2022 (12) TMI 1209 - AT - Income Tax

Taxability of search fees - DRP/AO held that a sum received by the appellant towards executive search fees is 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 - AR submitted that in preceding assessment years Advance Pricing Agreement ( APA ) was entered by the Indian subsidiary of the assessee company, which covered the transactions with assessee - HELD THAT - The year under consideration is not covered by the APA. From the perusal of aforesaid order passed by the coordinate bench of the Tribunal in assessee‟s own case for preceding assessment year, we find that the issue of taxability of search fees was decided in favour of assessee in assessment year 2011 12 also and the coordinate bench, in aforesaid decision, supported the findings rendered in preceding year as well as its conclusions, by reference to benchmarking agreed between Indian subsidiary and CBDT vide APA dated 30/08/2016. Therefore, we are of the considered view that findings rendered in preceding assessment year are equally applicable to the year under consideration even though it is not covered by the aforesaid APA. Thus, respectfully following the order passed by the coordinate bench of the Tribunal in assessee‟s own case cited supra, we uphold the plea of the assessee and direct the AO to delete the addition on account of search fees. As a result, grounds No. 1 9 raised in assessee‟s appeal are allowed. Taxability of management fees - AO treated management service fees as fee for technical services‟ under Article 12(5)(b) / 12(5)(a) of India Netherlands DTAA, in line with its findings rendered in respect of taxability of search fees - HELD THAT - As is evident from the record, lower authorities have not examined any of the services and by following its findings rendered in respect of search fees taxed management service fees also as fee for technical services‟ under Article 12 of India Netherlands DTAA. Thus, in view of above, we deem it appropriate to remand the issue of taxability of management service fees to the file of AO for de novo adjudication, as per law, after necessary examination of relevant agreement. The AO is also directed to examine each and every service in respect of which assessee has received management service fees, while deciding this issue. The assessee shall be at liberty to furnish all the evidences in support of its claim. Needless to mention that no order shall be passed without affording reasonable opportunity of being heard to the assessee. As a result, grounds No. 10 17 are allowed for statistical purpose. Taxability of reimbursement of expenses - HELD THAT - This issue is recurring in nature and has been decided in favour of the assessee by the decision of the coordinate bench of Tribunal for preceding assessment years. Thus, respectfully following the order passed by the coordinate bench of the Tribunal in assessee's own case 2022 (9) TMI 1403 - ITAT MUMBAI we uphold the plea of the assessee and direct the AO to delete the addition on account of reimbursement of expenses. As a result, grounds No. 18 20 raised in assessee's appeal are allowed.

Summary

Issues Involved:
Taxability of Search Fees, Taxability of Management Fees, Taxability of Reimbursement of Expenses, Levy of Interest under Section 234D.

Issue-wise Detailed Analysis:

A. Taxability of Search Fees:
The primary issue pertains to whether the sum of Rs. 12,25,20,725 received by the assessee from Spencer Stuart India Private Limited (SS India) towards executive search fees is 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. The assessee contended that the search fees were not taxable in India, as previously decided by the Hon'ble Income-tax Appellate Tribunal (ITAT) in its own case for the assessment years 2011-12, 2014-15, and 2015-16. The ITAT had held that search fees are not taxable in India under Article 12(5)/12(4) of the India-Netherlands tax treaty. The Tribunal reiterated its earlier stance, noting that the license fees and search fees are governed by separate and distinct agreements and constitute different sources of income. The search fees were independent services and did not make available technical knowledge, experience, skill, know-how, or processes. Consequently, the Tribunal directed the AO to delete the addition on account of search fees.

B. Taxability of Management Fees:
The second issue involves the taxability of Rs. 6,98,32,224 received by the assessee from SS India towards management fees. The AO and the learned DRP treated the management service fees as "fees for technical services" under Article 12(5)(b)/12(5)(a) of the India-Netherlands DTAA. The Tribunal found that neither the AO nor the DRP independently examined the services rendered by the assessee and failed to appreciate that the management service fees were covered under a separate Shared Service Agreement dated 01/04/2018. The Tribunal remanded the issue back to the AO for de novo adjudication, directing the AO to examine each service for which the management service fees were received and to decide the issue as per law after necessary examination of the relevant agreement.

C. Taxability of Reimbursement of Expenses:
The third issue concerns the taxability of Rs. 1,74,99,501 reimbursed to the assessee by SS India for expenses incurred on its behalf at cost (without any mark-up). The AO and the DRP treated these reimbursements as taxable fees for technical services under section 9(1)(vii) of the Income-tax Act, 1961, as well as under Articles 12(5)(a) and 12(5)(b) of the India-Netherlands tax treaty. The Tribunal noted that this issue was covered by its earlier decision in the assessee's own case for assessment years 2016-17 and 2017-18, where it had held that the reimbursement of expenses did not constitute fees for technical services as per Article 12 of the tax treaty. The Tribunal directed the AO to delete the addition on account of reimbursement of expenses.

D. Levy of Interest under Section 234D:
The final issue pertains to the levy of interest of Rs. 62,798 under section 234D of the Act on excess refund granted. The Tribunal noted that this ground is consequential in nature and allowed it for statistical purposes.

Conclusion:
The Tribunal allowed the appeal by the assessee for statistical purposes, directing the deletion of additions on account of search fees and reimbursement of expenses, and remanding the issue of taxability of management fees to the AO for fresh adjudication. The ground regarding the levy of interest under section 234D was allowed for statistical purposes.