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2019 (6) TMI 783 - AT - Income TaxTDS u/s 195 - referral fee paid to a foreign concern, in USA for introducing clients to the assessee - income deemed to accrued or arisen in India - disallowance u/s 40(a)(i) for non deduction of tds - PE in India - HELD THAT - As the facts involved in the case before us i.e pertaining to taxability of referral fees paid by the assessee to the foreign concern, for the services rendered by it abroad, are more or less similar to the facts as were there in the case TOSHOKU LIMITED (AND ANOTHER APPEAL) 1980 (8) TMI 2 - SUPREME COURT we respectfully follow the same and conclude that the referral fees received by the foreign concern in the case before us, cannot in so far clause (i) to Sec. 9(1) is concerned, be held, to have deemed to accrued or arisen in India . As regards clause (ii), clause (iii) and clause (iv) of Sec. 9(1), it is observed that as the same are in context of income by way of (i). salaries earned in India; (ii) income by way of salary payable by the government; and (iii). dividend paid by an Indian company, respectively, therefore, the same are not relevant in the backdrop of the facts involved in the case before us. Managerial services - As the foreign concern was only rendering its services abroad for referring or introducing customers to the assessee, and was not rendering managerial advice or management services, therefore, the referral income received by the said foreign agency from the assessee cannot be held to have been received by it for rendering any managerial services. Technical services - As the foreign agency viz. Newmark Company Real Estate Inc., New York, USA, was only rendering referral services to the assessee, and was not undertaking or performing any technical services where special skills or knowledge relating to a technical field were required, therefore, it can safely be concluded that the referral fees received by the foreign agency from the assessee was not towards technical fees. Consultancy fees - As the foreign agency by using its skill, business acumen and knowledge which was acquired by it for its own benefit, was only referring customers to the assessee, therefore, it cannot be said that it was providing any consultancy services to the assessee. No obligation was cast upon the assessee to deduct tax at source on the amount was paid to the foreign concern viz. Newmark Company Real Estate Inc., New York, USA, towards referral fees, for the reason viz. (i) that, as the services rendered by the foreign concern for introducing a client did not did not make available any technical knowledge, experience, skill, know-how or processes to the assessee, therefore, the same did not fall within the realm of Fees for included services as envisaged in Article 12 of the India-USA, DTAA; and (ii). that, as the aforesaid payment made to the foreign concern for the services which were rendered entirely in USA, constituted its business profits within the meaning of Article 7 of the India-USA DTAA, therefore, in the absence of any Permanent Establishment ( PE ) of the said foreign concern in India, the said amount could only be brought to tax in USA. Even as per Sec. 90(2) of the Act, in pursuance of the beneficial provisions of the India- USA DTAA, as the referral fees received by the foreign concern was not taxable in India, therefore, no obligation was cast upon the assessee to have deducted any tax at source on the said payment. Accordingly, for the said reason also no disallowance u/s 40(a)(i) of the referral fee was called for in the hands of the assessee. - Decided in favour of assessee.
Issues Involved:
1. Disallowance of commission paid under Section 40(a)(i) of the Income Tax Act. 2. Applicability of Double Taxation Avoidance Agreement (DTAA) between India and USA. 3. Obligation to deduct tax at source under Section 195 of the Income Tax Act. 4. Condonation of delay in filing the appeal. Issue-wise Detailed Analysis: 1. Disallowance of Commission Paid under Section 40(a)(i): The assessee company, engaged in international real estate advisory and property management services, paid a referral fee of ?24,62,367/- to Newmark & Company Real Estate Inc., USA, without deducting tax at source. The Assessing Officer (A.O) disallowed this payment under Section 40(a)(i) of the Income Tax Act, citing a similar disallowance in the assessee's case for A.Y. 2009-10. The A.O referred to the 'Explanation' to Section 9(2) introduced by the Finance Act, 2010, which deems income to accrue or arise in India irrespective of the non-resident's residence or place of business. The CIT(A) upheld this disallowance, following the precedent set in the earlier assessment year. 2. Applicability of DTAA between India and USA: The assessee argued that the commission paid was not taxable under the DTAA between India and USA. The services rendered by the foreign concern did not "make available" any technical knowledge, skill, or know-how to the assessee, thus not falling under "Fees for included services" as per Article 12 of the DTAA. Furthermore, the payment constituted business profits under Article 7 of the DTAA, and in the absence of a Permanent Establishment (PE) in India, it was taxable only in the USA. 3. Obligation to Deduct Tax at Source under Section 195: The Tribunal observed that the A.O failed to demonstrate how the referral fees fell within the scope of income under 'Explanation 2' of Section 9(2), i.e., interest, royalty, or fees for technical services. The Tribunal noted that the referral fees were for services rendered outside India, and as per the Supreme Court's judgment in CIT Vs. Toshoku Ltd., such income cannot be deemed to accrue or arise in India. The Tribunal concluded that the referral fees did not constitute managerial, technical, or consultancy services, and thus, no tax deduction at source was required under Section 195. 4. Condonation of Delay in Filing the Appeal: The assessee's appeal was delayed by 17 days due to an inadvertent omission by its tax consultant, who was preoccupied with shifting office premises. The Tribunal accepted this explanation as a bona fide omission and condoned the delay, allowing the appeal to be heard on merits. Conclusion: The Tribunal set aside the order of the CIT(A) and vacated the disallowance of ?24,62,357/-. It concluded that the referral fees paid to the foreign concern were not taxable in India under the provisions of the Income Tax Act or the India-USA DTAA, and thus, no obligation to deduct tax at source existed. The appeal of the assessee was allowed.
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