Korn Ferry (US) Vs ACIT (ITAT Delhi)
Conclusion: Amount received as reimbursements for expenses related to software subscription services should not be taxed as technical services income under Article 12 of the of the India-USA Double Taxation Avoidance Agreement ( DTAA ) or Section 9(1)(vii).
Held: Assessee-company received Rs.55,29,572/- for reimbursement and general management charges. It had submitted before AO that reimbursement/general management charges had been received by it from Future step Recruitment Services Pvt. Ltd. and Hay Consultants India Private Limited, which were wholly-owned subsidiaries. Assessee acted as a central hub for its affiliates, buying services like Cyberreason Antivirus, LinkedIn, and Microsoft. The costs were then shared among the affiliates, helping them save on expenses compared to buying these services on their own. It also stated that the Rs.55,29,572/- was for reimbursing expenses related to software subscription services. Assessee provided a copy of the Master Services Agreement between Resource LLC and Korn/Ferry International Futurestep. The agreement showed that Resource LLC was providing mobile and online services as a Global Provider on a Software as a Service ( SaaS ) basis. Assessee accessed these services through Resource LLC by paying monthly fees as agreed. Resource LLC appointed the assessee as a distributor of the platform to client companies, allowing the partner to use the platform for its own needs or on behalf of clients. AO based on the agreement contended that the assessee was providing services to its clients after getting licenses from service providers and setting up a central platform for further licensing. Assessee charged only for using this infrastructure, not for the software itself. The services were provided with a markup as allowed in the contract. AO contended that because there was a markup on the charges, the receipts were considered income from technical services rather than mere reimbursement. Therefore, AO treated these receipts as taxable technical services income under both the Act and the DTAA. AO relied on the case Rieter Machine Works Limited Vs. ACIT wherein it was held that costs recovered for third-party software, used in IT services for an Indian company, were taxable as ‘Fees for Technical Services’ or ‘royalty’ under the DTAA. Assessee, aggrieved by the decision of the AO appealed before the tribunal. It was noted by Tribunal that assessee received Rs.28,76,000 from Futurestep Recruitment Services Pvt. Ltd. and Rs.26,52,000 from Hay Consultants India Pvt. Ltd., which were the only subsidiaries. Assessee procured services from third parties and relevant costs was passed on to by assessee to the affiliates benefiting from such services. Assessee paid to the sellers and in turn got the money reimbursed from their associates. Hence, the same could not be taxed. Even otherwise also, it would not partake the character of fee for inclusive services (FIS) as no knowledge or know-how was made available to the associates.
