DCIT Vs Aedas Pte. Ltd. (ITAT Delhi)
ITAT Delhi held that the payments received by the assessee in view of architectural design services rendered to its clients in India are not chargeable to tax as FTS in terms of Article 12(4) of the India-Singapore DTAA.
Facts- The assessee is a company incorporated under the laws of Singapore and is a tax resident of Singapore. The assessee is engaged in the profession of rendering project specific architectural design services. The architectural designs provided by the assessee are executed in Singapore. These designs are highly technical in nature and require a great degree of technical knowledge and expertise. During the AY 2015-16, the assessee earned revenue amounting to Rs. 10,81,68,728/- from customers in India from rendition of architectural design services.
During the course of assessment proceedings, the assessee was show caused as to why the payment received in lieu of architectural design services should not be taxed as Fees for Technical Services and/or royalty in terms of Article 12 of the Double Taxation Avoidance Agreement between India and Singapore.
Post reply from the assessee, AO proceeded to tax these payments as FTS and alternatively as royalty under the provisions of the Act as well as under Article 12 of the India-Singapore DTAA as well as section 9(1)(vii) of the Act.
CIT(A) held that payments received by the assessee from its customers in India through rendition of architectural design services could not be characterised as FTS and /or royalty in terms of Article 12 of India Singapore DTAA.
Conclusion- Held that these payments could not be characterised as royalty in terms of Article 12(3) of India-Singapore DTAA for the reason that the assessee does not retain the designs and the ownership of the design gets transferred to the client and that the contracts entered by the assessee with the clients are for development / conceptualisation of the designs and not for transfer of mere right to use of an existing design.
Held that the payments received by the assessee in view of architectural design services rendered to its clients in India are not chargeable to tax as FTS in terms of Article 12(4) of the India-Singapore DTAA.
FULL TEXT OF THE ORDER OF ITAT DELHI
The appeal filed by the Revenue is directed against the order dated 19.11.2019 of the Ld. Commissioner of Income Tax (Appeals) – 42, New Delhi (“CIT(A)”) pertaining to Assessment Year (“AY”) 2015-16.
2. The Revenue has raised the following grounds of appeal:-
“1. Whether on the facts and on the circumstances of the case, the Ld. CIT(A) is correct in holding that receipt from customers in India for rendering design services is not FTS as per article 12(4) of India Singapore DTAA.
2. Whether on the facts and circumstances of the case Ld. CIT(A) was correct in holding that the assesee did not make available expertise to Indian clients while transferring the all encompassing design including concept designs, schematic designs architectural design etc. and ignoring specific clauses of agreements which clearly indicate make available (eg Clauses 14 & 23 of agreements with L&T).
3. Whether on the facts and circumstances of the case Ld. CIT(A) was correct in holding that receipts from Indian clients of the assesee were alternatively not taxable as royalty as royalty under Singapore DTAA. The CIT(A) ignored the fact that receipts were for use and right to use of technical design.”
3. Briefly stated, the facts are that the assessee is a company incorporated under the laws of Singapore and is a tax resident of Singapore. The assessee is engaged in the profession of rendering project specific architectural design services. The architectural designs provided by the assessee are executed in Singapore. These designs are highly technical in nature and require a great degree of technical knowledge and expertise. During the AY 2015-16, the assessee earned revenue amounting to Rs. 10,81,68,728/- from customers in India from rendition of architectural design services. For the AY 2015-16 the assessee filed its return of income on 31.03.2017 declaring NIL taxable income and claimed a refund of INR 89,53,140 on account of taxes withheld by customers in India. The assessee’s case was selected for scrutiny and statutory notices under section 143(2) and 142(1) of the Income Tax Act, 1961 (‘the Act”) were issued to the assessee wherein the necessary information/details regarding the impugned receipts by the assessee were called for which were duly submitted by the assessee and examined.
3.1 During the course of assessment proceedings, the assessee was show caused as to why the payment received in lieu of architectural design services should not be taxed as Fees for Technical Services (“FTS”) and/or royalty in terms of Article 12 of the Double Taxation Avoidance Agreement between India and Singapore (“India-Singapore DTAA”). In response thereto, as regards taxability of such payments as FTS, the assessee submitted that it merely creates designs and transfers them to the customers and does not impart any technical knowledge or science or training or skill or experience in the field of architecture so as to enable the clients to apply the technology contained therein by themselves. And hence the payments received by the assessee from its customers in India are not taxable as FTS under Article 12(4) of the India-Singapore DTAA.
