Case nº A.A.R. No. 832 of 2009 of Authority for Advance Rulings, March 18, 2010 (case HMS Real Estate Pvt. Ltd. Vs Commissioner of Income-tax-I)

JudgeFor Appellant: S.D. Kapila and R.R. Maurya, Advs., Sanjiv Gupta, Adv. HMS Real Estate, Amit Jain, Project Accoutant and Vijay Mathur, Advisor MPCO
PresidentP.V. Reddi, J. (Chairman) and J. Khosla, Member
Resolution DateMarch 18, 2010

Judgment:

P.V. Reddi, J. (Chairman), (New Delhi)

  1. In this application under Section 245Q(1), the applicant seeks advance ruling on the following three questions:

  2. Whether the compensation payable to Hellmuth, Obata + Kassabaum L.P., USA under clause VA of the Agreement dated October 15, 2008 can be disintegrated in three parts; viz., (a) for development and sale of designs (b) consultancy for construction documents, and, (c) for 'Construction administration' and 'additional services'?

  3. If the answer to Question No. 1 is in the affirmative:

    (a) Whether consideration payable for sale of designs is taxable under the D.T.A.A. with USA (the Treaty) in view of the fact that the US entity has no permanent establishment in India?

    (b) Whether payment of fees for technical advisory services to HMS/Indian Associate Architects during the Phase-2 of the Project (Construction Document) is taxable under the Article 12(4) of the Treaty even though it is to be excluded from "included services" under Article 12(5)(a) of the Treaty?

    (c) Whether fees for supervisory/advisory services during the Construction Administration phase is taxable under Article 12(4) of the Treaty and, if so, would such fees attract tax at the rate of ten per cent as prescribed in Section 115A of the Act?

  4. Whether reimbursement of expenses actually incurred by the US entity without any mark up is subject to provisions of Section 195 of the Act?

    Question No. 2 has been recast by the applicant after 1st hearing.

  5. The applicant is an Indian company engaged in the business of development and management of commercial real estate. The applicant proposes to construct an international quality commercial office/hotel complex in Gurgaon. For this purpose, it has entered into an Agreement on 15th Nov. 2008 with Hellmuth, Obata + Kassabaum L.P. (HOK) a limited partnership which is a resident of USA, for provision of Architectural design services. The agreement also provides for appointment of a local Architect as associate Architect. Accordingly, M/s RSP Architects Planners and Engineers Pvt. Ltd. (RSP) has been appointed as 'Associate Architect'. Payments to the local associate Architect are to be made separately and are not under consideration in the application. As per the agreement, both, HOK-the Architect and RSP-the Associate Architect, have been retained "to work jointly and on a cooperative basis in order to perform the entire design, construction documents and construction administration for the Project, each responsible for its share of work but jointly responsible in providing the entire design, construction documents and construction administration service necessary to complete the Project".

    2.1. Under the head "Scope and Description of Services" - 'Design Services', the obligations of Architect are stated as follows:

  6. The Architect will participate with and assist the Owner, as required, in developing and refining the general Project concept for the Project described in Exhibit A. The Architect will develop a detailed program for the Project based on in-depth interviews with the Owner and other parties designated by the Owner. The Architect shall review with the Owner, as requested, alternative approaches to design and construction of the Project and will prepare such schematic or conceptual drawings as may be required.

  7. After the owner has approved the general Project concept and Project program, the Architect shall prepare, for review and approval by the Owner, design development drawings and outline specifications adequate for obtaining preliminary cost and price estimates, and assist the Associate Architect in developing a set of construction drawings and specifications, which are adequate for complete pricing and construction of the Project as required ("Contract Documents").

  8. Upon completion of the construction drawings and specifications by the Associate Architect, and prior to submitting such documents to the Owner for issuance to contractors for prices and construction, the Architect review each such final construction drawing and specification with all other drawings and specifications for consistency with the approved design embodied in the Design Development documents, completeness and to avoid errors and omissions.

  9. The Architect shall cooperate with the Associate Architect in obtaining approval of governmental authorities having jurisdiction over the Project and also assist him to ensure that the Contract Documents shall conform to applicable restrictions, laws, and regulations in effect. The Contract Documents shall consist of all necessary drawings, details, plans, elevations, sections, and schedules, dimensioned, noted, and coordinated, as well as specifications, and the Associate Architect shall seal and sign the drawings and specifications as the architect of record.

  10. The Architect shall assist the Associate Architect and Owner in the preparation of any necessary bidding information, and any forms of agreement between the general contractor and the subcontractors for the Project.

    2.2. The architect's basic services are classified broadly into 6 heads:

    (a) Master plan/Concept design

    (b) Schematic design

    (c) Design development phase in which design is finalized after reviewing the detailed design prepared by the local design consultants

    (d) Construction document phase wherein the architect will provide coordination and drawing review with the associate architect, preparation of designs sketches to clarify design intent and review of specifications for design content.

    (e) Bidding and contract selection process

    (f) Construction phase:

    (i) key selected shop drawings prepared by the associate architects;

    (ii) consultation and site visits;

    (iii) review and evaluation of cost saving proposals submitted upto start of construction of the contractor.

    2.3. There is also a provision for rendering additional services not otherwise included in the Agreement or not customarily furnished as per the prevailing architectural practices. For such additional services, additional payment has to be made according to an agreed formula. Reimbursable expenses are also specified in the Agreement.

  11. The above scope of work under the Agreement has been summarized by the applicant as follows:

    1. Development of program and master plan concept Design;

    2. Development of Schematic design concepts;

    3. Preparation of Design Development drawings;

    4. Coordination and drawing review of documents;

    5. Assisting the owner in bidding and contractor selection process;

    6. Observing construction progress;

    7. Review of cost saving and alternative proposals; and

    8. Additional services as may be required.

    3.1. In respect of the above items of work, HOK is entitled to a fixed fee (net of taxes) as per Clause V of the Agreement on submission of monthly invoices and the fee will be received by HOK in US dollars outside India. It is pointed out that items (a) to (c) above which broadly fall under the first phase lead to finalization of designs and drawings. Item (d) which relates to construction documents is the second stage. Items (e) to (g), it is stated, comes under the third stage i.e. technical consultancy and supervisory services. It is conceded by the learned Counsel for the applicant that as far as the payments received by HOK in the third stage during construction are...

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