TaxTMI 
TaxTMI 
2010 (1) TMI 48
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....der the head 'Architecture'. As regards the allied fields there are four items which will be referred to later on. In order to execute the work, the applicant entered into an agreement with Arch Vista Engineering Projects Pvt. Ltd., Pune and the agreement in this behalf was entered into on 5th May, 2008. That Agreement is known as 'Sub-Consultancy Agreement'. In the course of arguments, the applicant's counsel while referring to the scope of work under the two Agreements has submitted that most of the work undertaken under the main Agreement was given on sub-contract to Arch Vista, Pune. The learned counsel has pointed out that the main work done by the applicant was furnishing conceptual drawings and designs. We will in due course refer to the details of the works said to have been undertaken exclusively by the applicant. It is the case of the applicant that a team of architects and designers stationed in Germany have produced the designs and drawings and delivered the same to the Govt. electronically by placing the same on the internet in Germany. It is the contention of the applicant that the designs and drawings it has supplied to the Govt. of Tamil Nadu are in the nature of a ....
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....eceived by the applicant from the Public Works Department, Government of Tamil Nadu is taxable as "Fees for Technical Services" under section (1)(vii) of the Income-tax Act, 1961 read with Article 12 - fees for technical services under the Double Tax Avoidance Agreement entered into between India and Germany? 3. Whether on the facts and circumstances of the case there is a permanent establishment of the applicant in India under the provisions of the Double Tax Avoidance Agreement between India and Germany? 4. Whether on the facts and circumstances if the answer to question no.3 is in the affirmative, whether the amounts received by the applicant are attributable to such permanent establishment? 5. If the answer to question no.3 is in the affirmative, whether the income attributable to the PE would not be restricted to the amounts received by the applicant in India and does not include the amounts received by the sub-contractor from the Public Works Department, Government of Tamil Nadu? 6. If the answer to Question no. 3 is in the affirmative and the answer to Question no. 5 is negative, whether the consultancy charges paid to the sub-contractor on which the Public Works Departm....
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....idered separately. Irrespective of the sub-contract, it is submitted that the project must be deemed to have been executed in India and the entire amount payable under the contract entered into with the Government of Tamil Nadu is liable to be taxed in India as 'fees for technical services'. Moreover, it is pointed out that the applicant company had itself categorized the receipts as FTS and sought an order to withhold tax at the rate of 10 per cent pursuant to which the assessing officer passed the order on 31.10.2008. 6. In view of the respective contentions, the question to be resolved is whether the amount received or receivable by the applicant under the contract is in the nature of FTS or is it a transaction of sale of documents containing architectural designs and drawings? 7. The expression 'fees for technical services' ('FTS' for short) is categorized as deemed income under section 9(1)(vii) of the Act. Explanation 2 to section 9(1)(vii) defines the expression 'fees for technical services' as any consideration (including any lump sum consideration) for the rendering of managerial, technical or consultancy services (including the provision of services of technical or othe....
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....ces plan, detailed cost estimates alongwith state-of-the-art specifications, providing assistance in tender process and awarding of works, obtaining statutory approvals, periodic inspection and evaluation of project works and reporting to the client and providing project completion report with final "as built" drawings. The 2nd part which is titled "Allied Fields" has four items i.e., landscape architecture, architectural conservation, retrofitting of buildings and graphic design. 8.2. The schedule of services to be rendered by the consultant forms part of the Agreement and they run into 17 paragraphs (vide 1.2 to 1.18). 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 learned counsel for the applicant has stated that the applicant has carried out four items of work mentioned in paras 1.7, 1.8, 1.10 and 1.18 and the remaining works/services were all carried out by the sub-contractor. Para 1.7 refers to preparation of conceptual drawings and study mod....
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....specified in the Sub-Consultancy Agreement. Schedule-II sets out the "scope and programme of the sub-consultancy services". The services to be performed by the sub-consultant during the design stages are enumerated in the schedule. The first one is 'Schematic design' which includes architectural, structural, mechanical, engineering and landscaping. The next heading is 'Design' relating to architectural, structural engineering, mechanical engineering, landscaping and interior design. The next item is 'Construction documents' relating to the said items i.e. architectural etc. The other three items are Tender, Site Service and Completion report. 9.1. On completion of all works, the sub-consultant has to advise on cost variation with justification, prepare and submit twelve sets of 'As executed' drawings in hard copy with one set of soft copy and assist for obtaining approval of statutory authorities. This is similar to para 1.18 of the main Agreement. It was stated at the time of arguments that the same function was in fact performed by the applicant, probably based on the material furnished by the sub-consultant. The sub-consultant is required to employ qualified personnel in compli....
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....dia to any substantial extent. We do not think so. 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. It is within the framework of the conceptual designs and working drawings prepared by the applicant in consultation with the client that the sub-consultant undertakes further designing as detailed above. The role of the consultant does not stop at that and the consultant will not exit from the scene with the presentation of the conceptual design. The applicant will remain to be the consultant throughout the period of the work by o....
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....d engineers stationed in Germany. 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. 10.1. It is pointed out that the Revenue in its comments has proceeded on a wrong assumption that the services relating to various surveys and soil testing in the initial stages was done by the applicant itself whereas its sub-contractor who has undertaken such work. However, the fact that such services at the preliminary stage were undertaken by the sub-contractor which does not detract from the position that the applicant has essentially rendered technical and consultancy services. 11. The learned counsel for the applicant has placed reliance on three decisions. The first one is the case of Scientific Engineering House P.Ltd. vs. CIT (157 ITR 86 17) decided by Supreme Court of India. In that case the appellant company which manuf....
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....vs. Davy Ashmore India Ltd.(190 ITR 626). In that case, the assessee received a 'letter of intent' from LMI Ltd., for maintenance and supply of terminal equipment for a cold rolling mill being imported by them. LMI issued a purchase order in terms of which the assessee was to arrange import of concept designs and drawings for enabling it to prepare detailed manufacturing drawings for the purpose of manufacture of the terminal equipments. On receipt of the purchase order from LMI, the assessee placed an order with a U.K. company - DMP Limited for the supply of one print each of concept designs and drawings for the terminal equipment. The 'letter of intent' specifically mentioned that the remittances of purchase consideration would be made subject to the approval of RBI. The ITO took the view that the payments made to the non-resident company were in the nature of 'royalty' within the meaning of Explanation 2 to Section 9(1)(vii) of the Act. The CIT(Appeals) and the Tribunal, however, held that the payment to the non-resident was not in the nature of 'royalty'. This view was confirmed by the High Court. After considering the meaning of 'royalty', the High Court held thus: "The prese....
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.... view of the Tribunal that the amount paid as a part of the total contract price towards design and engineering of the steam generators supplied by the foreign companies to the assessee was not royalty and the foreign company was not liable to pay tax in India on this amount. The High Court held that neither sub-clause (vi) or (vii) of Section 9 would be applicable as the design was only preliminary to the manufacture and integrally connected therewith. The design supplied was not to enable the assessee to commence the manufacture of the machinery itself with the aid of design, but the limited purpose of furnishing the designs and drawings was only to ensure that they had the approval of requirements of the buyer. The fact situation and the nature of contract here is very much different. We are unable to appreciate how the said decision supports the applicant's contention. 12. For the aforesaid reasons, we cannot accept the contention of the applicant that the income received under the contract with the Government of Tamil Nadu is not in the nature of FTS and that the transaction shall be construed to be an outright sale of designs and drawings. 13. Question no.3 relates to Perm....