TMI Blog2018 (6) TMI 359X X X X Extracts X X X X X X X X Extracts X X X X ..... gement 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 - I.T.A./1696/Mum/2015 - - - Dated:- 1-6-2018 - Shri Rajendra,Accountant Member And Ram Lal Negi,Judicial Member For The Revenue : Shri Samuel Darse-CIT-DR assessee by: S/Shri Mukesh Butani/Shreyash Shah Order u/s.254(1)of the Income- tax Act,1961(Act) PER RAJENDRA, AM Challenging the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... )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 order and the objections of the assessee, that DRP referred to the clause(bb)to Article 3 of the LA 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 and fees thereon was to be consistent with the licensor s policies, that the terms and conditions relating to the ESF was inbuilt in the LA itself. Referring to the SA, the DRP observed that the parties had entered into an agreement to provide support and services to each other on principal 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 member s economic contribution to cross-border search business, that as per Article (2a) (ii) on a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that it was only on account of the obligation cast upon the Indian company under the LA that it was bound to execute all cross-country search assignments through Netherland entity, that it was only on account of search assignment 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 the licence fee and search fee and by the assessee under the LA were in nature of royalty which was taxable in India, that the search fee of ₹ 5. 39 crore received from Indian entity by the AE was nothing but fee for services which were ancillary and subsidiary to the application or enjoyment of the right/ property /information for which a payment , described in Article 12 of the tax treaty, was received. Finally, rejecting the objections filed by the assessee, it held that fee of ₹ 5, 39, 62, 507/-was taxable in India. 3. Before us, the Authorised Representative(AR)stated that during the assessment proceedings, the assessee was asked as to why it should not be taxed as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 not 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 parcel of the same transaction, that the search fees received by the assessee was ancillary and subsidiary 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 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 ₹ 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erience, 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 App ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee was not FTS, that at page 134 of the PB was exact computation of the reimbursement, , that clauses 2(a)(i) to 2(a)(v) of the SA defined the scope of the search services, that clause 2(a)(v) of the SA (Pg. 123B of the PB. )provided that the reimbursement related to search services would form part of the search fees, that the SA provided that the assessee could from 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 related 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). The DR supported the order of the AO. 4.2. We find the assessee had received payments from SSIPL towards reimbursement of expenses amounting to ₹ 70, 36, 912, that the expenses reimbursed to the assessee by SSIPL were mainly towards travel and stay, video confer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tomated 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, preparing documentation, etc. , through these agents, that for the sake of convenience of all these agents, a centralised system was maintained to avoid unnecessary cost, that the system comprised booking and communication software, hardware and a data communications network and was, thus, an integral part of the international 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 all the agents and that the systems enabled the agents to ..... X X X X Extracts X X X X X X X X Extracts X X X X
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