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TMI Blog2022 (12) TMI 1209X X X X Extracts X X X X X X X X Extracts X X X X ..... rnational Taxation) 4(2)(2) Mumbai [Assessing Officer] on the basis of the directions of the Dispute Resolution Panel [DRP] for the aforesaid assessment year on the following among other grounds: A. Taxability of Search Fees 1. That on the facts and circumstances of the case, the impugned assessment completed vide order dated 21.01.2022 passed under section 143(3) read with section 144C(13) of the Act, is illegal and bad in law. 2. That on the facts and circumstances of the case, the impugned assessment having been completed on the basis of directions issued by the 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/Assessing Officer erred in holding that a sum of Rs.12,25,20,725 /- 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 under Articles 12(5)(a) and / or 12(5)(b) of the India-Netherlands tax treaty. 4. In spite of the learned DRP accepting that the material facts a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e rendered by the Indian entity 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 which SSI has procured from SSI BV as part of Licence Agreement (supra). These services are provided by SSI on behalf of SSI BV and then the bill is raised on the clients. However, the client it required to pay the same, directly to SSI BV. Hence the receipts in respect database provided of Spencer Stuart group by assessee to SS India for search services, is ancillary and subsidiary to the enjoyment of the licence, trade mark and other rights granted by the assessee to SS India, the receipts in respect of which have already been offered by assessee as Royalty under article 12(4)..." The learned DRP/ Assessing Officer erred in holding that services rendered by the appellant makes available the technology/technical know-how to SS India without providing any documentary evidence to support the findings of the DRP/ Assessing Officer or reasons for the same. B. Taxability of management fees 10. That on the facts and circumstances of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gement service fees is nothing but an ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 4 of this Article is received. These services are rendered by the Indian entity 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 which SSI has procured from SSI BV as part of Licence Agreement (supra). These services are provided by SSI on behalf of SSI BV and then the bill is raised on the clients. Thus the services which are being rendered as part of the Service agreement are basically based, ingrained and totally dependent on the Licence agreement, receipts of which are undisputedly have been offered as Royalty by the assessee itself in the past years." 17. The learned DRP/ Assessing Officer erred in holding that management services rendered by the appellant makes available the technology / technical know-how to SS India without providing any documentary evidence to support the findings of the DRP/ Assessing Officer or reasons for the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r dated 23/09/2021 passed under section 144C of the Act total income of the assessee was computed at Rs. 21,16,51,560, after making various additions. The assessee filed detailed objections before the learned DRP. Vide directions dated 05/01/2022, issued under section 144C(5) of the Act, objections filed by the assessee were rejected, inter-alia, following the directions issued in assessee‟s own case for preceding assessment years. In conformity, the Assessing Officer ("AO") passed the final assessment order dated 21/01/2022 under section 143(3) read with section 144C(13) of the Act. Being aggrieved, the assessee is in appeal before us. 4. The issue arising in grounds No. 1 - 9, raised in assessee‟s appeal, is pertaining to taxability of search fees. 5. At the outset, during the course of hearing, the learned Representative appearing for the parties fairly agreed that this issue is covered by the decision of coordinate bench of the Tribunal in assessee‟s own case for assessment years 2016-17 and 2017-18 in Spencer Stuart International BV vs ACIT, in ITAs No. 1148 and 1297/Mum/2021. 6. We find that, in aforesaid case, the coordinate bench of Tribunal vide its or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e. As per the SA search fees was to be determined on the basis of relative contribution of each party, which menas in a given situation, SSIPL could also receive search fees from the assessee. But, same was not true for licence fee. The assessee had not to pay anything 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndia. First effective ground of appeal is decided in favour of the assessee." 9. The aforesaid discussion by our coordinate bench clearly brings out that the Licence Agreement which results in earning of Royalty income (which has since been offered to tax) and 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dated 30.08.2016 (supra) with the Indian subsidlary, l.e. SS India. In terms of the said APA, a copy of which is placed in the Paper Book, the period covered includes the captioned assessment years also. The transactions covered by the APA, inter-alia, involve payment of licence fee 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 28,37,57,880/- 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 b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... res of the APA to point out that there is a complete dichotomy between the nature and characterisation of the transactions accepted in the APA in the context of SS India vis-a-vis the assessing authority of the present assessee. Ostensibly, it does not need any more emphasis that the nature and characterisation of the amount in the hands of the present assessee has to correspond to what has been accepted by the income-tax authorities in the case of the payer of the same, i.e. SS India. In fact, at the time of hearing, the learned representative for the assessee referred to the modified return of income under Section 92CD of the Act filed by SS India subsequent to the APA dated 30.12.2017 as also the order passed by the TPO under Section 92CA(3) dated 09.06.2017 and the assessment order under Section 143(3) dated 30.12.2017 in the case of SS India for Assessment Year 2014-15. The aforesaid orders give effect to the APA dated 30.08.2016 and it, inter-alia, reflects that the stated value of the payment of Executive search fee to the assessee before us has been found to be at an arm's length price. Similar is the situation for Assessment Year 2015-16. 12. At this stage, we may sp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 'Royalty'. Pertinently, it is stated that the search fee is received "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)". Notably, the fee which is earned by the assessee for allowing use of its trademark, trade name and software, etc. owned by it is a matter of contract in terms of the Licence Agreement dated 01.01.2006 for which the assessee receives Royalty. The payment of 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 Resou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 8. The issue arising in grounds No. 10 - 17, raised in assessee‟s appeal, is pertaining to taxability of management fees. 9. The brief facts of the case pertaining to this issue, as emanating from the record, are: During the year under consideration, assessee received management service fees amounting to Rs. 6,98,32,224 from Spencer Stuart (India) Pvt. Ltd. ("SS India"). Under the Shared Service Agreement entered into between assessee and SS India, the services provided by the assessee typically include financial services, firm wide marketing services, oversight, control and management services, administration services, legal and tax services, IT servic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y 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. 12. The issue arising in grounds No. 18 - 20, raised in assessee‟s appeal, is pertaining to taxability of reimbursement of expenses. 13. At the outset, during the course of hearing, the learned Representative appearing for the parties fairly agreed that this issue is also covered by the decision of coordinate bench of the Tribunal in assessee‟s own case for as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... imarily in the nature of travel and stay abroad for Indian employees visiting overseas for global meetings, that Insurance coverage for employees is totally unrelated to search fees, that reimbursement of software license cannot be linked to search fees, that the QUEST NT software formed part of LA and the license fees were already offered to tax as royalties., that a confirmation letter dated 6/3/2014 submitted to the AO by SSIPL pertaining to purchase of fixed assets amounting to Rs.16,58,018 is part of the PB. In our opinion, reimbursement of expenses would not constitute FTS as per Article 12 of the tax treaty. Here, we would also like to refer to the judgment of AP Mollar (supra). Facts of that case were that the assessee was a foreign company engaged in shipping business and was a tax resident of Denmark, that it had agents working for it, who booked cargo and acted as clearing agents for the assessee, that in order to help all its agents across the globe, the assessee had set up and maintained a global telecommunication facility called Maersk net system which was a vertically integrated communication system. The agents would pay for the system on pro rata basis. According ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... missioner (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." Considering the above, we decide second ground of appeal in favour of the assessee." Since the facts and circumstances are similar in this year, as noted by the DRP in the impugned order, following the precedent in assessee's own case dated 11.06.2018 (supra), the said issue is decided in favour of the assessee a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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