2018 (6) TMI 359 - AT - Income Tax

ESF not taxable as FTS under India-Netherlands DTAA: Court grants TDS credit

The court held that the Executive Search Fees (ESF) received by the assessee were not taxable in India as Fees for Technical Services (FTS) under the ... 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 1. ISSUES PRESENTED and CONSIDEREDThe core legal issues considered in the judgment are:Whether the Executive Search Fees (ESF) received by the assessee from Spencer Stuart India Limited (SSIPL) qualifies as Fees for Technical Services (FTS) under Article 12(5) of the India-Netherlands Double Taxation Avoidance Agreement (DTAA) and is taxable in India.Whether the reimbursement of expenses amounting to Rs. 70.36 lakhs received by the assessee from SSIPL is taxable as income or should be treated as non-taxable reimbursements.Whether the assessee is entitled to short credit of Tax Deducted at Source (TDS) of Rs. 70,567.2. ISSUE-WISE DETAILED ANALYSISIssue 1: Taxability of Executive Search Fees (ESF)Relevant legal framework and precedents: The primary legal framework involves Article 12(5) of the India-Netherlands DTAA, which defines FTS and its taxability. The assessee argued that ESF is not taxable in India in the absence of a Permanent Establishment (PE).Court's interpretation and reasoning: The court examined the agreements between the assessee and SSIPL, namely the License Agreement (LA) and the Service Agreement (SA). It concluded that the ESF was independent of the license fees and not ancillary or subsidiary to the LA.Key evidence and findings: The court found that the ESF was based on a global shared revenue allocation model and was independent of the license fees. The ESF was determined on the basis of relative contributions of the parties involved.Application of law to facts: The court applied Article 12(5) of the DTAA and concluded that the ESF did not qualify as FTS as it did not make available technical knowledge or skill as required under the DTAA.Treatment of competing arguments: The court considered the Department's argument that the ESF was ancillary to the LA, but found no evidence supporting this claim. It also noted the AO's previous acceptance of the assessee's position in earlier assessment years.Conclusions: The court held that the ESF was not taxable in India as FTS under the DTAA, and the first ground of appeal was decided in favor of the assessee.Issue 2: Taxability of Reimbursement of ExpensesRelevant legal framework and precedents: The assessment of whether reimbursements constitute income involves examining the nature of the payments and whether they include any profit element.Court's interpretation and reasoning: The court referred to the precedent set in the A P Moller case, where reimbursements were not considered income if they were merely cost-sharing without profit elements.Key evidence and findings: The reimbursements were supported by third-party invoices and related to expenses such as travel, insurance, and software licenses, which were not linked to search fees.Application of law to facts: The court found that the reimbursements were purely cost-sharing arrangements without any markup, similar to the A P Moller case.Treatment of competing arguments: The Department argued that the reimbursements should be taxed as FTS, but the court found no basis for this claim.Conclusions: The court concluded that the reimbursements did not constitute FTS and were not taxable as income, deciding the second ground of appeal in favor of the assessee.Issue 3: Short Credit of TDSRelevant legal framework and precedents: The issue involves verifying the factual correctness of the TDS credit claimed by the assessee.Court's interpretation and reasoning: The court directed the AO to verify the facts and allow credit if the claim was found to be correct.Key evidence and findings: The court did not provide specific findings but left the matter for factual verification by the AO.Application of law to facts: The court applied standard procedural directives for verification of TDS claims.Treatment of competing arguments: No significant competing arguments were presented for this issue.Conclusions: The court allowed the ground of appeal related to TDS credit, subject to verification by the AO.3. SIGNIFICANT HOLDINGSVerbatim quotes of crucial legal reasoning: 'Considering the above, 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.'Core principles established: The judgment establishes that ESF is not taxable as FTS if it does not make available technical knowledge or skill. Reimbursements without profit elements are not taxable as income.Final determinations on each issue: The ESF was not taxable in India, the reimbursements were not taxable as income, and the TDS credit issue was remanded for verification by the AO.