TMI Blog2010 (1) TMI 48X X X X Extracts X X X X X X X X Extracts X X X X ..... ot the case of the Revenue that the sub-contractor’s place shall be deemed to be the PE of the applicant - 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 - 837/2009 - - - Dated:- 29-1-2010 - Mr. Justice P.V. Reddi and MR. J. Khosla, JJ. Present for the Applicant: Dr. Anitha Sumanth and Mr. G.S.D. Babu (E Y) Present for the Department: None RULING The applicant is a Company incorporated under the laws of Germany and is engaged in the business of architectural designs and drawings. In response to a tender invited by the Govt. of Tamil Nadu for preparation of designs and drawings for the construction of a huge complex for Tamil Nadu Legislative Assembly, the applicant submitted the tender and it was selected as "consultant for supply of the architectural designs and drawings". An Agreement was entered into on 15th Feb, 2008 for the supply of designs and drawings for block A. The applicant wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts that its personnel in India were there only to gather information and to explain drawings and plans prepared by the applicant's personnel in Germany. It had to do certain minimal supervisory and coordination activities in regard to the works undertaken by M/s Arch Vista. It is stated that the personnel of the applicant visited India for short durations for a total period of 89 days during the financial year April 2008 to March,2009. The purpose for which the presence of the applicant's personnel in India was required are set out in the application. On behalf of the applicant, it is submitted by the learned counsel that the sub-Contract Agreement had the approval of Tamil Nadu Govt. and as stated in the application, the payments were made by the Govt. of Tamil Nadu both to the applicant and the sub-contractor (ArchVista) as per the agreed percentages specified in the sub-Contract Agreement. 3. The following questions (as recast) have been formulated by the applicant for the purpose of seeking advance ruling: 1. Whether on the facts and circumstances of the case the amounts received by the applicant outside India from the Public Works Department, Government of Tamil Nadu, are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ous technical services are referred to, the applicant did not carry out most of those activities/works as the Indian company was nominated as sub-contractor to do the substantial portion of contracted works. It is pointed out that the applicant was selected on the evaluation of the design concept presented by it and the applicant's role was mostly confined to the conceptual stage of designing. The applicant has not set up any establishment in India inasmuch as most of the items connected with work including survey and designing aspects during construction and execution of the project were taken care of by the sub-contractor. The applicant shared the contract price with the sub-contractor according to the agreed ratio and the Government of Tamil Nadu has been directly making payments to the applicant and the sub-contractor accordingly. It is, therefore, submitted that if the work entrusted to the sub-contractor at various stages is excluded from consideration, the applicant cannot be said to have rendered technical or consultancy services to the Government of Tamil Nadu; hence, the income cannot be considered to be fee for technical services. 5. The DIT (International Taxation) wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onts us. 8.1. In the preamble to the Contract Agreement, it is recited that "this contract for the consultancy is for preparation of conceptual drawings, comprehensive detailed drawings, designs, specifications, preparation of detailed project report for the construction of a building complex for Tamil Nadu Legislative Assembly in Chennai .". The expression 'consultancy services' is used at more than one place in the Agreement. Under the heading 'scope of work', Part.I - 'Architectural', 24 items are mentioned. 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- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rk mentioned in the Schedule are preparation of detailed engineering design specifications and estimates at market rates wherever necessary and such services will include structural, architectural designs of the building taking into consideration the earthquake and other digester equipment, designs for all internal and other services including air-conditioning. Preparation of pre-qualification criteria for short-listing the contractors, deploying qualified technical personnel and supervisory at site, preparation of master PERT chart, preparation of milestone chart for progress monitoring, reporting formath for the client quality assurance plan etc. 8.3. The stages of payment starting from conceptual design stage upto the submission of completion report and drawings are specified in para 3.3 of the Agreement. In Appendix-B of the main Agreement, it is stipulated that the chief consultant shall attend periodical review meetings conducted by the applicant with the required progress details. 