The Indian Income Tax Appellate Tribunal (ITAT) delivered a ruling in the case of The Indian Hotels Company Ltd. v. Income Tax Officer (unreported) dealing with the issue of whether fees payable to a foreign company for carrying out interior designing constituted "fees for technical services" (FTS) or "royalty" under the India-Singapore tax treaty (the tax treaty).

(a) Facts. The taxpayer (i.e. The Indian Hotels Company Ltd.) was a hotelier and it contracted Messrs. Hirsh Bender Associates Interior Designer (HBA), a Singapore-based company, to carry out interior designing work for the renovation of the taxpayer's hotel in India. The tax authorities directed the taxpayer to deduct tax from fees paid to HBA as they consider the remittance to be FTS.

The taxpayer contended that the fee payable to HBA did not fall within the ambit of FTS and hence, was not covered under Art. 12(4) of the tax treaty. The taxpayer also claimed that the payment was not in the nature of "royalty" as defined under Art. 12(3) of the tax treaty. The taxpayer's contention was that the payment to HBA was for the outright sale of interior design and drawings. Therefore, the taxpayer argued that it had purchased the design/drawing and the rights in such property had passed to it. Therefore, the payment was not "royalty" as defined in Art. 12 of the tax treaty.

The tax authorities, however, held that various terms and conditions of the agreement entered into between the taxpayer and HBA showed that it was not a case of "sale" and was in fact an agreement for provision of services. The taxpayer appealed to the Commissioner of Income Tax (Appeals) who rejected the appeal, and the taxpayer appealed to the ITAT.

(b) Issue. The key issue before the ITAT was whether the amount paid to HBA was for an outright purchase of designs and drawings or was only towards provision of interior decorating services for use in redesigning or renovating the interiors of the taxpayer's hotel.

(c) Decision. The ITAT ruled that the fee payable to HBA was not FTS or "royalty" under the tax treaty.

The ITAT observed that, pursuant to the agreement, HBA was required to hand over and transfer all plans and interior concepts in regard to the areas defined in the agreement, and all such interior design drawings and presentation material became the "property" of the taxpayer.

The taxpayer had purchased and acquired the interior designs and drawings from HBA and the property therein had passed to the taxpayer. Thus, the ITAT held that the fee payable to HBA did not come within the ambit of FTS or "royalty" for the purposes of the tax treaty.