Some Indian tax treaties (for instance, with the United Arab Emirates) do not include provisions for ‘fees for technical services’ (FTS). In such a case, if an item of income amounts to FTS under the Indian Income Tax Act, 1961 (IITA1961), how should it be characterized for the tax treaty purpose? The Indian Income Tax Appellate Tribunal (ITAT) recently examined this question in a recent decision.

In the above-mentioned decision, a UAE company had provided certain services to a group company in India. The income for the said services amounted to FTS under the Income Tax Act, 1961 (IITA1961). The Indian tax authorities rejected the UAE company’s claim that in absence of the FTS provisions in the tax treaty between India and the United Arab Emirates, that income had to be characterized as ‘business profits’ and that Art. 7 (Business profits) of the tax treaty governed the tax treatment in the Source State.

Before the ITAT, the UAE company reiterated that...