Indo-German DTAA - non-resident provides architectural drawings - claims it to be outright sale - Since rendering technical services is essence of contract, payments received by non-resident are fees for consultancy services as per Sec 9(1)(vii) and also Article 12.4 of DTAA: Advance Ruling
By TIOL News Service
NEW DELHI, FEB 03, 2010: WITH opening of the economy there has been a growing trend among the Indians to engage foreign service providers for specialised and quality engineering works. But the propensity to pay income tax in the source country is not very pronounced. In this case the Tamil Nadu Government floats a global tender to hire a professional company for providing architectural designs and drawings for construction of its Legislative Assembly. The applicant in this case, a German tax resident, participates in the tender and gets selected for the job. The applicant provides the basic designs and drawings but claims that it is a case of outright sale and its designs and drawings be treated as an asset like plant and machinery. However, the Revenue takes the stand that it is a clear-cut case of consultancy work which fits into the meaning for fees for managerial, technical and consultancy services as per Explanation 2 to Sec 9(1)(vii).
Having heard the parties the Authority for Advance Ruling has held that it is indeed a case of consultancy contract and the fees received by the applicant are fees for consultancy services as per Sec 9(1)(vii) and also as per Article 12.4 of the DTAA. However, since the assessee had deployed its personnel for only 89 days, it cannot be said to have a PE and the income cannot be treated as business profits as per the DTAA. It is also held that only that part of income is to be taxed which is accounted by the applicant and not the one which was paid to the Indian sub-contractor for the set of works executed by it.
Facts of the case
Applicant enters into an agreement with an arm of the State Government - for execution of the project the applicant enters into another agreement with a Pune-based company - applicant claims it provided only architectural designs and drawings by uploading the same on their server in Germany and the same was downloaded by the State Govt arm - claims it is a case of pure sale of an asset which may be treated as plant and machinery - further claims the main work was executed by the Indian company - Revenue takes the stand that the services provided by the applicant are consultancy in nature and the payments received are well within the meaning of fees for managerial, technical and consultancy services as per Explanation 2 to Sec 9(1)(vii) and also as per Article 12.4 of the DTAA
Having heard the parties the Authority for Advance Ruling holds that,
++ The expression ‘consultancy services’ is used at more than one place in the Agreement. The list starts with “preparation of design brief after taking client’s additional instructions”. The second item is designs and site development, the third item is preparation of concept drawings to the satisfaction of the client. The next item is providing “3D Walk- through presentation and getting approval of the client”. Site evaluation, analysis and impact of proposed development on its immediate environs. Then follows the items relating to furnishing of designs on various aspects such as structural, sanitary, drainage, water supply and sewerage system, electrical, electronic and internet system, heating, ventilation and air-conditioning, elevator and escalator, fire-detection and security system, disaster management system, integrated building management system, System design for special security and interior designs and architecture.
++ The schedule of services to be rendered by the consultant forms part of the Agreement and they run into 17 paragraphs. Among other things, the list of services include detailed topographical surveys of the site, traffic survey, conducting soil test and hydro-geological survey, site evaluation and analysis report which are all required to prepare the conceptual and detailed drawings and designs.
++ The total fees will be split between the two parties. The Consultant will receive 55% of the payments and the sub-consultant will receive 45% of the payment. The payments for the sub-consultant will be done by the Client against the consultant’s certification of the sub-consultant’s invoice.
++ Although the client (Govt.) makes payment directly to the sub-contractor, that is only on the basis of certification by the applicant and at the instance of the applicant. The stages of payment of fees and the apportionment of total fees receivable under the contract are set out in Schedule-3. Under the head ‘Split Design services – Gmp Scope only architectural design”, seven stages are mentioned.
++ The rendering of technical services by the applicant is the essence of the contract. The mere fact that the sub-contractor is required to perform most of the services connected with designing the Complex and receives nearly half the contract value does not mean that the applicant has not rendered any consultancy services apart from presenting a conceptual architectural deign. The whole process starts with preparation of conceptual designs, drawings and study models to the requirements of the client and providing 3D walk-through presentation for the purpose and getting the approval of the client. The applicant also prepares complete working drawings and details sufficient for proper execution of works during construction. These are all critical services of technical and consultancy nature.
++ Taking a holistic picture, the inescapable conclusion is that the consideration received by the applicant under the contract with the Tamil Nadu Govt. can be legitimately treated as fees for technical services and it is not appropriate to describe the transaction as a pure and single sale of drawings and designs prepared in Germany. The applicant’s contention is therefore liable to be rejected for more than one reason.
++ Since the applicant's personnel were in India for only 89 days, there is no permanent establishment. Going by the scope and nature of work actually done by the applicant, it is difficult to infer that the applicant would have had a fixed place PE in India. Further it is not the case of the Revenue that the sub-contractor’s place shall be deemed to be the PE of the applicant. The facts and material on record do not lead such inference.
++ The payment received by the sub-contractor from the client on the basis of certification made by the applicant cannot be tagged on to the applicant’s income. In fact, tax is allowed to be deducted only on the amounts received by the applicant from the Government as per the order passed by the concerned income-tax authority.
(See 2010-TIOL-03-ARA-IT in 'Income Tax')
