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TMI Blog2019 (8) TMI 979X X X X Extracts X X X X X X X X Extracts X X X X ..... said Royalty has been factually found to be at arm s length price for the period under consideration as would be borne out of the order of TPO dated 09.06.2017 in the case of SS India. Therefore, once the payments in terms of the Licence Agreement, i.e. Royalty, has been found to be at arm s length price, no further amount can be attributable for using the Spencer Stuart s Worldwide Client List Database, Spencer Stuart s Mailing List Database, Spencer Stuart s Knowledge Management Resources Pages, Spencer Stuart s Board of Director s Database and other data base as per schedule B to the agreement which SSI has procured from SSI BV as part of Licence Agreement (supra) as sought to be made out by the Assessing Officer in order to invoke clause (iv) of Explanation-2 to Sec. 9(l)(vi) of the Act read with Article 12(4) of the India-Netherlands Tax Treaty. Therefore, in our view, the said action of the Assessing Officer is completely misconceived and is liable to be set-aside and we hold that no charge can be made out under Section 9(l)(vi) read with Article 12(4) of the India-Netherlands Tax Treaty qua the impugned sum of Executive search fee. We conclude by holding that the Assessing O ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on Panel ("DRP") under section 144C(5) of the Act, without judiciously and independently considering the factual and legal objections to the draft assessment order, is illegal and bad in law. 3. The learned DRP/DCIT erred in holding that a sum of ₹ 8,37,57,880 received by the appellant 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 12(5)(b) of the India-Netherlands tax treaty. 4. Alternatively, and without prejudice, the learned DRP/DCIT erred in holding that the said amount of ₹ 8,37,57,880 is taxable as royalty under Article 12(4) of the India-Netherlands tax treaty. 5. The learned DRP/DCIT erred in holding that the search fees received by the appellant is nothing but 'ancillary and subsidiary' to the application or enjoyment of the right, property or information for which a payment (i.e. license fees) described in paragraph 4 of Article 12(5)(a) of the India-Netherlands tax treaty is made; without appreciating that rendering executive search services is the core business of the appellant. 6. The learned DRP/DCIT erred in holdin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had arisen regarding taxability of the payments made to the assessee in the context of deduction of tax at source. The orders passed by the Assessing Officer under Section 201/201(1A) of the Act holding that there was a default on the part of Indian subsidiary in not deducting tax at source on payments made to the assessee-company (which are the subject matter of dispute before us) were not upheld by the CIT(A). In this regard, our attention has been drawn to pages 517 to 536 of the Paper Book, wherein is placed a copy of the order of CIT(A) dated 16.09.2016 in the case of Spencer Stuart (India) Pvt. Ltd. pertaining to Assessment Year 2012-13 arising from the order passed under Section 201/201(1A) of the Act by the Assessing Officer. Similar orders of even date passed by the CIT(A) for Assessment Years 2013-14 and 2014-15 have also been placed in the Paper Book at pages 537 to 576. It has also been pointed out that such orders of CIT(A) were carried in appeal by the Department to the Tribunal, wherein vide order in ITA Nos. 220 & 221/Mum/2017 dated 23.07.2018, the appeals of the Revenue have been dismissed. Apart therefrom, it has also been pointed out that for the period under con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ring the year under consideration assessee had received ₹ 8,37,57,880/- on account of Executive search services provided by the assessee to SS India. The said sum received by the assessee as search fee was considered to be in the nature of 'business income' and was not offered to tax by the assessee in India in the absence of any Permanent Establishment (PE) of the assessee in India. At this stage, it is also noteworthy that assessee claimed that the said income was not taxable as 'Fee for technical services' in view of Article 12(5) of India-Netherlands Tax Treaty inasmuch as the services rendered in question 'neither made available' any technical knowledge, experience, skill, know-how or process and nor did it constitute development and transfer of a technical plan or technical design in terms of Article 12(5)(b) of the India-Netherlands Tax Treaty. Assessee also took the stand that income by way of Executive search services are not for services which are ancillary or subsidiary to the property rights for which licence fee was received having regard to Article 12(5)(a) of the India-Netherlands Tax Treaty. 7. However, the Assessing Officer did not concur with the stand of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it was for use of information concerning industrial, commercial or scientific experience. For all the aforesaid reasons, the Assessing Officer finally concluded that the amount of executive search fee of ₹ 8,37,57,880/- received by the assessee was in the nature of 'fee for technical services' under Article 12(5)(a) as well as Article 12(5)(b) of the India-Netherlands Tax Treaty and alternatively, it was to be taxed as 'Royalty' under Article 12(4) of the India-Netherlands Tax Treaty read with clause (iv) of Explanation-2 to Sec. 9(l)(vi) of the Act. The aforesaid stand of the Assessing Officer was manifested in the draft assessment order dated 26.12.2016 passed under Section 143(3) r.w.s. 144C(1) of the Act, which was objected to by the assessee before the DRP. The DRP vide directions under Section 144(5) of the Act dated 21.09.2017 has concurred with the stand of the Assessing Officer and thereafter the Assessing Officer has passed final assessment order dated 03.10.2017 under Section 143(3) r.w.s. 144C(13) of the Act bringing to tax Executive search fee income of ₹ 8,37,57,880/- as proposed in the draft order. In this background, assessee is in appeal before us. So ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thing to SSIPL as licnece 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 same had no correlation with the SA. It is safe to say that the DRP had wrongly held that SA was originating from LA, Core business of the group was to identify, to evaluate and to recruit of senior personnel for a fee. If is found that to carry out the search function, SSIPL would employ consultants, who were and supported by researchers, knowledge managers and support staff. As per the Memorandum of Association (MOA) of SSIPL (Pg. 288-293 of the PB.), the principal business