TaxTMI 
TaxTMI 
2010 (3) TMI 109
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.... 2. If the answer to Question No.1 is in the affirmative:- (a) Whether consideration payable for sale of designs is taxable under the D.T.A.A. with USA (the Treaty) in view of the fact that the US entity has no permanent establishment in India? (b) Whether payment of fees for technical advisory services to HMS/Indian Associate Architects during the Phase-2 of the Project (Construction Document) is taxable under the Art.12(4) of the Treaty even though it is to be excluded from "included services" under Art.12(5)(a) of the Treaty? (c) Whether fees for supervisory/advisory services during the Construction Administration phase is taxable under Art. 12(4) of the Treaty and, if so, would such fees attract tax at the rate of ten per cent as prescribed in S.115A of the Act?" 3. Whether reimbursement of expenses actually incurred by the US entity without any mark up is subject to provisions of section 195 of the Act? Question No. 2 has been recast by the applicant after 1st hearing. 2. The applicant is an Indian company engaged in the business of development and management of commercial real estate. The applicant proposes to construct an international quality commercial o....
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....ing and specification with all other drawings and specifications for consistency with the approved design embodied in the Design Development documents, completeness and to avoid errors and omissions. 4. The Architect shall cooperate with the Associate Architect in obtaining approval of governmental authorities having jurisdiction over the Project and also assist him to ensure that the Contract Documents shall conform to applicable restrictions, laws, and regulations in effect. The Contract Documents shall consist of all necessary drawings, details, plans, elevations, sections, and schedules, dimensioned, noted, and coordinated, as well as specifications, and the Associate Architect shall seal and sign the drawings and specifications as the architect of record. 5. The Architect shall assist the Associate Architect and Owner in the preparation of any necessary bidding information, and any forms of agreement between the general contractor and the sub-contractors for the Project. 2.2. The architect's basic services are classified broadly into 6 heads: (a) Master plan/Concept design (b) Schematic design (c) Design development phase in which design is finalized after re....
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....the architect is subject to the approval of the owner. Cl VII B provides : "the architect shall be responsible for contracting with the international or US based consultants and shall coordinate all design activities of said consultants. Compensation for the professional services rendered by each of the consultants shall be paid directly to each consultant of the architect." It is stated that the consultants in US have been engaged in terms of this clause. 3.3. Clause V deals with 'Compensation' which is nothing but fee payable to the Architect. It is stipulated that the architect shall receive as compensation for all basic services the fixed price sum (excluding local taxes) of 2,114,000 US dollars based on a building size of 1,300,000 sq.ft. payable in response to monthly invoices based upon the amount of basic services and additional services. The counsel for the applicant has clarified that the applicant has to bear the taxes and pay TDS. The break-up of the stipulated fee of 2,114,000 US dollars is given as follows: Project Phase Amount in USD (Original Agreement) Master/Concept Design 275,000 Schematic Design 449,000 Design Development 542,000 Co....
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...., 1961 for the reason that the recipient has used its technical expertise for preparing and selling chattels, which are designs. This being a case of sale, there could be no question of transfer of use or right to use any plant or equipment." 4.1. Learned counsel for the applicant has reiterated the stand taken in the application. It is contended that the Agreement can be disintegrated into three parts; (a) for development and sale of designs (b) consultancy for construction documents and (c) 'Construction administration' and 'Additional services'. It is submitted that separate price is identified for each of these items and activities. If so viewed, only the payment received at the stage of construction administration in relation to services which are basically performed in India during the phase of construction are liable to be taxed as fees for included services at the percentage of rate provided for in Section 115A(1)(b)/BB of the IT Act, according to the counsel. The learned counsel for the applicant has strenuously contended that if the contract has to be viewed as a composite one without disintegrating it, the dominant nature and object of the contract has to be looked in....
