2013 (1) TMI 796 - AT - Income Tax

Nature of Fees for technical services - Held that - The assessee co. is incorporated in Hongkong and belongs to the CLSA Group of companies - amount in question received by the assessee company from CLSA India Ltd. - It was contended that the said contribution was paid towards reimbursement of various indirect overhead expenses incurred by the assessee company without any markup or service charges and the same being recovery of the overhead expenses actually incurred by the assessee company without any profit element, the same did not constitute income of the assessee company - the additional evidence filed by the assessee is very much relevant for deciding the issue under consideration - matter is remitted to CIT (Appeals) in order to give an opportunity to the learned CIT (Appeals) to verify the additional evidence and decide the issue afresh on such verification - Matter remanded back for statistical purposes Addition made on account of referral fees treating it in the nature of fees for technical services - whether the referral fees received by the assessee who is a non-resident in India from CLSAI is chargeable to tax in India - Held that - there was no business income in India of the applicant u/s 9(1)(i) nor even the deemed income as per Explanation 2 to sec 9(1)(i) - the referral fees paid by the Indian company was not fees for technical services u/s 9(1)(vii) - the referral fees received by the assessee is not taxable in India as per the case of Cushman and Wakefield (S) Pet. Ltd. (supra) - addition made by the AO and confirmed by the CIT on this issue is deleted - Decided in favor of assessee

Issues Involved:
1. Addition of Rs. 4,22,23,050/- as "Fees for technical services."
2. Addition of Rs. 7,73,58,162/- as referral fees treated as "Fees for technical services."

Issue 1: Addition of Rs. 4,22,23,050/- as "Fees for technical services"

The first issue pertains to the addition of Rs. 4,22,23,050/- made by the Assessing Officer (AO) and confirmed by the Commissioner of Income Tax (Appeals) [CIT(A)] on account of the payment received by the assessee towards recovery of overhead expenses from CLSA India Ltd., treating it as "Fees for technical services."

The assessee, a Hong Kong-based company, received Rs. 4,22,23,050/- from CLSA India Ltd. as a recovery of the share of indirect overhead expenses. The AO, noticing that CLSA India Ltd. had deducted tax at source from this payment, classified it as fees for technical services under section 9(1)(vii) of the Income Tax Act, making it taxable in India.

The assessee argued before the CIT(A) that the payment was merely a reimbursement of expenses without any markup or profit element, citing the group's practice and an overhead expenses reimbursement agreement. The CIT(A), however, found the assessee's evidence insufficient to prove that the payment was purely a reimbursement. The CIT(A) noted the lack of global accounts and supporting vouchers, leading to the conclusion that the payment was for technical services, thus taxable.

Upon appeal, the Tribunal allowed the assessee to submit additional evidence supporting its claim that the amount was a reimbursement without profit. The Tribunal remitted the matter back to the CIT(A) for verification of this additional evidence, directing a fresh decision on this basis.

Issue 2: Addition of Rs. 7,73,58,162/- as referral fees treated as "Fees for technical services"

The second issue involves the addition of Rs. 7,73,58,162/- received by the assessee as referral fees from CLSA India Ltd., which the AO and CIT(A) treated as fees for technical services.

The assessee explained that it referred overseas institutional clients to CLSA India Ltd., an Indian stockbroker, for which it received referral fees. The AO rejected the assessee's claim that this was not fees for technical services, instead treating it as such under section 9(1)(vii).

The CIT(A) upheld this view, noting that the referral fees arose from brokerage payments made in India, thus deeming the income to have accrued in India. The CIT(A) also classified the services as managerial and consultancy services, falling under the definition of fees for technical services. The CIT(A) relied on various judicial precedents, including the Authority for Advance Ruling (AAR) in Raju Malhotra and other Tribunal decisions, to support this conclusion.

The Tribunal, however, disagreed with the CIT(A)'s reliance on these precedents, particularly noting that the AAR's decision in Raju Malhotra did not consider Explanation 1(a) to section 9(1)(i), which requires business operations to be carried out in India for income to be deemed as accruing in India. The Tribunal also referred to the decision in Cushman and Wakefield (S) Pte Ltd., where similar referral fees were not considered fees for technical services.

The Tribunal concluded that the referral fees received by the assessee did not constitute fees for technical services and were not taxable in India. Consequently, the addition made by the AO and confirmed by the CIT(A) on this issue was deleted.

Conclusion:

The appeal of the assessee was allowed, with the Tribunal remitting the first issue back to the CIT(A) for fresh consideration based on additional evidence and deleting the addition related to the second issue.

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