2018 (6) TMI 359 - AT - Income Tax

Taxability of Executive Search Services fees - tds u/s 195 - search fee received under the SA - PE in India - Held that - We are of the opinion that the search fee and license fee were distinct from each other and that the search fee received under the SA was independent of the LA and was not taxable in India as FTS under Article 12(5)(a)of the DTAA. It is a fact that in earlier years the AO himself had held that fees under the both the agreements were separate and that only licence fees was taxable. No hesitation in holding that the search fee could not be treated to be ancillary and subsidiary to LA, that the same did not in any way aid, promote or supplement the application or enjoyment of the right, property, or information, that the search fee received under the SA was independent of the LA and was not taxable in India. Ground of appeal is decided in favour of the assessee. Taxability of amount reimbursed to the assessee by the Indian entity for expenses incurred on its behalf - DTAA - Held that - Following the judgement in case of DIRECTOR OF INCOME TAX (IT) I VERSUS A.P. MOLLER MAERSK AS 2017 (2) TMI 993 - SUPREME COURT 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 it 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 - Decided in favour of assessee

Summary

Issues Involved:
1. Taxability of Executive Search Fees (ESF).
2. Taxability of reimbursement of expenses.
3. Short credit of TDS.

Issue-wise Detailed Analysis:

1. Taxability of Executive Search Fees (ESF):

Challenging the order of the Assessing Officer (AO), passed u/s. 143(3) r.w.s. 144C(13) of the Act, in pursuance of the Directions, dated 23.12.2014 of the Dispute Resolution Panel (DRP)-IV, Mumbai, the assessee has filed the present appeal. The assessee, engaged in the business of executive search service as well as providing technology, software, and related support services to group companies, filed its return of income on 28/11/2011, declaring total income at ?3.92 crores. The assessment was completed on 23/01/2015, determining its income at ?10.02 crores. It is a tax resident of the Netherlands.

During the assessment proceedings, the AO found that the assessee had entered into two agreements with Spencer Stuart India Limited (SSIPL) namely i) License Agreement (LA) and ii) Service Agreement (SA) on 01.01.2006, that during the year it received ?5.39 crores towards ESF under the SA, that the same was not offered for taxation claiming that the receipt was not taxable in the absence of a permanent establishment (PE) of the assessee in India. It was claimed that ESF was not taxable as Fee for Technical Services (FTS) in view of Article 12(5) of the DTAA. However, the AO did not agree with the assessee. He passed a draft order on 14.03.2014 taxing ESF.

Aggrieved by the order of the AO, the assessee filed objections before the DRP and made detailed submissions. After considering the draft order and the objections of the assessee, the DRP referred to the clause (bb) to Article 3 of the LA and held that as per the agreement, the licensee was under obligation to agree to the terms and conditions relating to search assignment, that the entire process of search assignment and fees thereon was to be consistent with the licensor’s policies, that the terms and conditions relating to the ESF was inbuilt in the LA itself.

Referring to the SA, the DRP observed that the parties had entered into an agreement to provide support and services to each other on a principal to principal basis for all cross-border search assignment transactions, that it allowed the non-resident AE to administer the allocation of fees and necessary adjustment to such fees to reflect properly the relative value of each member’s economic contribution to cross-border search business, that as per Article (2a) (ii) on all cross-border executive assignments SSIPL was bound to request the AE to provide services, that the agreement proved that the licensee was bound to execute all cross-border executive assignments only through the AE, that the obligation flowed out of the LA, that the license fee was being paid by the Indian entity, that the same was in the nature of FTS and was taxable in India, that the obligation on the part of the licensee to execute all cross-border executive assignments to the assessee was inbuilt on the signing of the LA, that as per sub-clause 2(a)(iv) of the SA the referral fees equal to 12.5% of origination and 12.5% of conversant, with a maximum amount of 25% had been mandated on a particular assignment, that it was a confirmation of the referral fees on search assignments which had been mandated in the license agreement, that the amount of fees payable on account of search assignments had been provided in the LA itself, that the mutually agreed costs for certain services provided in Article (2) (a) (iv) of the SA was a confirmation of the costs for the same services enshrined in Article 3(bb) (iii) of the LA, that the terms and conditions in the SA relating to education of search assignment and payment of such fees to the assessee was part and parcel of the LA, that the same were ancillary and subsidiary to the application or enjoyment of the right/property/information for which royalty was received by the assessee, that the arrangements under the LA and SA were not separate arrangements as claimed by the assessee, that the SA merely confirmed and elaborated what was provided in the LA, that the SA flowed out of the LA that the Indian company had no liberty with regard to making payment of license fee in the form of royalty to the assessee, that the LA and the SA were nothing but a set of related contracts that the person performing the services was the same person receiving the license fee which was admitted by the assessee to the nature of royalty.

