SPENCER STUART INETRNATIONAL BV, MUMBAI V. ADDL CIT (IT) 4(2), MUMBAI

ITA 1696/MUM/2015

• Counselvise Citation: [2018] 121 COUNSELVISE.COM (IT) 6829 (ITAT-MUMBAI)
• Duration Of Justice: 3 year(s) 2 month(s) 8 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 01-06-2018
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: E
• Next Hearing Date: 20-06-2017
• Assessment Year: 2011-2012
• Appeal Filed On: 23-03-2015
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: MUKESH BUTANISHREYASH SHAH
• Keywords: Business income; Transfer pricing; Double taxation relief; International transaction; Additional evidence

Judgement Text

, INCOME-TAX APPELLATE TRIBUNAL -LBENCH MUMBAI , , , BEFORE S/SHRI RAJENDRA,ACCOUNTANT MEMBER AND RAM LAL NEGI,JUDICIAL MEMBER ./I.T.A./1696/MUM/2015, /ASSESSMENT YEAR: 2011-12 SPENCER STUART INTERNATIONAL BV C/O.SPENCER STUART (INDIA)PRIVATE LIMITED 11TH FLOOR, AVANTHA HOUSE, DR. ANNIE BESANT ROAD, WORLI MUMBAI-400 030. PAN:AAKCS 2299 C VS. ACIT-(INTL. TAXATION)-4(2) MUMBAI. ( /APPELLANT ) ( / RESPONDENT ) REVENUE BY: SHRI SAMUEL DARSE-CIT-DR ASSESSEE BY: S/SHRI MUKESH BUTANI/SHREYASH SHAH / DATE OF HEARING: 06/04/2018 / DATE OF PRONOUNCEMENT: 01/06/2018 ,1961 254(1) ORDER U/S.254(1)OF THE INCOME-TAX ACT,1961(ACT) , - PER RAJENDRA, AM - CHALLENGING THE ORDER OF THE ASSESSING OFFICER(AO), PASSED U/S.143(3) R.W.S. 144C(13) OF THE ACT,IN PURSUANCE OF THE DIRECTIONS,DTD.23.12.2014 O F THE DISPUTE RESOLUTION PANEL(DRP)-IV, MUMBAI,THE ASSESSEE HAS FILED THE PRESENT APPEAL.TH E ASSESSEE,ENGAGED IN THE BUSINESS OF EXECUTIVE SEARCH SERVICE AS WELL AS PROVIDING TECHN OLOGY,SOFTWARE AND RELATED SUPPORT SERVICES GROUP COMPANIES,FILED ITS RETURN OF INCOME ,ON 28/11/2011,DECLARING TOTAL INCOME AT RS.3.92 CRORES.THE ASSESSMENT WAS COMPLETED ON 23/0 1/2015,DETERMINING ITS INCOME AT RS. 10.02 CRORES.IT IS A TAX RESIDENT OF NETHERLANDS. 2. VIDE ITS LETTER,DTD.27/03/2017,THE ASSESSEE MADE A REQUEST TO ADMIT ADDITIONAL EVIDENCE AS PER THE RULE 29 OF THE ITAT,RULES,1963.IT HAS BEEN STATED IN THE APPLICATION THAT THE ISSUE FOR CONSIDERATION FOR THE YEAR UNDER APPEAL RELATED TO TAXABILITY OF EXECUTIVE SEARCH SERVICES FEES RECEIVED BY THE ASSESSEE FROM SPENCER STUART INDIA LIMITED(SSIPL)UNDER THE HEAD F EES FOR TECHNICAL SERVICES(FTS),THAT SSIPL HAD ENTERED INTO AN APA WITH THE ON 30/08/2016,THAT THE INTERNATIONAL TRANSACTION OF RECEIPT/PAYMENT OF EXE CUTIVE SERVICE FEE AND PAYMENT OF LICENCE FEE BETWEEN SSIPL AND ITS AE WOULD BE GOVERNED AS P ER THE APA, THAT THE DOCUMENT WAS VERY IMPORTANT TO ADJUDICATE THE ISSUE, THAT SAME D ID NOT REQUIRE FRESH INVESTIGATION OF THE FACTS. 