TMI Blog2010 (3) TMI 109X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 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. - The entire consideration receivable by HOK from the applicant is liable to be taxed in India ‘as fees for included services’ as per Article 12.4 of the Tax Treaty. However, as stated in para 11, the amount payable as consultancy fees to the consultants in USA has to be excluded while computing the chargeable income. - The entire consideration receivable by HOK from the applicant is liable to be taxed in India ‘as fees for included services’ as per Article 12.4 of the Tax Treaty. However, as stated in para 11, the amount payable as consultancy fees to the consultants in USA has to be excluded while computing the chargeable income. - As regards the payment of fees for technical advisory services at the construction document stage, it cannot be considered to be ancillary and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in the business of development and management of commercial real estate. The applicant proposes to construct an international quality commercial office/hotel complex in Gurgaon. For this purpose, it has entered into an Agreement on 15th Nov. 2008 with Hellmuth, Obata + Kassabaum L.P.(HOK) a limited partnership which is a resident of USA, for provision of Architectural design services. The agreement also provides for appointment of a local Architect as associate Architect. Accordingly, M/s RSP Architects Planners and Engineers Pvt. Ltd. (RSP) has been appointed as 'Associate Architect'. Payments to the local associate Architect are to be made separately and are not under consideration in the application. As per the agreement, both, HOK-the Architect and RSP-the Associate Architect, have been retained "to work jointly and on a cooperative basis in order to perform the entire design, construction documents and construction administration for the Project, each responsible for its share of work but jointly responsible in providing the entire design, construction documents and construction administration service necessary to complete the Project". 2.1. Under the head "Scope and Des ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... broadly into 6 heads: (a) Master plan/Concept design (b) Schematic design (c) Design development phase in which design is finalized after reviewing the detailed design prepared by the local design consultants (d) Construction document phase wherein the architect will provide coordination and drawing review with the associate architect, preparation of designs sketches to clarify design intent and review of specifications for design content. (e) Bidding and contract selection process (f) Construction phase : (i) key selected shop drawings prepared by the associate architects; (ii) consultation and site visits; (iii) review and evaluation of cost saving proposals submitted upto start of construction of the contractor. 2.3. There is also a provision for rendering additional services not otherwise included in the Agreement or not customarily furnished as per the prevailing architectural practices. For such additional services, additional payment has to be made according to an agreed formula. Reimbursable expenses are also specified in the Agreement. 3. The above scope of work under the Agreement has been summarized by the applicant as follows : a) Dev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Project Phase Amount in USD (Original Agreement) Master/Concept Design 275,000 Schematic Design 449,000 Design Development 542,000 Construction Document 375,000 Construction Administration 473,000 Total 2,114,000 3.4. As per the amendment to the Agreement, a further amount of USD 1,508,000 is payable at various stages which is by way of reimbursement of 'compensation' payable to the consultants in USA. Thus, the total consideration payable under the contract is USD 3,622,000. The applicant states that the aforesaid functions except construction administration are performed from outside India. The designs and drawings are transferred electronically to the applicant and ownership therein vests in the applicant. Development of designs is carried out by means of bi-weekly teleconferencing and video conferencing. For the purpose of developing the designs, HOK will engage specialist consultants outside India. After the delivery of designs, the preparation of detailed construction documents will take place in India by the Indian Architect in consultation with HOK. HOK, it is stated, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ounsel. 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 into. If so, it is nothing but outright sale of designs and technical documents delivered through website from outside India and on such delivery, the applicant becomes the owner as the entirety of rights over those designs have been conveyed to the applicant. Therefore it is submitted that the payments made to HOK (excepting those at the 'construction administration phase') do not fall within the definition of royalty under Art.12(3)(a) of the India-US DTAA. For the same reason, it is submitted that they do not fall under 'fees for included (technical) services' within the meaning of Art.12(4) of the India-US DTAA. Even if they are treated as 'business profits accruing or arising in India, the same cannot be subjected to tax under the Income-tax Act, 1961 in the absence of Permanent Establishment(PE), having regard to the Treaty provision in Art.7(1). As the number of days of presence of HOK employees in India will be much less than the prescribed number of days, a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xceed: (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) during the first five taxable years for which this Convention has effect, xx xx xx xx xx (ii) during the subsequent years, 15 per cent of the gross amount of royalties or fees for included services; and (b) in the case of royalties referred to in sub-para (b) of paragraph 3 and fees for included services as defined in this Article that are ancillary and subsidiary to the enjoyment of the property for which payment is received under paragraph 3(b) of this Article, 10 per cent of the gross amount of the royalties or fees for included services. 