Case Law Details

Case Name : In re GMP International GMBH (Authority For Advance Ruling)
Appeal Number : (AAR No. 837/2009)
Date of Judgement/Order : 29/01/2010
Related Assessment Year :
Courts : Advance Rulings

Foreign experts and companies having specialized knowledge and experience are often engaged by Indian companies for assignments which are to be partly executed outside India and partly in India. For this purpose, it is a common feature to enter into consortium or tripartite agreements.

However, some recent judgements (e.g Geo consult Zt Gmbh, In re [304 ITR 283]) have raised a big question mark on the tax liability of foreign companies by treating such arrangements as “Association of Persons”.

Therefore, the foreign companies are being advised to enter into separate direct agreements on principal-to-principal basis instead of consortium.

In the above context, a recent case of GMP International GMBH, In re [321 ITR 411] is worth consideration.

A German company was selected as “consultant for supply of the architectural designs and drawings” for the construction of a huge complex for the TN Legislative Assembly. In order to execute the work, the German company entered into an agreement with an Indian company as a “sub- consultancy agreement”. Most of the work undertaken under the main agreement was given on sub-contract to an Indian company.

It is the case of the German company that a team of architects and designers stationed in Germany have produced the designs and drawings and delivered the same to the Indian client electronically by placing the same on the internet in Germany. The crux of the case is that the consideration received by the German company under the contract is not in the nature of fees for technical services, if the scope of work excluding the sub-contracted works is taken into account. At best, the consideration paid under the agreement is liable to be taxed as business profits in India. However, as the German company does not have a permanent establishment in India, the receipts cannot be subjected to Indian income-tax by virtue of article 7(1) of the DTAA’ between India and Federal Republic of Germany.

In the light of above facts, the German company has raised mainly the following questions:

Whether the amount received by the German company for the designs and drawings is nothing but an out-right sale of the documents?

Whether the consideration received by German company could be treated as “Fees for Technical Services”?

Considering the aforesaid facts the authority finally held as under:

“On a perusal of the various recitals and features of the two agreements coupled with letter of award, we are unable to agree with the counsel for the applicant that rendering of the technical services by the applicant is not the essence of the contract , but, what is involved here is nothing but out- right sale of documents, viz., designs and drawings pertaining to the conceptual stage……. The mere fact that the sub-contractor is required to perform most of the services connected with designing of the complex and receives nearly half of the contract value does not mean that the applicant has not rendered any consultancy services apart from presenting a conceptual architectural design.”

“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 AAR held that the amount received by the applicant is taxable as FTS in India mainly because the responsibility of the German company was not limited to the supply of the drawing and design, rather as provided in the agreement, the German company would remain the consultant throughout the period of work by offering such services as may be required from time to time.

It is unfortunate that despite two clear separate agreements made on principal-to-principal basis, the German company was held liable to tax in India although all its main activities were carried out in Germany. This situation is certainly avoidable by more careful drafting of agreements.

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  1. v swaminathan says:


    As has been rightly stressed, a proper drafting of any contract agreement deserves to be given the utmost importance; especially in a case where a foreign party’s concerns / interests are involved. There could be no two views on the basic proposition that, – extreme care and caution require to be devoted to the drafting of any contract agreement, having special regard to inter alia its tax, particularly income-tax, implications.

    However, that is not the whole of the story; what follows is an attempt to explain:

    1. Deficiencies in the drafting of income-tax legislation:

    The concerned personnel of the government has to act with due diligence in discharging the most responsible and onerous task of the drafting of any enactment. They are expected to take the utmost care, so as to make doubly sure that the output draft is as complete, comprehensible and foolproof as humanly possible. But, in practice, such an ideal scenario, has by far remained a far cry.

    The point made will be readily appreciated, even if one simply bears in mind the on going exercise, undertaken afresh, with regard to producing a simplified income-tax code. The reference is to the infamous DTC, which is a classic example of a recent origin. It is more or less an admitted position that, – the draft code contains several careless omissions and commissions. Those appertain to certain crucial aspects, having far reaching ramifications. It is a tragedy that the so-dubbed simplified code,- that too soon after its release to the public with all fanfare and publicity,- came to be uniformly criticized in legal circles. The general grievance is that the draft code suffers from glaring and copious deficiencies. And, in its wake, perforce, the government had to undertake a fresh exercise in the matter, which is still on the anvil. It is anybody’s guess as to how many valuable man-years had been already spent, or are going to be spent, and, at what cost to the exchequer. One might have to wait for quite long for getting to know what the CAG has to say on the enormous waste of public monies, on the task of simplifying the law the government has been grappling with for years, nay decades now.

    2. Form vs Substance:

    Conventionally, based on sound principles, for examining the tax implications, it was invariably, except in certain extreme but compelling situations (e.g. tax evasion), the – ‘FORM’ of a transaction, – as mainly evidenced by the related contract agreement, – not its ‘SUBSTANCE’,- that used to be considered as the primary guiding factor / criterion. Be that as it may, in recent years, there has been a notable change or departure from that convention. Of the many cases since reported, it is the case of ‘Vodafone’ that stands out as the leading case on this aspect.

    Briefly stating, therefore, given the above scenario, it is not just the utmost care taken in the drafting of – the ‘form’ of – a contract agreement that can be safely assumed to be solely and exclusively instrumental for anyone to reach a definitive conclusion in any such matter.


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