TaxTMI 
TaxTMI 
2019 (8) TMI 979
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....ide order dated 03.10.2017 passed under section 143(3) read with section 144C of the Income-tax Act, 1961 ('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 Dispute Resolution 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 Rs. 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 Rs. 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 ....
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.... (6) TMI 359 - ITAT MUMBAI, a copy of which has been placed in the Paper Book at pages 440 to 448. It has also been asserted, without controversion by the Departmental Representative, that the transactions in dispute are with wholly owned Indian subsidiary of the assessee, i.e. Spencer Stuart (India) Pvt. Ltd. and in the case of the said concern also, an issue 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 hav....
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....ispute between the assessee and the Revenue. 6. Apart from the above arrangement, assessee has also entered into a Service Agreement dated 01.10.2006 in terms of which assessee and SS India agreed to provide, on a principal to principal basis, support and services to each other in relation to Executive search assignments. In terms of the said arrangement, during the year under consideration assessee had received Rs. 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 I....
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....er data base as per schedule B to the agreement which SSI has procured from SSI BV as part of Licence Agreement (supra)". Further, as per the Assessing Officer, the Executive search fee could be characterised as 'Royalty' even in terms of clause (iv) of Explanation-2 to Sec. 9(1)(vi) of the Act read with Article 12(4) of the India-Netherlands Tax Treaty since 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 Rs. 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 2....
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..... In other words, receipt of search fee by the assessee was independent of earning the license fee. As per the SA search fees was to be determined on the basis of relative contribution of each party, which means 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 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....
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....erty, or information, that the search fee received under the SA was independent of the LA and was not taxable in India. 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 Articl....
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....e stand of the assessing authority. 11. At this stage, we may also briefly touch upon the APA dated 30.08.2016 (supra) with the Indian subsidiary, i.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 Rs. 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 discussi....
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....chedule B to the agreement which SSI has procured from SSI BV as part of Licence Agreement (supra)". This stand of the Assessing Officer is starkly in contrast to the Position emerging in the APA dated 30.08.2016. If the Revenue was to contend that the Executive search fee is nothing but licence fee (i.e. Royalty), then even in the APA proceedings, the Revenue was to have re_characterised 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 accept....
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....cer erred in holding that the Executive search fee was in the nature of 'fee for technical services' under Article 12(5)(a) as well as 12(5)(b) of the India-Netherlands Tax Treaty and also erred in his alternative conclusion that the same was taxable 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. 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 Rs. 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 gr....
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....nses. The AO, however, did not accept this contention and held that the amounts paid by these three agents to the assessee were FTS rendered by the assessee and held them taxable in India under Article 13(4) of the Double Taxation Avoidance Agreement (DTAA) between India and Denmark and brought them to tax at 20% u/s.115A of the Act. FAA dismissed the assessee's appeal, but the Tribunal allowed 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....