of SSIPL was to carry out or execution of executive searches and therefore, the ESF cannot be treated as ancillary/subsidiary to the LA in fact, license fees was a percentage of the search fees earned by SSIPL from the executive searches done during the year. We also hold that for a service to be categorised as FTS it should make available technical knowledge, experience, skill, know-how, or processes, or it should consist of the developm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Service Agreement (which results in earning of Executive search fee) have been held to be separate and distinct agreements thereby constituting different sources of income. Our coordinate bench analysed the entire activities between assessee and SS India and observed that the principal business of SS India was to carry out or execute the mandate of Executive searches and thus the Executive search fee generating activities cannot be treated as ancillary and/or subsidiary to the Licence Agreement. Our coordinate bench has noted a pertinent fact that the licence fee payable in terms of the Licence Agreement was a percentage of search fee, which was earned by the Indian subsidiary, i.e. SS India, from the execution of Executive search mandate during a particular year. It is notable that in the context of Article 12(5)(b) of the India-Netherlands Tax Treaty, our coordinate bench noted that the Executive search fee earned by the assessee was independent of the Royalty earned in terms of the Licence Agreement and was not taxable in India as 'fee for technical services' in terms of Article 12(5)(a) or 12(5)(b) India-Netherlands Tax Treaty. The aforesaid position continues to hold the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by SS India to the assessee before us as well as the Executive search transactions between SS India and the assessee before us, inter-alia, involving the impugned earning of ₹ 8,37,57,880/- by the assessee as Executive search fee from SS India. We are only trying to point out the aforesaid to say that the APA entered into by the Competent Authority with SS India covers the instant transactions, which are a mirror image in the hands of the assessee before us. In fact, the proposition that the Licence Agreement (resulting in payment of licence fee offered to tax as Royalty) and the Service Agreement (resulting in payment of Executive search fee to the assessee) between the assessee and SS India are separate and distinct also found favour with the Competent Authority in the APA. In fact, the detailed discussion in the APA reveals an analysis of the functions performed, assets employed and risks undertaken by the assessee before it, i.e. SS India qua its transactions with the assessee before us. In fact, in the context of the arm's length price of the transactions, the APA makes a distinction between the payment of licence fee and Executive search transactions. So far as the Exec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... haracterised such Executive search fee as 'licence fee' and to tax it as 'Royalty' under the APA. However, as we have noted the features emerging from the APA, the Executive search fee has been identified and held to be a separate and distinct transaction as compared to the licence fee, which flows from the Licence Agreement. Ostensibly, if the present stand of the Assessing Officer, which in any case was not preferred in the earlier year of 2011-12, is to prevail, then it would jeopardise the entire APA. We concur with the assertion of the learned representative for the assessee that such a situation would render the APA redundant, a situation which deserves to be avoided. 13. Apart from the aforesaid, if the stand of the Assessing Officer that the Executive search fee is to be taken as 'Royalty' is accepted, it would open up another anomalous situation, as our subsequent discussion would show. The functional analysis of the Executive search transactions, which have been detailed in the APA, clearly bring out that it encompasses a whole range of services for performing the Executive search and can by no stretch of imagination be characterised as 'Royalty'. Apart therefrom, we fin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act. 15. Thus, so far as the Ground of appeal nos. 3 to 8 is concerned, the same are allowed, as above. 16. Insofar as Ground of appeal nos. 9 and 10 are concerned, the same relates to the taxability of reimbursement of expenses amounting to ₹ 1,24,43,236/- received by the assessee. The Assessing Officer and thereafter the DRP have held that the reimbursement of expenses received by the assessee in question are liable to be treated as 'fee for technical services' within the meaning of Article 12(5)(a) of the India-Netherlands Tax Treaty. 17. In this context, we notice that the DRP relied upon the directions of its predecessor DRP in Assessment Year 2011-12 in concluding that the said amount is liable to be taxed in India as 'fee for technical services'. At the time of hearing, it was a common ground between the parties that the said stand of the DRP for Assessment Year 2011-12 has since been negated by the Tribunal in assessee's own case vide order dated 01.06.2018 (supra) and the said order continues to hold the field. In this context, the relevant discussion contained in the order of Tribunal dated 01.06.2018 is as under :- "4.2. We find the assessee had received payme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llowed its further appeal. The Hon'ble High Court dismissed the Department's appeal holding that the Tribunal had rightly observed that the Maersk-net-communication-system was an automated software based communication system which did not require the assessee to render any technical services, that it was merely a cost sharing arrangement between the assessee and its agents to efficiently conduct its shipping business, that it was part of the shipping business and could not be captured under any other provisions except under the DTAA. The Hon'ble Supreme Court, dismissing the appeal held as under: "…..the facts that the assessee had its information technology system, that the assessee had appointed agents in various countries for booking of cargo and servicing customers In those countries, preparing documentation, etc., through these agents, that for the sake of convenience of all these agents, a centralised system was maintained to avoid unnecessary cost, that the system comprised booking and communication software, hardware and a data communications network and was, thus, an integral part of the international shipping business of the assessee and ran on a combination of m ..... X X X X Extracts X X X X X X X X Extracts X X X X
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