9. We may now notice some of the provisions in the Sub-Consultancy Agreement. The preamble to the Agreement recites that the applicant (consultant) has entered into a Consultancy Agreement to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tractor, 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. They are: (1) concept design - 100% payment to applicant; (2) preliminary design - 80%; (3) statutory approvals - 80%; (4) tender documents - 70%; (5) appointment of contractors - 60%; (6) Construction drawings - 50%; (7) completion - 30%. Thus, 45% is allocated to the share of ArchVista and the remaining 55% to the applicant. It shows that the applicant is entirely connected with the concept design and as regards the other items relating to architectural design, both the applicant and the sub-contractor have a part to play. 10. On a perusal of the various recitals and features of the two agreements coupled with the Letter of Award, we are unable to agree with the counsel for the applicant that rendering of technical services by the applicant is not the essence of the contract, but, what is involved here is nothing but outright sale of documents viz. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ign stage and ending with 'completion'. There is nothing in the Agreement nor any material has been placed before us that the client does not consult or seek assistance of the applicant as and when required, notwithstanding the presence of the sub-contractor. By virtue of the sub-contract, no doubt, the applicant's personnel need not stay in India throughout the duration of the contract, but its periodical monitoring and offering technical advice as and when required and guiding the sub-consultant by deploying its expertise cannot be brushed aside. In our view, the description given in the Letter of Award i.e. "rendering comprehensive architectural services" and the specification in the main Agreement that the contract is for the "consultancy for preparation of conceptual drawings, comprehensive detailed drawings" etc. reflects the correct factual position. The services and responsibilities undertaken by the applicant do not run counter to the above description. The supplies of designs and drawings by means of electronic despatch or otherwise is only an integral part of the consultancy services undertaken and executed by the applicant. The intervention of the sub-contractor, as sta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ments was to be done by the applicant and that the expression 'plant' must be given a wider meaning. It was held that the technical know-how in the shape of drawings, designs, processing data, etc. fell within the definition of plant and was, therefore, a depreciable asset. There was no discussion on the question whether the foreign collaborator can be said to have received fee for technical services for supplying the know-how in the form of drawings and documents. In fact, during the relevant assessment year, section 9(1)(vii) was not on the Statute Book. The second question answered in that case was that the expenditure incurred by the appellant was of a capital nature as a result of which a capital asset of technical know-how in the shape of drawings and designs, processing data, etc. acquired by the assessee and that capital asset was a depreciable asset. None of these points arise for consideration in the instant case. The observation that the expenditure incurred by the assessee by way of 'purchase price' of the drawings etc. comprised in documentation services shall be confined to the context. The ratio of that decision cannot be pressed into service to draw the conclusion i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ined in the present case i.e. whether the payment received by the applicant under Consultancy Service Agreement is in the nature of FTS within the meaning of section 9(1)(vii) of the Act and Article 12.4 of the Tax Treaty between India and Germany. Further, it may be noted that apart from supplying the concept designs and drawings which the U.K. Company was having with them, there was no rendition of any sort of technical or consultancy service in India. As it was a case of outright sale as distinct from the conferment of the right to use the designs, plans, secret formula etc. the payment made to U.K. Company was held to be not in the nature of royalty. The nature of the contract and the transaction is very much different in the case on hand. 11.2. One more case relied upon by the applicant's counsel is the decision of Madras High Court in CIT vs. Neyveli Lignite Corporation Ltd. (243 ITR 458 20). That case too does not come to the aid of the applicant. The point considered in that case was more on the applicability of the Section 9(1)(vi) i.e. the royalty provision. The contract in that case was for the design, manufacture and supply of all imported equipments as well as superv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts representing fees for technical services are liable to be taxed in India, suggesting thereby that even the amounts received by the sub-contractor should also be taxed in the hands of the applicant. It is pointed out in this context that the sub-contract cannot be viewed separately. The stand taken by the department in this regard is wholly untenable. 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. 15. The answers to the questions are as follows: Q.No. (1) (2): The amount received by the applicant from the Government of Tamil Nadu under the contract is essentially in the nature of "fees for technical services" within the meaning of Explanation 2 to Section 9(1)(vii) of the Income-tax Act, 1961 read with Article 12.4 of DTAA and cannot be regarded as consideration for the sale of designs and drawings. Question no. (1) (2) are answered accordingly. Q.No.(3): On the facts presented by the applicant, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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