ITAT rejects tax department’s FTS, royalty claims on Spencer Stuart’s executive search fees

The income-tax tribunal has ruled in favour of executive search firm Spencer Stuart International BV in a dispute over the taxation of fees received from its Indian affiliate, holding that executive search fees could not be treated as fees for technical services under the India-Netherlands tax treaty.

The Mumbai bench of the Income Tax Appellate Tribunal, partly allowing the appeal filed by the executive search firm, also deleted a tax addition relating to reimbursement of expenses and sent a separate dispute over management fees back to the tax authorities for fresh examination.

In this case, the revenue department sought to characterise the executive search fees received by Spencer Stuart International BV from Spencer Stuart (India) Pvt Ltd as fees for technical services under Article 12 of the India-Netherlands tax treaty. It had alternatively sought to treat the payments as royalty.


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The division bench of Vice President Saktijit Dey and Accountant Member Bijayananda Pruseth rejected the Revenue's attempt to treat the executive search fees as fees for technical services or royalty and directed the Assessing Officer to delete the addition. It separately restored the dispute relating to management fees to the Assessing Officer for fresh examination after providing due and reasonable opportunity of being heard to the assessee.

Hitesh Sawhney, Partner, Price Waterhouse & Co. LLP, said the ruling reaffirms that the tax treatment of cross-border services must be determined by examining the nature and character of the services and the agreements under which the relevant income arises.

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“By distinguishing executive search services under the Service Agreement from royalty-bearing rights under the separate License Agreement, the Tribunal held that the two revenue streams constituted distinct sources of income and could not be treated as a single bundled transaction,” said Sawhney.

Before the appellate tribunal’s order, the executive search firm, through counsel Mukesh Butani and Shruti Agarwal, argued that the issue regarding the nature and character of the executive search fee, whether in the nature of FTS/royalty or business income, came up for consideration before the Tribunal in the assessee's case in Assessment Years 2011-12 to 2019-20. The company submitted that in past assessment years, the Tribunal has consistently held that the fee received is neither in the nature of Fees for Technical Services (FTS) nor a royalty.

The assessing officer had classified the payments as fees for technical services. But the tribunal noted that Article 12(5) of the India-Netherlands treaty does not include managerial services within its scope.

“The decision also provides guidance that executive search fees could not be characterised as fees for technical services under the India-Netherlands DTAA, as the Tribunal found that the executive search services did not make available technical knowledge, experience, skill, know-how, processes, or a technical plan or design, as contemplated by the India-Netherlands DTAA,” said Sawhney. “For management fees, it noted that managerial services are outside the purview of the definition of Fee for Technical Services under the India-Netherlands DTAA, but directed a service-by-service examination of the bundled services as per the agreement,” he added.

The dispute involved management fees of about Rs 14.06 crore received under a shared services agreement. The agreement covered financial services, firm-wide marketing, oversight and management, administrative services, legal and tax services, information technology, and worldwide database services.