribunal categorically held:

   Change from employment to consultancy per se is not tax avoidance.

 

Commercial arrangements between parties cannot be disregarded without evidence of sham.

 

VIII. Final Decision of ITAT

Consultancy income not taxable in India under Article 14 of India–UAE DTAA.

 

Invocation of SEP does not result in taxation in absence of attributable Indian operations.

 

Appeal allowed in favour of the assessee.