3.2 As regards taxability of the payments received by the assessee as royalty on alternate basis by the Ld. Assessing Officer (AO) the assessee submitted that it is engaged in creation and development of architectural designs as per the requirements of its clients in relation to its projects. The payments relate only to the services rendered in designing and developing the architectural designs which are unique to the requirements of the client and their projects. It was further submitted that it is not revenue or rent that is receivables for the right to use such designs or plans and that remuneration specifically takes the character of a professional fee rendered for professional designing services and therefore cannot be of the nature of royalty as defined under Article 12 of the India Singapore DTAA.
3.3 The submissions of the assessee were not found tenable by the Ld. AO who proceeded to tax these payments as FTS and alternatively as royalty under the provisions of the Act as well as under Article 12 of the India-Singapore DTAA as well as section 9(1)(vii) of the Act vide his draft assessment order dated 29.12.2017. The assessee did not file objections before the Ld. DRP consequent to which the Ld. AO passed the final assessment order under section 144C(3)/144 of the Act on 20.02.2018. Aggrieved the assessee preferred appeal before the Ld. CIT(A). The Ld. CIT(A) examined the issue in details and held that the payments received by the assessee from its customers in India through rendition of architectural design services could not be characterised as FTS and /or royalty in terms of Article 12 of India Singapore DTAA for the reasons recorded in his appellate order.
4. Dissatisfied, the Revenue is in appeal before the Tribunal. Ground No. 1 and 2 relate to the taxability of the payments received by the assessee as FTS in terms of Article 12(4) of the India-Singapore DTAA and ground No. 3 relates to the taxability of these payments as royalty under Article 12(3) of the India-Singapore DTAA on an alternate basis.
5. The Ld. DR strongly supported the order of the Ld. AO. He referred to work order/agreement between L&T and the assessee specifically clause 14 and clause 23 thereof (page 145 and 154 of the Paper Book) relating to ownership of documents copyrights and the representations by the consultant to infer that the payments received by the assessee falls within the purview of FTS/royalty.
6. The Ld. AR relied on the findings of the Ld. CIT(A) and submitted that the Ld. CIT(A) has independently and exhaustively examined the issue after calling for additional details/documents. He relied on the decision of the Mumbai Bench of the Tribunal in the case of DCIT vs. Forum Homes (P) Ltd. (2022) 192 ITD 184 (Mum. Trib.) wherein the Tribunal on the similar fact pattern has held that the payment received in lieu of architectural design services does not qualify as FTS. Further, relying on the decision of the Pune Bench of the Tribunal in the case of Gera Developments P. Ltd. vs. DCIT (2016) 160 ITD 439 and decision of the Calcutta High Court in CIT vs. Davy Ashmore India Ltd. (1990) 190 ITR 626 submitted that the impugned payments received by the assessee could not be characterised as royalty in terms of Article 12(3) of the India-Singapore DTAA.
7. We have heard the Ld. Representative of the parties and perused the material on record. With respect to ground No. 1 and 2, the Ld. CIT(A) has recorded his detailed findings in paras 6.2 – 6.33 of his appellate order concluding that the payments received by the assessee fall within the purview of exclusion clause embedded in Article 12(4)(c) of the India-Singapore DTAA which provides for exclusion of service that does not enable the person acquiring the service to apply the technology contained therein. Therefore, these payments are not chargeable to tax in India as FTS. The key findings of the Ld. CIT(A) are summarised as under:-
i) The Ld. CIT(A) called for additional details and documents, such as, party-wise revenue, party-wise agreements, frequency of visit in India by professionals from assessee concern to discharge services, methodology of delivery of services, sample emails reflecting the delivery of services, duration of project party-wise, etc for evaluating the true nature of services, which were duly furnished by the assessee vide letter dated 28.01.2019 (copy at pages 104-175 of the Paper Book).
ii) Upon evaluation of these additional details, the Ld. CIT(A) observed that the emails exchanged between the assessee and its clients were generic in nature and contained discussion regarding the timelines to complete the task and its follow-up sharing of PDF of design intent. The emails nowhere indicated the fact of sharing step wise process of preparing such design / plan.
iii) Secondly, scope of work as per agreement with the clients did not include transfer of technology / knowledge / skill set to the client and that there was no clause regarding capacity building of client’s resources in the agreement.
iv) Thirdly, the agreements bound the client to separately engage the services of independent Local architect who, in turn, assisted the client in putting such designs provided by the assessee to use by aiding in construction of building and thus, the deliverables could not have been independently applied by the client for their immediate or any other project.
