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New Page 1Part C : Tribunal &
AAR International Tax Decisions
8 HMS Real Estate
(2010) TIOL 17 ARA-IT
Article 12 of the India-US DTAA,
S. 115A & S. 195 of the Income-tax Act
Dated : 18-3-2010
Basic design services provided by US entity which includes
preparation of plan, concept design, schematic design, design development and
other related consultancy services during construction phase are part of
architectural services provided by the US entity. Payment received for such
services are fees for included services as it involved development and transfer
of technical plan and design. The agreement needs to be read having regard to
the predominant features of the contract and by taking into account crux and
substance of the contract.
Remittance made to the US entity for making payment to
consultants for the services rendered by such consultants directly to the
taxpayer represents reimbursement of actual expenses and does not represent
income chargeable to tax.
Facts :
The US entity entered into agreement with the Indian company
for providing architectural design services in connection with development and
management of commercial real estate project of ICO. In terms of the agreement,
the US entity was obliged to develop master plan, prepare concept design,
schematic designs, etc. Additionally, it was also obliged to :
(i) understand the specifications from ICO and get the
designs approved by ICO;
(ii) assist ICO in bidding and contractor selection
process;
(iii) observe construction progress;
(iv) provide alternative proposals for cost reduction; and
(v) co-operate with the local director in getting the
requisite approvals or modify the designs to conform with the regulations,
etc.
The agreement was for a fixed fee. The fee was payable on the
basis of the milestones achieved. The US entity was also entitled to
reimbursement of fees paid by it to the consultants who assisted the US entity
in rendering services if such consultants were appointed with the consent of ICO.
For rendering services, personnel of the US entity were
present in India for a period of 50 days. There was no dispute that the presence
of the US entity did not result in emergence of service PE in India.
ICO as a payer contended that substantial portion of the
consideration was for transfer and sale of designs on an outright basis. By
relying on the specific provision of the agreement, it was contended by ICO that
all the rights in designs, including right to use the designs for the other
projects vested in ICO. Hence, the contract was for sale of design which was
concluded outside India and hence not taxable, either under the IT Act or in
terms of DTAA.
AAR held :
-
The AAR rejected contention of the ICO that the agreement
merely involved transfer of right, title and interest in the drawings, models
and work product and that the transaction can be regarded as one of sale of
designs. The AAR concluded that the contract was for rendering of services
having regard to the following :
-
The agreement needs to
be read as a whole. The true scope and dominant object of the contract needs
to be ascertained having regard to the predominant features of the contract
and by taking holistic view of the matter.
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The US entity developed
the designs after in depth interview with ICO and participated as an expert
service provider at every stage from the conceptualisation till the stage of
completion. This supported that the contract was a service contract.
-
The role of the
applicant did not end upon transfer of plans, drawings and designs.
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The substance
and crux of the contract was rendering of services and the sale of designs
was incidental. To contend that the essence of the contract was the sale of
designs, models and that the services were to distort and stultify true
nature and dominant purpose of the contract.
-
The consideration
was for development and transfer of a technical plan and designs, which is
specifically covered as fees for included services. Article 12(4)(b) covers
transfer of technical plan or design which arises as a sequel to and as an
integral part of the service contract.
-
The decision of
the Calcutta High Court in CIT v. Davy Ashmore, (190 ITR 626) is
distinguishable as that case involved transfer of designs which were already
available on an outright basis and did not appear to be a case of tailor-made
designs and drawings.
The remittance
made to the US entity for reimbursements towards the fees of the consultants
who assisted the US entity in rendering architectural services and who were
appointed with the consent of ICO represented remittance towards reimbursement
of actual expenses. Accordingly, it was not income chargeable to tax.