1696/M/15-SPENCER STUART INTERNATIONAL B.V. 2 DURING THE COURSE OF HEARING BEFORE US,THE AUTHORIS ED REPRESENTATIVE(AR)REITERATED THE ARGUMENTS THAT ARE PART OF THE APPLICATION.THE DEPA RTMENTAL REPRESENTATIVE(DR)LEFT THE ISSUE TO THE DISCRETION OF THE BENCH.WE HAVE GONE THROUGH THE APA,SUBMITTED BY THE ASSESSEE. IN OUR OPINION THE APA ALONG WITH ITS ANNEXTURES IS CR UCIAL TO DECIDE THE ISSUE.THEREFORE,WE ADMIT THE SAME. 3. FIRST EFFECTIVE GROUND OF APPEAL(GS.OA2-2.2)IS ABOU T EXECUTIVE SEARCH FEES (ESF), AMOUNT -ING TO RS.5.39 CRORES.DURING THE ASSESSMENT PROCEE DINGS,THE AO FOUND THAT THE ASSESSEE HAD ENTERED IN TO TWO AGREEMENTS WITH SPENCER STUART IN DIA LIMITED(SSIPL)NAMELY I).LICENSE AGREEMENT (LA)AND II).SERVICE AGREEMENT(SA)ON 01.01 .2006,THAT DURING THE YEAR IT RECEIVED RS.5.39 CRORES TOWARDS ESF UNDER THE SA,THAT THE S AME WAS NOT OFFERED FOR TAXATION CLAIMING THAT THE RECEIPT WAS NOT TAXABLE IN ABSENCE OF A PE RMANENT ESTABLISHMENT (PE)OF THE ASSESSEE IN INDIA.IT WAS CLAIMED THAT ESF WAS NOT TAXABLE AS FEE FOR TECHNICAL SERVICES(FTS)IN VIEW OF ARTICLE 12(5)OF THE DTAA.HOWEVER,THE AO DID NOT AGREE WITH THE ASSESSEE.HE PASSED A DRAFT ORDER ON 14.03.2014 TAXING ESF. 3.1. AGGRIEVED BY THE ORDER OF THE AO,THE ASSESSEE FILED OBJECTIONS BEFORE THE DRP AND MADE DETAILED SUBMISSIONS.AFTER CONSIDERING THE DRAFT OR DER AND THE OBJECTIONS OF THE ASSESSEE,THAT DRP REFERRED TO THE CLAUSE(BB)TO ARTICLE 3 OF THE L A AND HELD THAT AS PER THE AGREEMENT,THE LICENSEE WAS UNDER OBLIGATION TO AGREE TO THE TERMS AND CONDITIONS RELATING TO SEARCH ASSIGN - MENT,THAT THE ENTIRE PROCESS OF SEARCH ASSIGNMENT A ND FEES THEREON WAS TO BE CONSISTENT WITH THE LICENSORS POLICIES,THAT THE TERMS AND CONDITIO NS RELATING TO THE ESF WAS INBUILT IN THE LA ITSELF. REFERRING TO THE SA,THE DRP OBSERVED THAT THE PARTI ES HAD ENTERED INTO AN AGREEMENT TO PROVIDE SUPPORT AND SERVICES TO EACH OTHER ON PRINC IPAL TO PRINCIPAL BASIS FOR ALL CROSS-BORDER SEARCH ASSIGNMENT TRANSACTIONS,THAT IT ALLOWED THE NON-RESIDENT AE TO ADMINISTER THE ALLOCA - TION OF FEES AND NECESSARY ADJUSTMENT TO SUCH FEES TO REFLECT PROPERLY THE RELATIVE VALUE OF EACH MEMBERS ECONOMIC CONTRIBUTION TO CROSS-BORDER SEARCH BUSINESS,THAT AS PER ARTICLE (2A) (II) ON ALL CROSS-BORDER EXECUTIVE ASSIGNMENTS SSIP L WAS BOUND TO REQUEST THE AE TO PROVIDE SERVICES,THAT THE AGREEMENT PROVED THAT LICENSEE WA S BOUND TO EXECUTE ALL CROSS-BORDER EXECUTIVE ASSIGNMENTS ONLY THROUGH THE AE, THAT THE OBLIGATION FLOWED OUT OF THE LA,THAT THE LICENCE FEE WAS BEING PAID BY INDIAN ENTITY, THAT T HE SAME WAS IN THE NATURE OF FTS AND WAS TAXABLE IN INDIA,THAT THE OBLIGATION ON THE PART OF THE LICENSEE TO EXECUTE ALL CROSS-BORDER EXECUTIVE ASSIGNMENTS TO THE ASSESSEE WAS INBUILT O N THE SIGNING OF THE LA,THAT AS PER SUB CLAUSE 2(A)(IV)OF THE SA THE REFERRAL FEES EQUAL TO 12.5% OF ORIGINATION AND 12.5% OF 1696/M/15-SPENCER STUART INTERNATIONAL B.V. 3 CONVERSANT,WITH A MAXIMUM AMOUNT OF 25% HAD BEEN MA NDATED ON A