2018 (7) TMI 2031 - AT - Income Tax

TDS u/s 195 - default u/s 201(1) 201(1A) - search services rendered by the assessee to its clients based on utilization of data base received by assessee under separate license agreement - PE in India - DTAA with Netherlands - HELD THAT - As gone through the tribunals order in the case of Spencer Stuart International BV 2018 (6) TMI 359 - ITAT MUMBAI 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. - Decided against revenue

Summary

Issues Involved:
1. Tax withholding obligation on search fee payments.
2. Nature of search fee under the India-Netherlands DTAA.
3. Relationship between license agreement and service agreement.
4. Applicability of Article 12(5)(a) of the India-Netherlands DTAA.
5. Treatment of search fee as business income or fee for technical services (FTS).
6. Relevance of Advance Pricing Agreement (APA).

Detailed Analysis:

1. Tax Withholding Obligation on Search Fee Payments:
The primary issue revolved around whether the assessee had a tax withholding obligation under Section 195 of the Income Tax Act for search fee payments made to Spencer Stuart (India) Pvt. Ltd. (SSIPL). The Assessing Officer (AO) treated the assessee in default for non-deduction of TDS, considering the search fee as ancillary to the license agreement and thus taxable as fee for technical services (FTS) under Article 12(5)(a) of the India-Netherlands DTAA.

2. Nature of Search Fee under the India-Netherlands DTAA:
The AO concluded that the search fee was ancillary and subsidiary to the license agreement, thus falling under the definition of FTS as per Article 12(5)(a) of the India-Netherlands DTAA. The AO emphasized that the search fee was related to the application or enjoyment of rights under the license agreement, which included sharing of income from referral clients.

3. Relationship Between License Agreement and Service Agreement:
The AO argued that the service agreement between the assessee and SSIPL was not independent but flowed from the license agreement. This was based on the clauses in the license agreement that mandated the sharing of referral income and the execution of cross-border assignments through SSIBV. Consequently, the AO held that the search fee was essentially a payment for services ancillary to the license agreement.

4. Applicability of Article 12(5)(a) of the India-Netherlands DTAA:
The CIT(A) reversed the AO’s findings, stating that the search fee did not fall within the parameters of Article 12(5)(a) of the DTAA. The CIT(A) observed that the services rendered under the service agreement were not connected with the rights for which the royalty payment was made. The CIT(A) noted that the search fee was related to the actual work performed for clients and not to the enjoyment of the database or other rights under the license agreement.

5. Treatment of Search Fee as Business Income or Fee for Technical Services (FTS):
The CIT(A) held that the search fee was business income and not FTS, as it did not make available technical knowledge, experience, skill, know-how, or processes. The CIT(A) also referred to the APA, which treated the income from such services as business profits, not as ancillary to the license fee.

6. Relevance of Advance Pricing Agreement (APA):
The CIT(A) and the Tribunal both referred to the APA between the assessee and the Indian Government. The APA specified that the payments for cross-border executive search transactions were treated as business profits and apportioned using the Profit Split Method. The APA also indicated that the license fee and service fee were distinct and treated separately.

Tribunal’s Judgment:
The Tribunal upheld the CIT(A)’s decision, confirming that the search fee was not in the nature of FTS under Article 12(5)(a) of the India-Netherlands DTAA. The Tribunal referenced a previous case (Spencer Stuart International BV vs. ACIT) where it was held that the search fee did not qualify as FTS because it did not make available technical knowledge or skills. The Tribunal also noted that the AO had previously treated the license fee and search fee as separate, reinforcing the CIT(A)’s view that the search fee was independent of the license agreement and not taxable as FTS.

Conclusion:
The Tribunal dismissed the Revenue’s appeals, affirming that the search fee paid by the assessee to SSIPL was not taxable as FTS under the India-Netherlands DTAA and did not warrant TDS under Section 195 of the Income Tax Act. The judgment emphasized the distinct nature of the license and service agreements and the treatment of search fee as business income, supported by the APA.