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Income Tax Appellate Tribunal, “L” BENCH, MUMBAI
These appeals filed by the Revenue are arising out of the common order of Commissioner of Income Tax (Appeals)-58, Mumbai [in short CIT(A)], in appeal No. CIT(A)-58/Cur 05/2015-16 dated 16.09.2016. The order under section 201(1) & 201(1A) read with section 195 framed by the Income Tax Officer, ward 4(2)(2), Mumbai (ITO) vide order dated 11.03.2015.
The only common issue in these appeals of Revenue is as regards to the order of CIT(A) reversing the findings of the AO in treating the assessee in default for non-deduction of TDS on the payment made in regard to search services rendered by the assessee to its clients based on utilization of data base received by assessee under separate license agreement with Spencer Stuart (India) Pvt. Ltd. (SSIPL) under section 201(1) and 201(1A) of the Act, read with section 195 of the Act. For this Revenue has raised the identical grounds in all the three appeals and the grounds raised
in for AY 2014-15 reads as under: -
1. Whether on the facts and circumstances of the case and in law, the 1d. CIT(A) erred in holding that there was no tax withholding obligation on the assessee as the search fee paid was not in the nature of F1'S within the meaning of Article 12(5)(a) of the DTAA with Netherlands. The CIT(A) failed to appreciate that the search services rendered by the assessee to its client was based on utilization of the database received by the assessee under the separate License Agreement with SSIBV and hence they were ancillary and subsidiary to enjoyment of right, property under the licence agreements?
2. Whether on the basis of the facts and circumstances the case and in law, the Ld. CIT(A) while holding that the search fee paid was not in the nature of FF5 within the meaning of Article 12(5)(a) of the DTAA with Netherlands, erred in relying upon the para 3 of the APA to conclude that the payments have been accepted as business profits and there is no indication of an interference in the APA that services are ancillary to the licence fee. The CIT(A) failed to appreciate that the APAs would be a binding only to the extent of fixation of the Arms Length Price in hand of payer and in absence of any specific finding to the contrary, it would not be binding to decide the nature and taxability of receipts in the hands of recipient, irrespective of the Arm's Length price fixed in hands of payer under the APA.?".”
Briefly stated facts are that the AO after discussing the contents of the License Agreement between SSIBV and SSIPL dated 01.01.2006, concluded at para 3.5 that the search fees paid by the assessee is nothing but a payment for services which are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph (iv) of Article 12(5)of India Netherland Double Taxation Avoidance Agreement (DTAA). The AO has placed reliance on clause (bb) of Article 3 of the Agreement, wherein the clause relating to sharing of income between the two group companies with respect to revenues from referral clients has been elaborated. The AO has concluded that the assessee is bound by the terms of license agreement with reference to sharing of the relent income. He has placed considerable emphasis on the fact that the modality of sharing referral income i.e. 12.5% of the origination and 12.5% of the conversion fee subject to a maximum of 25% is to be shared by the licensee, has been included in the license agreement itself. Thus, any consideration arising out of such service agreement would be ancillary and subsidiary to the main License Agreement. Further analysing the service agreement dated 01.10.2006, the AO has held that as per Article 2a(ii) of the agreement, on all cross border executive assignments, Stuart India who has contracted with a client and is invoicing the client is bound to request SSIBV to provide the requested service. The AO has concluded that Stuart India is bound to execute all cross border executive assignments only through SSIBV and this obligation flows out of the License Agreement entered into by Stuart India SSIBV. He has claimed that the license agreement and the service agreement are not separate arrangements and that the service agreement flows out of the license agreement. He has also concluded that the person performing the services is the same person receiving the license fee which is admitted to be in the nature of royalty. He has concluded that the service fee, being related to the license agreement, constitutes payment for a service which is related to application or enjoyment of the right, property or information. He has concluded that it is only on account of the obligation cast upon SS India under the License Agreement that it is bound to execute all cross- country search assignments through SSIBV and it is only on account of such assignments that SSIBV earns the search fees. The facts on record and the discussion hereinabove clearly show that search fee by assessee to SSIBV is ancillary and subsidiary to royalty i.e. license fees. It is not relevant whether the search fee received by the non-resident company i.e. SSIBV is higher than the license fees. In reality, both the license fee and search fee earned by the non-resident company i.e. SSIBV under the license Agreement (the Service Agreement merely being a confirmation and elaboration of the License Agreement) are in the nature of "royalty" which is taxable in India as per provisions of the India - Netherlands Tax Treaty. In view of the aforesaid reasons, the search fees paid by Spencer Stuart (India) Pvt Ltd (SS India) is nothing but fee for services which are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in Article 12(4) of the India - Netherland Tax Treaty. The same would therefore constitute fee for technical services within the meaning of Article 12(5)(a) of the Treaty. The search fee is, therefore, taxable in India.