PARTICULAR ASSIGNMENT, THAT IT WAS A CONFIRMATION OF THE REFERRAL FEES ON SEARCH ASSIGNMENTS WHICH HAD BEEN MANDATE -ED IN THE LICENSE AGREEMENT,THAT THE AMOUNT OF FEE S PAYABLE ON ACCOUNT OF SEARCH ASSIGN - MENTS HAD BEEN PROVIDED IN THE LA ITSELF,THAT THE M UTUALLY AGREED COSTS FOR CERTAIN SERVICES PROVIDED IN ARTICLE (2) (A) (IV) OF THE SA WAS A CO NFIRMATION OF THE COSTS FOR THE SAME SERVICES ENSHRINED IN ARTICLE 3(BB) (III) OF THE LA,THAT THE TERMS AND CONDITIONS IN THE SA RELATING TO EDUCATION OF SEARCH ASSIGNMENT AND PAYMENT OF SUCH FEES TO THE ASSESSEE WAS PART AND PARCEL OF THE LA,THAT THE SAME WERE ANCILLARY AND SUBSIDIA RY TO THE APPLICATION OR ENJOYMENT OF THE RIGHT/PROPERTY/INFORMATION FOR WHICH ROYALTY WAS RE CEIVED BY THE ASSESSEE,THAT THE ARRANGE - MENTS UNDER THE LA AND SA WERE NOT SEPARATE ARRANGE MENTS AS CLAIMED BY THE ASSESSEE, THAT THE SA MERELY CONFIRMED AND ELABORATED WHAT WAS PRO VIDED IN THE LA,THAT THE SA FLOWED OUT OF THE LA THAT THE INDIAN COMPANY HAD NO LIBERTY WI TH REGARD MAKING PAYMENT OF LICENCE FEE IN FORM OF ROYALTY TO THE ASSESSEE,THAT THE LA AND THE SA WERE NOTHING BUT A SET OF RELATED CONTRACTS THAT THE PERSON PERFORMING THE SERVICES W AS THE SAME PERSON RECEIVING THE LICENCE FEE WHICH WAS ADMITTED BY THE ASSESSEE TO THE NATUR E OF ROYALTY. IT MADE A REFERENCE TO ARTICLE 12(5)OF THE INDIA NE THERLANDS TAX TREATY AND HELD THAT THE SEARCH FEE QUALIFIED AS FEE FOR TECHNICAL SERVICES IN TERM S OF ARTICLE 12(5),THAT THE SAME WAS ANCILLARY AND SUBSIDIARY TO ROYALTIES,THAT THE ACTIVITY OF EA RNING SEARCH FEE WAS A MAJOR ACTIVITY OF THE ASSESSEE,THAT IT WAS ONLY BY VIRTUE OF THE LA THAT THE SEARCH FEE FROM THE INDIAN ENTITY AROSE TO THE ASSESSEE,THAT IT WAS ONLY ON ACCOUNT OF THE OBL IGATION CAST UPON THE INDIAN COMPANY UNDER THE LA THAT IT WAS BOUND TO EXECUTE ALL CROSS-COUNT RY SEARCH ASSIGNMENTS THROUGH NETHERLAND ENTITY,THAT IT WAS ONLY ON ACCOUNT OF SEARCH ASSIGN MENT THAT THE AE WOULD EARN THE SUCH FEES,THAT THE SEARCH FEES RECEIVED BY THE ASSESSEE WAS ANCILLARY AND SUBSIDIARY TO THE ROYALTY I.E. LICENCE FEE, THAT IT WAS NOT RELEVANT WHETHER THE SEARCH FEES RECEIVED BY THE ASSESSEE WAS HIGHER THAN THE LICENCE FEE,THAT IN REALITY BOTH TH E LICENCE FEE AND SEARCH FEE AND BY THE ASSESSEE UNDER THE LA WERE IN NATURE OF ROYALTY WHI CH WAS TAXABLE IN INDIA, THAT THE SEARCH FEE OF RS.5.39 CRORE RECEIVED FROM INDIAN ENTITY BY THE AE WAS NOTHING BUT FEE FOR SERVICES WHICH WERE ANCILLARY AND SUBSIDIARY TO THE APPLICAT ION OR ENJOYMENT OF THE RIGHT/ PROPERTY /INFORMATION FOR WHICH A PAYMENT ,DESCRIBED IN ARTI CLE 12 OF THE TAX TREATY, WAS RECEIVED. FINALLY,REJECTING THE OBJECTIONS FILED BY THE ASSES SEE,IT HELD THAT FEE OF RS.5,39,62,507/-WAS TAXABLE IN INDIA. 