v) Fourthly, the agreements could not be said to be all-encompassing as the assessee only addressed the preliminary requirement of its clients, viz., conceptualizing the designs and in no manner met the be all and end all requirement of the client so as to enable the client to undertake construction solely based on the services provided by the assessee. Rather, the client had to additionally engage a local architect who assisted them with the execution of the project.
vi) Fifthly, the deliverable was closely knitted to the project and could not have been utilised by the client independently in any other project without the services of the assessee. This is evidenced from the fact that the assessee has entered into multiple agreement with the same client such as ARCOP Associates Pvt. Ltd.
vii) Even the role of the local architect was clearly defined and was limited to providing inputs from local regulation perspective.
viii) That under Article 12(4)(c) of the India-Singapore DTAA, services that do not enable the person acquiring them to apply the technology contained therein are excluded from the ambit of “Fees for Technical Services”.
ix) That there is a distinction between imparting conclusions vis-a-vis imparting ‘Knowledge’ and it is important to distinguish the same to decide a case of ‘make available’.
x) Lastly, the instant case deals with imparting of conclusion in the form of architectural plans and designs and therefore, in view of restricted definition of FTS under the treaty, these services/ payments would not partake the character of ‘Fees for Technical services’ in terms of Article 12 of the India-Singapore DTAA.
7.1 It is an undisputed fact that the assessee is a tax resident of Singapore and does not have a permanent establishment in India. Hence it has opted to be governed by the provisions of the India-Singapore DTAA being more beneficial to it.
8. Article 12(4) of India-Singapore DTAA reads as under:-
“Article 12
Royalties And Fees For Technical Services
4. The term “fees for technical services” as used in this Article means payments of any kind to any person in consideration for services of a managerial, technical or consultancy nature (including the provision of such services through technical or other personnel) if such services:-
(a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 3 is received; or
(b) make available technical knowledge, experience, skill, know-how or processes, which enables the person acquiring the services to apply the technology contained therein; or
(c) consist of the development and transfer of a technical plan or technical design, but excludes any service that does not enable the person acquiring the service to apply the technology contained therein.
For the purposes of (b) and (c) above, the person acquiring the service shall be deemed to include an agent, nominee, or transferee of such person.”
9. From the above, it is apparently clear that a mere rendering of technical service is not roped in the purview of Article 12(4)(c) unless the person utilising such services is enabled to apply the technology contained therein. It is a matter of fact that the assessee has rendered project specific architectural design services to its customers in India which services require highly technical expertise and hence these services partake the nature of technical services. It is however the case of the assessee that though the assessee has rendered technical services to its clients in India in terms of Article 12(4) of India-Singapore DTAA, it has not ‘made available’ any technical knowledge and skill etc. to its Indian clients and hence it falls within the exception clause embedded in Article 12(4)(c) of the India-Singapore DTAA and thus the impugned payments received by it could not be taxed as FTS.
9.1 The assessee provides architectural design services which are project specific. These services involve creation of designs and architectural drawings and prints which are as per the requirement of its Indian customers and specific to a particular project. Thus the assessee is rendering technical services and is engaged in the development and transfer of technical plans or technical designs so as to satisfy the first limb of Article 12(4)(c) of the India-Singapore DTAA. What is now left to be examined is that whether the architectural design services rendered by the assessee would enable its Indian customers to apply the technology contained in such architectural designing services.
9.2 In the case of Forum Homes (P) Ltd. (supra) the Mumbai Bench of the Tribunal analysed the applicability of Article 12(4) of the India-Singapore DTAA involving similar issue on similar fact pattern as that of the assessee. In this case, the assessee, a resident company was developing a residential project in India and had availed architectural services from three non resident entities located at Singapore and paid fees to these non resident entities in consideration thereof. The Tribunal held that conditions of Article 12(4) of the India-Singapore DTAA were not fulfilled and the said fee could not be qualified as FTS since while providing architectural services neither any technical knowledge, skill, experience, know-how etc. was made available for utilising them in future independently nor any developed drawing or design have been provided to the assessee which could be applied by the assessee independently. The relevant observations and findings of the Tribunal is reproduced below:-
“9. A reading of article 12(4) of the tax treaty would make it clear that payment made to a resident of one of the contracting state can be regarded as FTS, if, in course of providing managerial/technical or consultancy services, technical knowledge, experience, skill, know-how or processes is made available which enables the person acquiring such services to apply the technology contained therein. It further provides, if the services consist of development and transfer of a technical plan or technical design, but excludes any services that does not enable the person acquiring the service to apply the technology ITA 5804/Mum/2018 contained therein would not qualify as FTS. In the facts of the present appeal, the payments made and the nature of services rendered are as under:–
