India-Z9 tax treaty provides that architectural services are technical services and payment for the same to a company may be taxed in India.…

CA Final · Direct Tax Laws and International Taxation · MTP · January 2026
India-Z9 tax treaty provides that architectural services are technical services and payment for the same to a company may be taxed in India. However, if such professional services are provided by a firm or individual, then payment for such services are taxable only if the firm has a fixed base in India or stay of partners/ employees in India exceed 180 days. Limitation of benefit clause does not exist in tax treaty between India-Z9. M/s DesignSphere Inc is a company incorporated in country Z9. It is engaged in the business of providing architectural design services all over the world. It receives an offer from Serenity Estates Pvt Ltd, an Indian company, for design and development of resorts all over India. M/s DesignSphere Inc forms a partnership firm with a third party (director of the company) having only a nominal share. The firm enters into an agreement to carry out the services in India. The company seconded its trained manpower to the firm. The manpower stayed in India for less than 180 days. Thus, the partnership firm claimed the treaty benefit and no tax was paid in India. Can such an arrangement be examined under GAAR?

Suggested Answer and Working Notes:

In the given case, M/s. DesignSphere Inc., a company incorporated in Country Z9, entered into a contractual arrangement with Serenity Estates Pvt. Ltd., an Indian company, for rendering architectural design services in India. M/s DesignSphere Inc. constituted a partnership firm in its home country with one of its directors as a nominal partner in order to avoid tax liability in India. The newly formed firm entered into the agreement with the Indian client, while the actual manpower and resources were seconded from the company. The firm thereafter claimed that the payment was not taxable in India under the India-Z9 tax treaty, as it had no fixed base and its partners/employees did not stay in India beyond the 180-day limit. It is obvious that there was no commercial necessity to create a separate firm except to obtain the tax benefit. The firm was only on paper as the manpower was drawn from the company. The firm did not have any commercial substance. Moreover, it is a case of treaty abuse. Hence, GAAR may be invoked to disregard the firm and tax payment for architectural services as fee for technical services. However, the rate of tax on such payment shall be as applicable under the treaty, if more beneficial.

Topics: Provisions to Counteract Unethical Tax Practices

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