3..BEFORE US,THE AUTHORISED REPRESENTATIVE(AR)STATE D THAT DURING THE ASSESSMENT PROCEEDINGS,THE ASSESSEE WAS ASKED AS TO WHY IT SHO ULD NOT BE TAXED AS PER THE PROVISIONS OF 1696/M/15-SPENCER STUART INTERNATIONAL B.V. 4 ARTICLE 12(5)OF THE DTAA,THAT NO OTHER QUERY WAS RA ISED,THAT THE PAYMENT AND RECEIPT OF THE MULTI COUNTRY EXECUTION FEE WAS BASED ON A GLOBAL S HARED REVENUE ALLOCATION MODEL WHICH WAS DEVELOPED FOR SPENCER STUART GROUP AND ALL OPER ATING ENTITIES IN THE GROUP WERE COVERED UNDER THE SAME MODEL,THAT THE SHARED REVENUE ALLOCA TION MODEL WAS USED TO ALLOCATE THE REVENUES FROM GLOBAL SEARCHES FOR CONSISTENCY WITH THE COSTS PUT BY THE SPENCER STUART ENTITIES INTO THOSE SEARCHERS,THAT HAVING REGARD TO THE NATURE OF SPENCER STUART'S BUSINESS, PROFIT SPLIT METHOD WAS TREATED THE MOST APPROPRIAT E METHOD,THAT THE PRINCIPAL BUSINESS OF SPENCER STUART GROUP WAS PROVISION OF PROFESSIONAL SERVICES PERTAINING TO EXECUTIVE SEARCH, THAT RECEIPT OF SEARCH FEE BY THE ASSESSEE WAS INDE PENDENT OF LICENSE FEES, THAT THE ASSESSEE COULD CONTINUE TO EARN SEARCH FEES,EVEN IN THE ABSE NCE OF LICENSE FEES,THAT THE SERVICES WHICH WERE ANCILLARY AND SUBSIDIARY TO THE USE OF LICENSE /TRADEMARK/SOFTWARE WERE PROVIDED FOR IN THE LA AND HAD NO CORRELATION WITH THE SA, THAT THE INCLUSION OF THE SHARING CLAUSE IN THE LA MERELY REINFORCED THE NATURE OF SERVICES BEING REND ERED AND MODALITY ADOPTED FOR SHARING SUCH REVENUE,THAT IN NO WAY IT WOULD CHANGE THE CH ARACTER OF THE SERVICES,.HE REFERRED TO ADVANCE PRICING AGREEMENT(APA) ENTERED BETWEEN SSIP L AND THE GOVERNMENT OF INDIA.HE REFERRED TO RECITALS OF SERVICE AGREEMENT AND CONTE NDED THAT IT WAS PRINCIPLE TO PRINCIPLE BASIS,THAT IT HAD NO RELATION WITH LICENCE AGREEMEN T.HE MADE A REFERENCE TO PAGES 240 AND 241 OF THE PAPER BOOK AND ARTICLE 12(4)OF INDIA NETHERL AND TAX TREATY.HE STATED THAT ONE AGREEMENT WAS ABOUT GRANTING LICENCE AND THE OTHER TALKED OF HEAD HUNTING AND TECHNOLOGY TRANSFER,THAT THE DRP HAD WRONGLY MIXED THE TWO AGR EEMENTS,THAT THE ASSESSEE WOULD RECEIVE SERVICE FEE BASED ON ROYALTY,THAT ARRANGEMENT WAS O THER WAY ROUND AND THAT THE SAME WAS NOT APPRECIATED IN RIGHT PERSPECTIVE, THAT THE IT WAS T O RECEIVE LICENCE FEE @13.5%,THAT BRAND FEE WAS CONSIDERED BY THE DRP WHILE PASSING THE DIRECTI ONS,THAT GLOBAL BUSINESS OF INDIAN ENTITY WAS IGNORED,THAT FEE INCLUDED INITIATION,MATURING A ND EXECUTION.HE REFERRED TO PG.3 OF THE APA APPLICATION.HE ALSO REFERRED TO THE ORDER PASSE D U/S.201(PG.306-8OF THE PB.)OF THE ACT FOR THE SUBSEQUENT YEAR WHEREIN THE ISSUE OF SERVIC E FEE WAS DEALT WITH.HE FURTHER ARGUED THAT THE CONTENTION OF THE ASSESSEE WAS ACCEPTED BY THE AO IN THE EARLIER AY.S(AY.S.2008-09 AND 2009-10),WHEREIN IT WAS HELD THAT SEARCH FEES WAS N OT ANCILLARY AND SUBSIDIARY TO THE LA. THE DEPARTMENTAL REPRESENTATIVE (DR)STRONGLY RELIED UPON THE DIRECTION OF THE DRP AND STATED THAT BOTH THE AGREEMENTS WERE PART AND PARCE L OF THE SAME TRANSACTION, THAT THE SEARCH FEES RECEIVED BY THE ASSESSEE WAS ANCILLARY AND SUB SIDIARY TO THE ROYALTY. 