2018 (2) TMI 969 - AT - Income Tax

Income accrued in India - Referral fees received by the assessee from Credit Suisse Securities (India) Pvt. Limited - constitute Fees for Technical services - HELD THAT - Merely because the fee was payable by the Indian Company to CSDB after execution of the work of the referred client is no ground to determine the nature of the payment. In this context, the Authority for Advance Rulings in the case of Cushman Wakefield(S) Pte. Ltd., 2008 (7) TMI 8 - AUTHORITY FOR ADVANCE RULINGS has dealt with a somewhat similar situation, wherein the applicant was a resident of Singapore, who had earned commission from an India based entity for having referred customers. As per the Authority for Advance Rulings, such referral fee , being in the nature of commission was to be treated as being in the nature of business income ; both, under the Act as well as under the Indo-Singapore Double Taxation Avoidance Agreement (DTAA), and not as fees for technical services . Notably, the aforesaid decisions have also been referred and relied upon by the DRP in concluding that the referral fee is in the nature of commission to be taxed as business income and not as fees for technical services . In the course of hearing before us, no decision to the contrary has been brought out by the Revenue. For all the said reasons, we are unable to uphold the stand of the Assessing Officer that the impugned referral fee was a consideration in the nature of fees for technical services . Another factual aspect which is not in dispute is that CSDB has no PE in India and also the fact that assessee s PE in India i.e., Mumbai bank branch had no role to play in the performance of the referral activity in question. Neither the discussion in the draft assessment order and nor in the course of hearing before us any credible assertions to the contrary has been brought out by the Revenue. Thus, considering that the referral activity was undertaken outside India and assessee s Mumbai branch (PE) had no role to play in the performance of the referral activity, the referral fee of ₹ 18,27,90,578/- earned by CSDB could not be construed to be attributable to assessee s PE in India and thus, the DRP rightly applied Article 7 of Indo- Swiss Double Taxation Avoidance Agreement (DTAA) and held the same to be non-taxable in India.- Decided in favour of assessee.

Summary

Issues:
1. Taxability of referral fees received by the assessee from an Indian company.
2. Determining whether the referral fees constitute "Fees for Technical services" or "commission income."
3. Applicability of the Indo-Swiss Double Taxation Avoidance Agreement (DTAA) on the taxability of the referral fees.
4. Existence of Permanent Establishment (PE) in India for tax purposes.

Analysis:

1. Taxability of Referral Fees:
The dispute arose from the referral fee of ?18,27,90,578/- received by the assessee's Dubai branch from an Indian company. The Assessing Officer contended that the fee was taxable in India under Section 5(2)(b) read with section 9(1)(i) of the Income Tax Act as it accrued in India. However, the Dispute Resolution Panel (DRP) held that the referral fee was not taxable in India as it was not in the nature of "fee for technical services" and was not attributable to the assessee's Permanent Establishment (PE) in India. The DRP's decision was based on the Indo-Swiss DTAA, which governed the taxability of the referral fee.

2. Nature of Referral Fees - Fee for Technical Services or Commission Income:
The Assessing Officer classified the referral fee as "fee for technical services," but the DRP disagreed, considering it as commission income. The DRP's decision aligned with previous legal interpretations and rulings, which established that referral fees of this nature should be treated as commission income rather than fees for technical services. The DRP's decision was supported by legal precedents such as Cushman & Wakefield (S) Pte. Ltd. and CLSA Ltd. cases, which emphasized the distinction between commission income and fees for technical services.

3. Applicability of Indo-Swiss DTAA:
The DRP's decision was further reinforced by the fact that the assessee's Dubai branch had no Permanent Establishment (PE) in India, and the referral activity was conducted outside India without any involvement of the Mumbai bank branch, which was the assessee's PE in India. Therefore, the DRP correctly applied Article 7 of the Indo-Swiss DTAA to conclude that the referral fee was not taxable in India. This decision was upheld based on the absence of a PE in India and the specific provisions of the DTAA.

4. Conclusion:
In conclusion, the Appellate Tribunal affirmed the DRP's decision, dismissing the Revenue's appeal. The Tribunal also dismissed the cross appeal and cross objection filed by the assessee as infructuous. The Tribunal's decision was based on the correct interpretation of the nature of the referral fee, the application of the DTAA provisions, and the absence of a PE in India for tax purposes. The legal analysis and precedents cited in the judgment supported the Tribunal's decision in favor of the assessee.