3. The term "royalties" as used in this Article means: (a) payments of any kind received as a consideration for the use of, or the right to use, any copyright of a literary, artistic, or scientific work, including cinematograph films or work on film, tape or other means of reproduction for use in connection with radio or television broadcasting, any patent, trade mark, design or model, plan secret formula or p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. One should take stock of the predominant features of the contract. The learned counsel for the applicant, in fact, does not suggest that a different approach has to be adopted. We have to take a holistic view in considering the agreement without being carried away by the apparent tenor of some of the clauses in the Agreement. For instance, clause (VIII) on which utmost reliance is placed shall be considered in the context of and in conformity with the spirit of the entire Agreement. Viewed from that angle, can it be said, as the applicant seeks to contend, that the crux and substance of the contract is the sale of designs and drawings and the basic services enumerated in the Agreement are only incidental to the sale or the inference should be the other way i.e. the transfer of designs being part of a package of architectural services undertaken by HOK under the contract? We are inclined to think that the reasonable view to take, on an appreciation of the Agreem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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) because it excludes any service that does not make technology available to the person acquiring the service. Generally speaking, technology will be considered "made available" when the person acquiring the service is enabled to apply the technology. The fact that the provision of the service may require technical input by the person providing the service does not per se mean that technical knowledge, skills, etc., are made available to the person purchasing the service, within the meaning of paragraph (b). Similarly, the use of a product which embodies technology shall not per se be considered to make the technology available." 7.1. It is significant to note that the latter part of clause (b) of para 4 speaks of "development and transfer of a technical plan or technical design. This limb of clause (b) is squarely attracted to the present case because technical services rendered by HOK resulted in the development and transfer of technical plan and design to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in 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 which the assessee arranged for the import of concept designs and drawings from U.K. on the strength of import licence for the purpose of enabling the purchaser to make use of them in the preparation of detailed manufacturing drawings. The question arose whether the payment made to the foreign company which supplied the designs was 'royalty' and to be taxed under the Income-tax Act, 1961. The learned judges held that it was a case of sale and no royalty was generated. The following passage is relevant: "Having regard to the facts and circumstances of this case, it must be held that the present case is not a case where the non-resident is retaining the property in the designs and drawings. Such designs and drawings are imported under the import policy and with the approval of the Reserve Bank of India on the basis of the letter of intent. The importation of the designs and drawings postulates an out and out transfer or sale of such designs and drawings and th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 substance, incidental to the grant of right to use the know- how in various ways specified in clause 2.1. The transfer of technical documentation was only a step in aid for making the technical know-how available to the transferee CEAT." 10.2. This reasoning is equally applicable here. The said ruling far from supporting the applicant's case, goes against the applicant's contention. 11. There is one more point to be considered i.e. about the payments made to consultants in USA. The remittances to HOK for the purpose of making payments to Consultants under the Agreement can also fall under Article 12(4) (b) as they also render architectural services. However, since HOK is not the beneficiary of the said payments and they are to be passed on to the consultant in USA for the services rendered outside India such payments will not attract tax liability under the Income-tax Act in India. But, it is made clear that the actual payments made to the consultant can be verifie ..... X X X X Extracts X X X X X X X X Extracts X X X X
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