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.... connection with the project shall become the property of the owner. "Nevertheless, it is understood by the owner that all such drawings etc. may be in appropriate for use in any other project." Reference has also been made to Clause XIX which says that Architect shall not use or disclose confidential information without owner's prior written approval. 5. Before proceeding further, we may refer to Art.12 of the Tax Treaty (DTAA). Article 12 - Royalties and fees for included services 1. Royalties and fees for included services arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. 2. However, such royalties and fees for included services may also be taxed in the Contracting State in which they arise and according to the laws of that State, but if the beneficial owner of the royalties or fees for included services is a resident of the other Contracting State, the tax so charged shall not exceed: (a) in the case of royalties referred to in sub-paragraph (a) of paragraph 3 and fees for included services as defined in this Article [other than services described in sub-paragraph (b) of this paragraph]: (i) ....
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....for permitting the use or right to use the design, model or plan. It is pointed out that once the designs and drawings relating to the project are delivered to the applicant by posting them on the project Web through the 'servers' located in USA the applicant becomes the absolute owner thereof and the HOK is barred for making use of them for its own purpose. The payment for the designs etc. is received once and for all and the payment is not contingent on the productivity use or further alienation thereof as contemplated in the second part of clause (a) of Article 12(3). 7. We are unable to appreciate the contention of the learned counsel for the applicant that on the basis of clause VIII of the Agreement conveying the right, title and interest the Architect has in the drawings, specifications, models and work product (which are described as 'products of services'), the transaction has to be regarded as one of sale of designs. The Agreement cannot be read in isolation and the components of the contract cannot be placed in water-tight components. The agreement shall be read as a whole. The approach should be to ascertain what is the true scope and dominant object of the contract.....
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.... subordinate to the transfer of plans, drawings and designs. The fact that there is separate specification of price for convenience of payments and adhering to schedules or that a major portion of the amount is payable at the design development stage is not conclusive. We are of the view that having regard to the scope, objective and predominant features of the Agreement, the HOK must be said to have received payment ('compensation') in the nature of FTS or included services within the meaning of clause (b) of Article 12.4 of the Treaty, irrespective of whether 'royalty' clause is attracted or not. In this context, we may refer to the relevant comments in the Memorandum of Understanding concerning fees for included services under Article 12 which is arrived at between the Goverments of India and USA on 15th May, 1989. It is stated that typical categories of services that generally involve either the development and transfer of technical plans or technical designs or making technology available as described in para 4(b), include architectural services. The scope of 4(b) of Article 12 has been explained, thus: "This category is narrower than the category described in paragraph 4(a....
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....b of 'royalty' definition. Suffice it to say that it is a moot point and it is unnecessary for us to express a view on this aspect. 8. We are, therefore, of the view that basic(design) services which include preparation of Master Plan, concept design, schematic design, design development and construction documents, assistance in bidding and contractors' selection process and consultancy during construction phase are all part of architectural services undertaken the HOK as per the Agreement and the payment received by HOK for furnishing all these documents and services to the applicant fall appropriately within the meaning of 'fees for included services' under Article 12.4(b) of the India-US Treaty. They cannot be disintegrated and viewed in water-tight compartments. We reject the contention of the applicant that the payments attributable to the sale of designs, plans and other construction documents cannot be subjected to tax in India as they do not fall within the purview of Article 12 of the Treaty. 9. The learned counsel for the applicant has relied on the decision of Division Bench of Calcutta High Court in CIT vs. Davy Ashmore India Ltd [190 ITR 626]. That was a case in ....
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....rship therein having been transferred absolutely to CEAT Ltd., the consideration paid cannot be brought within the scope of Article 12.3 of the Treaty. 10.1. In that case the transfer of know-how of technology for the manufacture of radial tyres and the transfer of ownership of tread and side wall design were dealt with separately in the Agreement. The tread and side wall design was distinct from that part of the agreement which related to transfer of know-how. It was specifically observed in para 15 that this part of the transaction cannot be viewed to be merely incidental to the conferment of right to use the know-how granted under clause (2) of the Agreement. Therefore, the factual position was different in that case. On the other hand, the contention that even in respect of first part of the agreement (i.e transfer of technical know-how), there was sale of technical documentation and such sale having taken place outside India was not liable to be taxed under the Income-tax Act was rejected. The following observations in para 9.1. are pertinent: "Assuming that there was sale of technical documentation, that is not the end of the matter. Such sale is, in reality and in subs....