2010 (1) TMI 48 - AAR - Income Tax

Transfer outside India Fees for Technical Service (FTS) Permanent Establishment Amount received from subcontractors consultancy charges paid to sub contractors - 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 (a Germen Company) 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 was additionally entrusted with the work of preparation of architectural designs and drawings for block B also in October 2008 held that - income received under the contract with the Government of Tamil Nadu is in the nature of FTS - the transaction can not be construed to be an outright sale of designs and drawings - Going by the scope and nature of work actually done by the applicant, it is difficult to infer that the applicant would have had a fixed place PE in India. Further it is not 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

Issues Involved:
1. Taxability of amounts received by the applicant from the Government of Tamil Nadu.
2. Classification of the amounts received as "Fees for Technical Services" under the Income-tax Act, 1961 and the DTAA between India and Germany.
3. Existence of a Permanent Establishment (PE) of the applicant in India.
4. Attribution of amounts received to the PE if it exists.
5. Inclusion of amounts received by the sub-contractor in the applicant's income.
6. Deductibility of consultancy charges paid to the sub-contractor.

Detailed Analysis:

Issue 1: Taxability of Amounts Received
The applicant, a German company, argued that the amounts received from the Government of Tamil Nadu for architectural designs and drawings should be considered as consideration for the sale of a capital asset and not liable to tax in India. The applicant contended that the designs and drawings were prepared in Germany and delivered electronically, thus constituting an outright sale of a capital asset.

Issue 2: Classification as Fees for Technical Services
The core issue was whether the amounts received constituted "Fees for Technical Services" (FTS) under Section 9(1)(vii) of the Income-tax Act, 1961, and Article 12.4 of the DTAA between India and Germany. The applicant claimed that most of the work was subcontracted to an Indian company, Arch Vista Engineering Projects Pvt. Ltd., and the applicant's role was limited to providing conceptual designs and drawings. However, the ruling emphasized that the applicant's involvement in preparing conceptual designs, working drawings, and providing technical advice constituted technical and consultancy services. The ruling concluded that the consideration received was indeed FTS, as the services rendered were integral to the consultancy agreement and not merely a sale of documents.

Issue 3: Existence of a Permanent Establishment
The applicant asserted that it did not have a Permanent Establishment (PE) in India, as its personnel were only present in India for short durations and the substantial work was carried out by the sub-contractor. The ruling agreed with the applicant, stating that the facts did not support the existence of a fixed place PE in India. The sub-contractor's place could not be deemed as the applicant's PE.

Issue 4: Attribution to Permanent Establishment
Given the conclusion that there was no PE in India, the amounts received by the applicant could not be attributed to a PE.

Issue 5: Inclusion of Sub-contractor's Receipts
The Revenue's argument that the entire receipts, including those received by the sub-contractor, should be taxed in the hands of the applicant was rejected. The ruling clarified that the payments received by the sub-contractor could not be included in the applicant's income.

Issue 6: Deductibility of Consultancy Charges
Since the ruling concluded that there was no PE in India, the question of deductibility of consultancy charges paid to the sub-contractor did not arise.

Conclusion:
1. The amounts received by the applicant from the Government of Tamil Nadu are classified as "Fees for Technical Services" under the Income-tax Act, 1961, and the DTAA between India and Germany.
2. The applicant does not have a Permanent Establishment in India.
3. Questions regarding attribution to a PE, inclusion of sub-contractor's receipts, and deductibility of consultancy charges are not applicable due to the absence of a PE.

The ruling was pronounced on January 29, 2010.

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