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 I T GRANTED LICENSE TO SSIPL TO USE TRADE - 1696/M/15-SPENCER STUART INTERNATIONAL B.V. 5 NAME,TRADEMARK,LOGOS OF 'SPENCER STUART' AND THE RI GHTS 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 O F SSIPL,THAT THE LICENSE FEE AMOUNTING TO RS.3,85,47,171/- RECEIVED BY THE ASSESSEE FROM SSIP L,AS PER THE LA,WAS OFFERED TO TAX AS ROYALTY AS PER THE PROVISIONS OF THE ACT R.W.ARTICL E 12(4) OF THE INDIA-NETHERELANDS DTAA, THAT IT HAD ALSO ENTERED INTO A SA WHEREBY, BOTH SS IPL 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 ASSESS EE,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 TAXABL E IN INDIA IN THE ABSENCE OF A PE IN INDIA. THAT IT ALSO CLAIMED THAT THE SEARCH FEE WAS NOT TA XABLE AS FTS IN VIEW OF ARTICLE 12(5) OF THE DTAA,THAT THE AO IN HIS DRAFT ASSESSMENT ORDER PROP OSED 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 GOV ERNED BY SEPARATE AND DISTINCT AGREEMENTS ENTERED INTO BY THE ASSESSEE AND SSIPL AND THEY WOU LD CONSTITUTE DIFFERENT SOURCES OF ITS INCOME FOR THE YEAR UNDER CONSIDERATION.IN OTHER WO RDS,RECEIPT OF SEARCH FEE BY THE ASSESSEE WAS INDEPENDENT OF EARNING THE LICENSE FEE.AS PER T HE SA SEARCH FEES WAS TO BE DETERMINED ON THE BASIS OF RELATIVE CONTRIBUTION OF EACH PARTY,WH ICH 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 O F RIGHT,PROPERTY ETC. GOVERNED BY THE LA. SERVICES, ANCILLARY AND SUBSIDIARY TO THE USE OF LI CENSE / TRADEMARK/SOFTWARE ARE PROVIDED FOR IN THE LA AND SAME HAD NO CORRELATION WITH THE SA.I T 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 ASSOCIAT ION (MOA) OF SSIPL (PG. 288-293 OF THE PB.),THE PRINCIPAL BUSINESS OF SSIPL WAS TO CAR RY OUT OR EXECUTION OF EXECUTIVE SEARCHES AND THEREFORE, THE ESF CANNOT BE TREATED AS ANCILLA RY/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 A S FTS IT SHOULD MAKE AVAILABLE TECHNICAL KNOWLEDGE, EXPERIENCE, SKILL, KNOW-HOW, OR PROCESSE S,OR IT SHOULD CONSIST OF THE DEVELOPMENT 1696/M/15-SPENCER STUART INTERNATIONAL B.V. 6 /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 TH E INCLUSION OF THE SHARING CLAUSE(CLAUSE (BB) TO ARTICLE 3)IN THE LA TO ARRIVE AT THE CONCLU SION 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 A NCILLARY IN NATURE TO THE LA.WE FIND THAT THE FAA HIS ORDERS,DATED 16/09/2016,FOR THE AY.S. 2 012-2013 TO 2014-15,IN CONTEXT OF THE PROCEEDINGS U/S 201 OF THE ACT,HAS DECIDED THE IDEN TICAL ISSUE IN FAVOUR OF SSIPL AND HAS HELD THAT SEARCH FEES REMITTED BY SSIPL TO THE ASSE SSEE DID NOT REPRESENT FEES FOR TECHNICAL SERVICES UNDER ARTICLE 12(5)(A) OF THE INDIA-NETHER LANDS DTAA AND WAS