Aggrieved, assessee preferred the appeal before CIT(A) and CIT(A) held that the search fee paid by the assessee was not in the nature of FTS within the meaning of Article 12(5)(a) of the act DTAA of Indian Internationals. For this he observed in Para 7 to 7.8 as under: - “7. The submission made by the appellant has been examined. It is seen that the appellant has made two type of payments to its associate SSIBV - first relates to a license fee paid pursuant to a License Agreement between the two. It has been claimed that the license fees are uniform throughout all group members. The second payment relates to payments made in lieu of services rendered by group members with reference to revenue received by the appellant company and is paid in accordance with a services agreement entered into with SSIBV for which the modalities of payment have also been incorporated in the License Agreement. While the first payment has been admitted by the assessee to be in the nature of royalty with consequential deduction of TDS on remittances made, the second payment has been treated as business income of the foreign party, and in absence of any PE in India, has been claimed to be not subject to tax in India. There is no dispute with reference to the first payment. With respect to payment in consideration for services rendered, the AO has held that since the mandate for this payment arises out of the license agreement with SSIBV, these payments are subservient to the License Agreement and hence they are taken to be ancillary to the License Agreement. The AO has, accordingly, treated the payment as being in the nature of Fee for Technical Services as contemplated under Article 12(5)(a) of the India Netherland DTAA and hence liable to TDS.
7.1 The payment made by the assessee pursuant to services agreement is found to be on account of two counts- i. In cases where the order originates from the appellant and revenue is received by the assessee but the work pertains to another jurisdiction where the entire execution is carried out. This happens, for instance, in cases where an Indian company wants to appoints an employee in its overseas office. The work is given to the Indian party but the execution is carried out by a group member in that jurisdiction. ii. In cases where the candidates belong to multiple jurisdiction and hence, for the purpose of verification or collection of details, consultants in multiple jurisdiction are utilised.
7.2 It is seen that in the first instance, the entire execution is carried out by associates in coordination with the assessee and the final result is communicated to the client. In the second case, the associates carry out the work assigned to them and share the final details with the assessee company so as to enable the assessee to take a call on the selection.
7.3 It is seen that the License Agreement between the assessee and SSIBV dated 1. 1.2006 relates to access to the database maintained by SSIBV and a host of other rights including right to use the brand name and trade mark, the rights accessed by the assessee have been described in detail in assessee's submission. The License Agreement proceeds to include clauses relating to rendering of services between group associates and sharing of income, specifying certain percentages with reference to the activities like originating, converting and executing assignments. It is seen that the services referred to in these clauses have no reference to the rights granted to the assessee under the agreement. The inclusion of the sharing clause merely reinforces the nature of services being rendered and modality adopted for sharing such revenue. However, this inclusion, in no way, changes the character of these services.
7.4 Article 12(5)(a) of the India Netherland Treaty is as reproduced below:
5. For purposes of this Article, "fees for technical services' means payments of any kind to any person in consideration for the tendering of any technical or consultancy services (including through the provision of services of technical or other personnel) if such services:
(a) are 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; or (b) make available technical knowledge, experience, skill, know- how or processes, or consist of the development and transfer of a technical plan or technical design.
7.5 For the services rendered under Services Agreement to fall within the parameters of Article 12(5)(a) of the DTAA, it is necessary that the services are ancillary and subsidiary to the application or enjoyment of the right or property or information for which payment in the nature of royalty has been received. It is seen that the royalty has been paid to SSIBV for use database being Quest/Quest NT Database, use of Spencer Stuart Global Intangibles proprietary information with reference to the activities of the assessee and right to use trade mark I brand name, administrative assistance, advisory services etc. Hence, any service rendered pursuant to these items of payment would constitute services which are ancillary and subsidiary to the application I enjoyment of these rights.
