The Hindu Business Line : It's all over hooking talent

Finding head honchos for companies can be a tough task. Is a franchisee using its principal's database for this purpose eligible for tax concessions?

THE World is small, is getting smaller, but it can "seem a very large place when trying to find a quality candidate to fill your needs," says www.boyden.com. "Boyden can be of assistance with worldwide offices linked by technology, highly experienced search professionals and a commitment to delivering value," says the site. But Boyden was the subject matter of discussion - not directly, but through a franchisee called Tristar Consultants - in a recently reported case of the Income Tax Appellate Tribunal, Mumbai.

Simply put, the dispute was this: Tristar said it was providing `technical or professional services' within the meaning of Section 80-O of the Income-Tax Act, but the Revenue said that Tristar's services were "no different from those of any other commonplace employment or recruitment bureau/establishment." For starters, Section 80-O is a sunset provision that grants tax concession to royalty, commission, fees and so on, received from foreign enterprises.

Database at the core

Tristar submitted that it used Boyden's know-how in its `executive search business', which involved "assisting of corporations and other entities in the determination and placement of suitable candidates for management or specialist positions," including that of the CEO. "These services are essentially vastly different from those provided by a common employment or recruitment bureau, which does no more than to register certain broad details, advertise for the positions and perform the function of recruitment," averred the company, and pointed out that `executive search' was gaining importance as a diploma course in institutions such as the J.K. Kellogg School of Business Management.

At the core of Tristar's work was "a database of more than 40,000 executives," compiled by "studying annual reports, contacting people who matter, referring to various journals and gathering market information." The database contained "a confidential SWOT analysis" of the candidates too. When approached by clients looking to appoint executives, Tristar used its database to advise them. It also gave them an evaluation report with its judgment "about the acceptability and usefulness of candidates to the client organisation."

Cases for and against

The Department contended that according to a 1981 decision in Eastman Consultants P. Ltd, there was no concession for "mere supply of particulars or bio-data of various Indians willing to work abroad and their selection or recruitment in India." However, Tristar had another case to rely on: that of E.P.W. Da Costa (1980) where an audience research study for BBC in the Hindi-speaking areas in Indian states to assess the radio-listening habits of the people was considered eligible for Section 80-O benefit.

A.D. Jain, Judicial Member of ITAT, observed that the Eastman Consultants case would not help the Revenue because the facts were not alike. Eastman had claimed Section 80-O benefit for conveying names of suitable candidates to foreign employers through `cryptic letters', and the court had held that the info so provided was not of the nature of `industrial, commercial, or scientific knowledge, experience or skill'. Tristar was not merely `conveying' names, reasoned the Tribunal. It prepared `comprehensive reports', to help in the formulation of `final selection'; assisted in `designing and structuring compensation packages'; and undertook `compensation studies' to help clients restructure in tune with the market. "The advice is finally based on the exclusive high quality database maintained by the assessee on reliable statistical theories of psychological analysis tests and ratios, which have contributed to formulating judgments," stated Jain. Therefore, Tristar's services belonged to the category of "advanced management consultancy services."

The search for quality management professionals is a task calling for "extreme sensitivity, caution, professionalism and confidentiality" - a specialised job that only "the best executive search consultants" can be entrusted with, and Tristar "undoubtedly qualifies to be that," said Jain. "That big corporations and multinationals have retained the assessee as their executive research consultant speaks volumes of the fact that the assessee has carved out a niche for itself as specialised professionals and consultants and that the information and services provided by it are of much value to foreign companies."

Professional services

A paragraph of the order discusses the meaning of `professional services'. Traditionally, a profession implied any vocation "requiring predominantly intellectual skills, dependent on individual characteristics of the person pursuing that vocation, requiring specialised and advanced education or expertise." But commercial or scientific knowledge is not confined to "the abstract exposition of commercial or scientific theories," in which case a book would suffice. Specialised knowledge also extends to industry study and deducing of "potential capability of a prospective candidate," which Tristar performed.

Jain, therefore, opined: "It would be foolhardy in today's age, which is aptly known as the age of information, to restrict and constrict the meaning of `professional services' to the classical concept," in the context of "ever-expanding horizons of human endeavour."

Moral: Not all databases are equal. Some are `executive' class.

Picture by R. Ragu

Cases@TheHindu.co.in

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