NOT SUBJECT TO TDS U/S.195 OF THE ACT.WE FIND THAT THE FAA HAS REFERRE D TO THE APA ENTERED BETWEEN SSIPL AND THE GOVERNMENT OF INDIA.AS PER THE APA,A SEPARATE B ENCHMARKING 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 COVERE D TRANSACTIONS SHALL BE PROFIT SPIRT METHOD(PSM)FOR PAYMENT AND RECEIPT IN RELATION TO C ROSS-BORDER EXECUTIVE SEARCH TRANSACT - TION AND COMPARABLE UNCONTROLLED PRICE(CUP)METHOD F OR PAYMENT OF LICENSE FEES TRANSACT - TION. CONSIDERING THE ABOVE,WE ARE OF THE OPINION THAT TH E SEARCH FEE AND LICENSE FEE WERE DISTINCT FROM EACH OTHER AND THAT THE SEARCH FEE RECEIVED UN DER 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 B OTH THE AGREEMENTS WERE SEPARATE AND THAT ONLY LICENCE FEES WAS TAXABLE.SO,WE HAVE NO HESITAT ION 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 INDEP ENDENT OF THE LA AND WAS NOT TAXABLE IN INDIA.FIRST EFFECTIVE GROUND OF APPEAL IS DECIDED I N FAVOUR OF THE ASSESSEE. 4. NEXT GROUND OF APPEAL IS ABOUT TREATING A SUM OF RS .70.36 LAKHS REIMBURSED TO THE ASSESSEE BY THE INDIAN ENTITY FOR EXPENSES INCURRED ON ITS B EHALF AT COST AS TAXABLE.IT WAS FOUND THAT THE ASSESSEE HAD CLAIMED TO HAVE RECEIVED REIMBURSEMENT OF EXPENSES OF RS.70,36,915/-FROM SSIPL UNDER THE HEADS MARKETING SERVICES(RS.15.02 L AKHS),INSURANCE COVERAGE(RS.26.27 LAKHS),SOFTWARE LICENSE EXPENSES(RS. 5.95 LAKHS),FI XED ASSETS PURCHASED (RS. 16.58 LAKHS)IT SUPPORT SERVICES(RS. 6.2 LAKHS),POSTSEASON DELIVERY CHARGES AND MISCELLANEOUS EXPENSES (RS. 28,506/-).IT WAS CLAIMED THAT THE AMOUNTS RECEIVED BY IT WERE PURELY IN THE NATURE OF REIMBURSEMENT OF EXPENSES AND COULD NOT BE TREATED AS INCOME. 1696/M/15-SPENCER STUART INTERNATIONAL B.V. 7 HOWEVER,THE AO AFTER RECEIVING THE DIRECTIONS OF TH E DRP HELD THAT SEARCH FEES WERE TO BE TREATED AS FEES FOR TECHNICAL SERVICES UNDER ARTICL E I2(5)(A) OF THE DTAA,THAT THE REIMBURSE - MENT OF EXPENSES WAS ALSO TO BE TAXED AS FTS 4.1 .BEFORE US,THE AR STATED THAT THE ASSESSEE HAD INCU RRED VARIOUS EXPENSES ON BEHALF OF THE INDIAN ENTITY,THAT IT WAS A PURE CASE OF REIMBURSEM ENT,THAT REIMBURSEMENT WAS CONNECTED WITH SERVICE AGREEMENT(PG.123B AND 123C OF THE PB).HE RE FERRED TO PARAGRAPHS 2.1.4 AND 2.1.5 OF THE AGREEMENTS AND STATED THAT MONEY RECEIVED BY TH E ASSESSEE WAS NOT FTS,THAT AT PAGE 134 OF THE PB WAS EXACT COMPUTATION OF THE REIMBURSEMEN T, ,THAT CLAUSES 2(A)(I) TO 2(A)(V) OF THE SA DEFINED THE SCOPE OF THE SEARCH SERVICES,THAT C LAUSE 2(A)(V) OF THE SA (PG.123B OF THE PB.)PROVIDED THAT THE REIMBURSEMENT RELATED TO SEAR CH SERVICES WOULD FORM PART OF THE SEARCH FEES,THAT THE SA PROVIDED THAT THE ASSESSEE COULD F ROM TIME TO TIME INCUR CERTAIN EXPENSES ON BEHALF OF SSIPL AND WOULD SEPARATELY BILL THE SAME , THAT THE DISPUTED EXPENSES WERE NOT PART OF SEARCH SERVICES AND HENCE THE SAME WERE