7.6 In the present case, the services pursuant to the Services Agreement relate to the actual work rendered by the assessee to his clients i.e. pursuant to mandate given by a client. These may include services relating to selection of a candidate in another territory, conducting search in another territory with reference to a candidate being finalised by the assessee, seeking information for a consultant in another territory with reference to candidates handled by the assessee and so on. These services are in no way connected with the assets or rights for which royalty payment is being made by the assessee company. Hence, in my view, the services do not represent services which would fall within the provisions of Article 12(5)(a) of the DTAA.
7.7 As regards the other limb of Article 12(5) is concerned, the AO has not made out a case that services have resulted in making available of technical knowledge, experience, skill, know-how or processes and hence, these services cannot be held to be falling under this clause.
7.8 There is another reason for not subjecting these amounts to tax. It is seen that the assessee has also received amounts from other group members on account of rendering such services. The assessee has entered into an APA with the Indian Government with respect to these two payments. The payment under the present period is covered by the APA agreement. In the said AM, it has been accepted by both the panics that the income arising out of such services, being payments/receipts in relation to cross border executive search transactions (pan 3 of the APA) have been treated as business profit of the group members and these have been apportioned by adopting a profit split method. The Profit Split Method required to be adopted has been elaborately discussed in the APA. The license fee has been separately discussed in the APA and a license fee not more than 13.5% has been found to be at arm's length. However, there is no indication of an inference in the APA that the services arc ancillary to the license fee.”
Aggrieved, now Revenue is in appeal before Tribunal.
At the outset, the learned Counsel for the assessee filed copy of tribunal order in group concern or venture where this payment is made in the case of Spencer Stuart International BV vs. ACIT in for AY 2011-12, wherein Tribunal held that the service fee paid is not in the nature of FTS for the reason that the service to be categorized as FTS, it should be made available technical knowledge, experience, skill, knowhow, or process or it should be consisting of the development/ transfer of technical plan or technical design in term of article 12(5)(a) of the DTAA. For this the Tribunal observed in Para 3.2 as under:-
“3.2.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 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 Rs.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-Netherelands 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 Rs.5.39 crores towards ESF provided by the 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 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 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 development /transfer of a technical plan or a technical design,in terms of Article 12(5)(b)of the DTAA.It is also observed that that the DRP had relied on the inclusion of the sharing clause(clause (bb) to Article 3)in the LA to arrive at the conclusion that the terms and conditions of the SA are part and parcel of the LA.But,we find that the departmental officers have not given any reasoning that could lead to the fact that SA was ancillary in nature to the LA.We find that the FAA his orders,dated 16/09/2016,for the AY.s. 2012-2013 to 2014-15,in context of the proceedings u/s 201 of the Act,has decided the identical issue in favour of SSIPL and has held that search fees remitted by SSIPL to the assessee did not represent fees for technical services under Article 12(5)(a) of the India-Netherlands DTAA and was not subject to TDS u/s.195 of the Act.We find that the FAA has referred to the APA entered between SSIPL and the Government of India.As per the APA,a separate benchmarking has been laid down for the international transaction of License fee and ESF.As per paragraph 5 & 6 of the APA,the Most Appropriate Transfer Pricing Methods for the covered transactions shall be Profit Spirt Method(PSM)for payment and receipt in relation to Cross-border executive search transact - tion and Comparable Uncontrolled Price(CUP)method for Payment of License fees transacttion.
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.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. So,we have 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. First effective ground of appeal is decided in favour of the assessee.”
In view of the above, the learned Counsel for the assessee stated that the issue is fully and squarely covered in favour of assessee, similar is the position in other years also. On the other hand, the learned Sr. Departmental Representative heavily relied on the order of the Assessing Officer.
We have gone through the facts and circumstances. We have also gone through the tribunals order in the case of Spencer Stuart International BV (supra), wherein the issue for consideration for the year under appeal relates to taxability of search services fee received by assessee from SSIPL under the head fee for technical services. We find that the Tribunal has considered this issue and hence, respectfully following the co-ordinate Bench on this very issue, we confirm the order of CIT(A) deleting the addition.
In the result, all the three appeals of Revenue are dismissed.
Order pronounced in the open court on 23-07-2018. AadoSa kI GaaoYaNaa Kulao mao idnaMk 23-07-2018 kao kI ga[- .