It made a reference to Article 12(5) of the India Netherlands tax treaty and held that the search fee qualified as fee for technical services in terms of Article 12(5), that the same was ancillary and subsidiary to royalties, that the activity of earning search fee was a major activity of the assessee, that it was only by virtue of the LA that the search fee from the Indian entity arose to the assessee, that it was only on account of the obligation cast upon the Indian company under the LA that it was bound to execute all cross-country search assignments through the Netherland entity, that it was only on account of search assignment that the AE would earn such fees, that the search fees received by the assessee was ancillary and subsidiary to the royalty i.e. license fee, that it was not relevant whether the search fees received by the assessee was higher than the license fee, that in reality both the license fee and search fee and by the assessee under the LA were in the nature of royalty which was taxable in India, that the search fee of ?5.39 crore received from the Indian entity by the AE was nothing but fee for services which were ancillary and subsidiary to the application or enjoyment of the right/property/information for which a payment, described in Article 12 of the tax treaty, was received. Finally, rejecting the objections filed by the assessee, it held that a fee of ?5, 39, 62, 507/- was taxable in India.

Before us, the Authorised Representative (AR) stated that during the assessment proceedings, the assessee was asked as to why it should not be taxed as per the provisions of Article 12(5) of the DTAA, that no other query was raised, that the payment and receipt of the multi-country execution fee was based on a global shared revenue allocation model which was developed for Spencer Stuart group and all operating entities in the group were covered under the same model, that the shared revenue allocation model was used to allocate the revenues from global searches for consistency with the costs put by the Spencer Stuart entities into those searches, that having regard to the nature of Spencer Stuart's business, Profit Split Method was treated the most appropriate method, that the principal business of Spencer Stuart group was the provision of professional services pertaining to executive search, that the receipt of search fee by the assessee was independent of license fees, that the assessee could continue to earn search fees, even in the absence of license fees, that the services which were ancillary and subsidiary to the use of license/trademark/software were provided for in the LA and had no correlation with the SA, that the inclusion of the sharing clause in the LA merely reinforced the nature of services being rendered and modality adopted for sharing such revenue, that in no way it would change the character of the services. He referred to the Advance Pricing Agreement (APA) entered between SSIPL and the Government of India. He referred to recitals of the service agreement and contended that it was principle to principle basis, that it had no relation with the license agreement. He made a reference to pages 240 and 241 of the paper book and Article 12(4) of the India Netherland tax treaty. He stated that one agreement was about granting a license and the other talked of headhunting and technology transfer, that the DRP had wrongly mixed the two agreements, that the assessee would receive a service fee based on royalty, that the arrangement was the other way around and that the same was not appreciated in the right perspective, that it was to receive a license fee @13.5%, that brand fee was considered by the DRP while passing the directions, that the global business of the Indian entity was ignored, that the fee included initiation, maturing, and execution. He referred to pg. 3 of the APA application. He also referred to the order passed u/s. 201(Pg. 306-8 of the PB.) of the Act for the subsequent year wherein the issue of service fee was dealt with. He further argued that the contention of the assessee was accepted by the AO in the earlier AYs (AYs. 2008-09 and 2009-10), wherein it was held that search fees were not ancillary and subsidiary to the LA. The Departmental Representative (DR) strongly relied upon the direction of the DRP and stated that both the agreements were part and parcel of the same transaction, that the search fees received by the assessee were ancillary and subsidiary to the royalty.

We have heard the rival submissions and perused the material on record. We find that the assessee had entered into a LA with SSIPL whereby it granted a license to SSIPL to use trade name, trademark, logos of 'Spencer Stuart' and the rights to use software owned by it as well as certain other support services, that in lieu of the rights provided to SSIPL it was entitled to a license fee computed at 13.5% of the net revenues of SSIPL, that the license fee amounting to ?3, 85, 47, 171/- received by the assessee from SSIPL, as per the LA, was offered to tax as royalty as per the provisions of the Act r.w. Article 12(4) of the India-Netherlands DTAA, that it had also entered into a SA whereby, both SSIPL and the assessee agreed to provide, on a principal to principal basis, support and services to each other in relation to executive search assignments (Pg. 123A-123F of the PB), that the assessee, also received ?5.39 crores towards ESF provided by it to the Indian AE, as per the SA, that it claimed that the search fee was in the nature of business income and was not taxable in India in the absence of a PE in India. that it also claimed that the search fee was not taxable as FTS in view of Article 12(5) of the DTAA, that the AO in his draft assessment order proposed to tax the search fees under Article 12(5)(a) of the DTAA, that the DRP upheld the draft assessment order.

In our opinion, license fees and search fees are governed by separate and distinct agreements entered into by the assessee and SSIPL and they would constitute different sources of its income for the year under consideration. In other words, receipt of search fee by the assessee was independent of earning the license fee. As per the SA search fees were to be determined on the basis of the relative contribution of each party, which means in a given situation, SSIPL could also receive search fees from the assessee. But, the same was not true for license fees. The assessee had not to pay anything to SSIPL as license fee. ESF were independent services and were not provided for the purpose of enjoyment/application of right, property, etc. governed by the LA. Services, ancillary and subsidiary to the use of license/trademark/software are provided for in the LA and the same had no correlation with the SA. It is safe to say that the DRP had wrongly held that SA was originating from LA. The core business