Amount Received from Indian Associate for ‘Support Service’ is not ‘Fees for included Services’ and not liable to Tax: ITAT [Read Order]

The Delhi Bench of Income Tax Appellate Tribunal ( ITAT ) has held that amount received from Indian Associate for ‘Support Service’ is not ‘Fees for Included Services’ and not liable to tax.

The Appellant M/s. Russell Reynolds, was incorporated under the laws of the United States of America and is engaged in the business of providing human resources advisory services to its clients, recruiting and retaining senior-level executives, and further assisting them in mitigating the risks associated with the senior-level appointments. It also provides management support services to its group companies.

The Income-tax return filed by the appellant shows only the royalty income received from Russell Reynolds Associates India Private Limited (RRAIPL) in terms of the ‘Licensing Agreement’ for use of Intellectual Property Rights. AO u/s 143(3) added the amount of support services under the ‘Services Agreement” as Fees for Included Services (FIS) under Article 12(4)(a) of India-USA DTAA. The CIT (A) upholds the addition and the aggrieved assessee filed an appeal before the ITAT.

The appellant submitted that such services are rendered for the day-to-day management of work of RRAIPL and qualify as ‘managerial’ services, which are not chargeable to tax as per Article 12 of India-US DTAA. Appellant further submitted that receipts from support services are not ‘income’ per se in the hands of the recipient in absence of any profit element and accordingly are not chargeable to tax in India also the support services are not ancillary and subsidiary to the services provided under the licensing agreement under Article 12 (4)(a) of the treaty as held by First Appellate Authority.

The Tribunal observed there is no recital in the agreement which would indicate that the use of tangible by Indian Associate was in any way necessary for the effective application or enjoyment of right, property, or information, for which the royalty was agreed to be paid. The services rendered were not customarily provided and it is also not established by the Revenue on the basis of any cogent evidence that such services are customarily provided in cases of licensing agreements for the use of Trade Marks.

The Coram of Sri Anil Chaturvedi, Accountant Member, and Sri Anubhav Sharma, Judicial Member while allowing the appeal has held that “thus, the learned FAA has fallen in error in squaring up the case of the assessee in terms of memorandum to the Treaty and giving a finding that the predominant factor is the grant of license to use the name which gives rise to royalty and all other payments and agreement flow from principal licensor – licensee agreement. Thus the finding of FAA, that the five determining factors for the classification of the consideration under paragraph 4(a) are clearly satisfied in the appellant’s case is not sustainable. Thus, the findings of the learned FAA deserve to be reversed. The ground is sustained”.

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