2022 (9) TMI 1403 - AT - Income Tax

Income deemed to accrue or arise in India - Executive search fee - taxable as fees for technical services under section 9(1)(vii) of the Income-tax Act, 1961 and under Articles 12(5)(a) and / or 12(5)(b) of the India-Netherlands tax treaty - alternative conclusion that the same was taxable as 'Royalty' under Article 12(4) of the India-Netherlands Tax Treaty read with clause (iv) of Explanation-2 to Sec. 9(1)(vi) of the Act - HELD THAT - For Taxability of Search Fees in assessee s own case for the A.Ys. 2014-15 2015-16 2019 (8) TMI 979 - ITAT MUMBAI and decided the issue in favour of the assesse and against the department. Assessing Officer erred in holding that the Executive search fee was in the nature of 'fee for technical services' under Article 12(5)(a) as well as 12(5)(b) of the India Netherlands Tax Treaty and also erred in his alternative conclusion that the same was taxable as 'Royalty' under Article 12(4) of the India-Netherlands Tax Treaty read with clause (iv) of Explanation-2 to Sec. 9(1)(vi) of the Act. Taxability of reimbursement of expenses - HELD THAT - Issue decided in favour of assessee in immediately preceding Assessment Years i.e., A.Y.2014-15 and 2015-16 2019 (8) TMI 979 - ITAT MUMBAI held that payments were in the nature of reimbursement of cost whereby the three agents paid their proportionate share of the expenses incurred on these said systems and for maintaining those systems. Neither the Assessing Officer nor the Commissioner (Appeals) had stated that there was any profit element embedded in the payments received by the assessee from its agents in India. Once the character of the payment was in the nature of reimbursement of the expenses, it could not be income chargeable to tax. Moreover, freight income generated by the assessee in the assessment years in question was accepted as not chargeable to tax as it arose from the operation of ships in international waters in terms of article 9 of the DTAA. Once that was accepted and was also found that the Maersk net system was an integral part of the shipping business which was allowed to be used by the agents of the assessee as well in order to enable them to discharge their role more effectively as agents, and the business could not be conducted without it, it could not be treated as any technical services provided to the agents. Appeals filed by the assessee are allowed.

Summary

Issues Involved:
1. Taxability of Search Fees
2. Reimbursement of Expenses

Detailed Analysis:

1. Taxability of Search Fees:

The appellant challenged the assessment order dated 16 March 2021, which was based on the directions of the Dispute Resolution Panel (DRP), arguing that the sum of Rs.6,29,16,235 received from Spencer Stuart India Private Limited (SS India) towards executive search fees is not taxable as fees for technical services under section 9(1)(vii) of the Income-tax Act, 1961, and under Articles 12(5)(a) and 12(5)(b) of the India-Netherlands tax treaty. The appellant contended that the DRP and the Assessing Officer did not judiciously consider the factual and legal objections to the draft assessment order and failed to follow the precedents set by the Hon'ble ITAT in the appellant's own case for previous assessment years (2011-12, 2014-15, and 2015-16), where the issue was decided in favor of the appellant.

The Tribunal observed that the issue had been consistently decided in favor of the appellant in earlier years, noting that the license fees and search fees were governed by separate agreements. The Tribunal emphasized that the search fees were independent services and not ancillary to the license agreement. The Tribunal held that the executive search fees do not constitute fees for technical services as per Article 12(5)(a) or 12(5)(b) of the India-Netherlands tax treaty and are not taxable in India. Additionally, the Tribunal rejected the alternative contention that the search fees should be treated as royalty under Article 12(4) of the tax treaty.

Respecting the principle of consistency, the Tribunal followed its earlier decisions and ruled in favor of the appellant, allowing the ground raised by the appellant regarding the taxability of search fees.

2. Reimbursement of Expenses:

The appellant also contested the taxability of a sum of Rs.69,22,763 reimbursed by SS India for expenses incurred on its behalf. The DRP/Assessing Officer treated this reimbursement as fees for technical services under section 9(1)(vii) of the Income-tax Act, 1961, and Articles 12(5)(a) and 12(5)(b) of the India-Netherlands tax treaty. The appellant argued that the reimbursement was at cost without any markup and provided all supporting third-party invoices during the assessment and DRP proceedings. The appellant pointed out that the Hon'ble ITAT had previously decided similar issues in favor of the appellant for assessment years 2011-12, 2014-15, and 2015-16.

The Tribunal noted that the issue had been consistently decided in favor of the appellant in earlier years, referencing the precedent set in the appellant's own case for the assessment year 2011-12, where the Tribunal held that reimbursement of expenses would not constitute fees for technical services as per Article 12 of the tax treaty. The Tribunal highlighted that the reimbursements were supported by third-party invoices and were purely cost-sharing arrangements without any profit element, as established in the case of DIT (International Taxation) v. A.P. Moller Maersk AS 392 ITR 186 (SC).

Following the principle of consistency, the Tribunal ruled in favor of the appellant, allowing the ground raised regarding the taxability of reimbursement of expenses.

Conclusion:

The Tribunal allowed the appeals filed by the appellant for both assessment years 2016-17 and 2017-18, following the principle of consistency and the precedents set in the appellant's own case for previous years. The Tribunal ruled that the executive search fees are not taxable as fees for technical services or royalty under the India-Netherlands tax treaty and that the reimbursement of expenses is not taxable as fees for technical services.

Order pronounced in the open court on 06th September, 2022.