NOT RELA TED TO SEARCH FEES,THAT THE REIMBURSEMENTS UNDER CONSIDERATION DID NOT FORM PART OF PARAGRAPH 2(A)(V) OF THE SA ,SOME OF THEM ARE COVERED BY PARAGRAPH 2(A)(VI) OF THE SA.HE FURTHER STATED THAT WHILE COMPLETING THE ASSESSMENTS FOR THE AY.S.2009-10 AND 2010-11,THE AO HAD NOT TAXED THE SIMILAR AMOUNTS..HE RELIED UPON THE CASE OF A P MOLLER (392 ITR 186).TH E DR SUPPORTED THE ORDER OF THE AO. 4.2. WE FIND THE ASSESSEE HAD RECEIVED PAYMENTS FROM SSI PL TOWARDS REIMBURSEMENT OF EXPENSES AMOUNTING TO RS.70,36,912,THAT THE EXPENSE S REIMBURSED TO THE ASSESSEE BY SSIPL WERE MAINLY TOWARDS TRAVEL AND STAY, VIDEO CONFEREN CING CHARGES, INSURANCE, REIMBURSEMENT FOR PURCHASE OF FIXED ASSETS AND OTHER MISCELLANEOU S EXPENSES,THAT THE REIMBURSEMENT OF THE EXPENSES WERE SUPPORTED BY THIRD-PARTY INVOICES,THA T THE REIMBURSEMENTS RELATED TO SERVICE AGREEMENT BETWEEN THE ASSESSEE AND SSIPL FOR SHARIN G THE COMPANY SERVICES,THAT THE SERVICES PROVIDED BY THE ASSESSEE WERE PURELY PASSED ON AS R EIMBURSEMENT OF ACTUAL COST WITHOUT ANY MARKUP.WE HOLD THAT MARKETING SERVICES ARE PRIMARI LY IN THE NATURE OF TRAVEL AND STAY ABROAD FOR INDIAN EMPLOYEES VISITING OVERSEAS FOR GLOBAL M EETINGS,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 CO NFIRMATION LETTER DATED 6/3/2014 SUBMITTED TO THE AO BY SSIPL PERTAINING TO PURCHASE OF FIXED ASS ETS AMOUNTING TO RS.16,58,018 IS PART OF THE PB.IN OUR OPINION,REIMBURSEMENT OF EXPENSES WOU LD NOT CONSTITUTE FTS AS PER ARTICLE 12 OF THE TAX TREATY. 1696/M/15-SPENCER STUART INTERNATIONAL B.V. 8 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 B OOKED CARGO AND ACTED AS CLEARING AGENTS FOR THE ASSESSEE,THAT IN ORDER TO HELP ALL ITS AGEN TS ACROSS THE GLOBE, THE ASSESSEE HAD SET UP AND MAINTAINED A GLOBAL TELECOMMUNICATION FACILITY CALL ED MAERSK NET SYSTEM WHICH WAS A VERTICALLY INTEGRATED COMMUNICATION SYSTEM. THE AGE NTS WOULD PAY FOR THE SYSTEM ON PRO RATA BASIS. ACCORDING TO THE ASSESSEE,IT WAS MERELY A SY STEM OF COST SHARING AND THE PAYMENTS RECEIVED BY THE ASSESSEE FROM ITS AGENTS IN INDIA W ERE IN THE NATURE OF REIMBURSEMENT OF EXPENSES.THE AO, HOWEVER,DID NOT ACCEPT THIS CONTEN TION AND HELD THAT THE AMOUNTS PAID BY THESE THREE AGENTS TO THE ASSESSEE WERE FTS RENDERE D BY THE ASSESSEE AND HELD THEM TAXABLE IN INDIA UNDER ARTICLE 13(4)OF THE DOUBLE TAXATION AVO IDANCE AGREEMENT(DTAA)BETWEEN INDIA AND DENMARK AND BROUGHT THEM TO TAX AT 20% U/ S.115A OF THE ACT.FAA DISMISSED THE ASSESSEES APPEAL,BUT THE TRIBUNAL ALLOWED ITS FURT HER APPEAL.THE HONBLE HIGH COURT DISMISSED THE DEPARTMENTS APPEAL HOLDING THAT THE TRIBUNAL HAD RIGHTLY OBSERVED THAT THE MAERSK-NET-COMMUNICATION-SYSTEM WAS AN AUTOMATED SO FTWARE BASED COMMUNICATION SYSTEM WHICH DID NOT REQUIRE THE ASSESSEE TO RENDER ANY TE CHNICAL SERVICES,THAT IT WAS MERELY