February 06, 2010
Comprehensive Architectural Services regarded as "Technical" Services
The Authority for Advance Rulings (“AAR”) has opined that the consideration received by GMP International GmbH (“Tax Payer”)1, upon its being appointed as “consultant for supply of the architectural designs and drawings”, is taxable in India as fees for technical services (“FTS”). The ruling may have a bearing on non-resident organizations that are providing architectural services to Indian entities.
The Government of Tamil Nadu, India (“Government”), floated a tender for preparation of designs and drawings for construction of a complex for its Legislative Assembly. The Tax Payer’s bid was successful and an agreement was executed between the Government and the Tax Payer for the supply of designs and drawings for a particular block of the complex (“Agreement”).
Although the Agreement was one for supply of designs and drawings, the services contemplated under the same were far more than mere supply of designs and drawings. Some of these services included “conducting a detailed topographical survey of the site, traffic survey, conducting soil tests and hydro-geological survey, site evaluation and analysis report which are all required to prepare the conceptual and detailed drawings and designs”.
Further, the Tax Payer executed a “sub-consultancy agreement” with Arch Vista Engineering Projects Pvt. Ltd., India (“Sub-consultant”) under which the Sub-consultant was to “provide certain of the said consultancy services contemplated under the Agreement”. The consideration under the sub-consultancy agreement was to be paid directly to the Sub-consultant by the Government with the approval of the Tax Payer.
The primary question before the AAR was whether the consideration paid to the Tax Payer pursuant to the Agreement was taxable in India as “fees for technical services” within the meaning of the India Germany Double Tax Avoidance Agreement (“DTAA”) read with Section Sec 9(1)(vii) of the Income Tax Act, 1961 (“ITA”).
Arguments of the Tax Payer
During the course of the proceedings before the AAR, the Tax Payer argued that the Tax Payers role under the Agreement was merely to supply architectural designs and drawings and, as such, the Tax Payer did not render any “managerial, technical or consultancy services” which was a requirement for FTS under the DTAA as well as the ITA. Further, since several other services contemplated under the Agreement were to be provided by the Sub-consultant, the Tax Payer’s responsibility was restricted to only delivering the architectural designs and drawings. Thus, the Tax Payer contended that the amounts received by it outside India from the Government, are in consideration for the sale of designs and drawing, being a capital asset transferred outside India.
The AAR opined that the rendering of technical services by the Tax Payer was the essence of the contract and it was not appropriate to limit the Tax Payer’s role under the Agreement to a single sale of drawings and designs. The mere fact that the Sub-consultant was required to perform most of the services under the Agreement did not mean that the Tax Payer had not rendered any consultancy services apart from presenting a conceptual architectural design. Thus, the consideration received by the Tax Payer were in the nature of FTS and accordingly taxable in India.
However, it is pertinent to note that the AAR refused to accept the Revenue’s argument that the consideration payable to both the Tax payer and the Sub-consultant was subject to tax as the Tax Payer’s income.
In recent times, there has been a growing trend to avail the services of foreign architects in India. This case throws light on the taxability of such specialized services. Architectural services involve a certain amount of expertise and are very client specific. This ruling clarifies that such services which involve the provision of designs and drawings may be regarded as being in the nature of technical or consultancy services.
Once again it can be inferred from this ruling that careful consideration needs to be given while drafting contracts in order to distinguish between a sale of designs and the provision of services.
1 Re: GMP International GmbH, A.A.R. NO. 837/2009
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