A COST SHARING ARRANGEMENT BETWEEN THE ASSESSEE AND ITS AG ENTS 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 HONBLE SUPREM E COURT,DISMISSING THE APPEAL HELD AS UNDER: . THE FACTS THAT THE ASSESSEE HAD ITS INFORMATIO N TECHNOLOGY SYSTEM, THAT THE ASSESSEE HAD APPOINTED AGENTS IN VARIOUS COUNTRIES FOR BOOKING O F CARGO AND SERVICING CUSTOMERS IN THOSE COUNTRIES, PREPARING DOCUMENTATION, ETC., THROUGH T HESE AGENTS, THAT FOR THE SAKE OF CONVENIENCE OF ALL THESE AGENTS, A CENTRALISED SYSTEM WAS MAINTAIN ED TO AVOID UNNECESSARY COST, THAT THE SYSTEM COMPRISED BOOKING AND COMMUNICATION SOFTWARE, HARDW ARE AND A DATA COMMUNICATIONS NETWORK AND WAS, THUS, AN INTEGRAL PART OF THE INTERNATIONA L SHIPPING BUSINESS OF THE ASSESSEE AND RAN ON A COMBINATION OF MAINFRAME AND NON-MAINFRAME SERVERS LOCATED IN DENMARK, THAT THE EXPENDITURE INCURRED FOR RUNNING THIS BUSINESS WAS SHARED BY AL L THE AGENTS AND THAT THE SYSTEMS ENABLED THE AGENTS TO CO-ORDINATE CARGOS AND PORTS OF CALL FOR ITS FLEET WERE FINDINGS OF FACT. ONCE THESE WERE ACCEPTED, BY NO STRETCH OF IMAGINATION, COULD THE P AYMENTS MADE BY THE AGENTS BE TREATED AS FEES FOR TECHNICAL SERVICES. THE PAYMENTS WERE IN THE NA TURE OF REIMBURSEMENT OF COST WHEREBY THE THREE AGENTS PAID THEIR PROPORTIONATE SHARE OF THE EXPENSES INCURRED ON THESE SAID SYSTEMS AND FOR MAINTAINING THOSE SYSTEMS. NEITHER THE ASSESSING OF FICER NOR THE COMMISSIONER (APPEALS) HAD STATED THAT THERE WAS ANY PROFIT ELEMENT EMBEDDED I N THE PAYMENTS RECEIVED BY THE ASSESSEE FROM ITS AGENTS IN INDIA. ONCE THE CHARACTER OF THE PAYM ENT 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 AC CEPTED 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 T HE AGENTS OF THE ASSESSEE AS WELL IN ORDER TO ENABLE THEM TO DISCHARGE THEIR ROLE MORE EFFECTIVEL Y AS AGENTS, AND THE BUSINESS COULD NOT BE CONDUCTED WITHOUT IT, IT COULD NOT BE TREATED AS AN Y TECHNICAL SERVICES PROVIDED TO THE AGENTS. 1696/M/15-SPENCER STUART INTERNATIONAL B.V. 9 CONSIDERING THE ABOVE,WE DECIDE SECOND GROUND OF AP PEAL IN FAVOUR OF THE ASSESSEE. 5. LAST GROUND OF APPEAL IS ABOUT SHORT CREDIT OF TDS OF RS.70,567/-.THE AO IS DIRECTED TO VERIFY THE FACTS AND ALLOW CREDIT IF THE CLAIM MADE BY THE ASSESSEE IS FOUND TO BE FACTUALLY CORRECT. LAST GROUND STANDS PARTLY ALLOWED. AS A RESULT, APPEAL FILED BY THE ASSESSEE STANDS PA RTLY ALLOWED. ! . ORDER PRONOUNCED IN THE OPEN COURT ON 1 ST JUNE , 2018. ' # $ 01 , 2018 SD/- SD/- ( / RAM LAL NEGI ) ( %'& / RAJENDRA ) ' '( / JUDICIAL MEMBER / ACCOUNTANT MEMBER MUMBAI; /DATED : 01 .06 .2018. JV.SR.PS. / COPY OF THE ORDER FORWARDED TO : 1. ASSESSEE / 2. RESPONDENT / 3. THE CONCERNED CIT(A)/ , 4. THE CONCERNED CIT / 5. DR L BENCH, ITAT, MUMBAI / , , . . . 6. GUARD FILE/ //TRUE COPY// / BY ORDER, / DY./ASST. REGISTRAR , /ITAT, MUMBAI.