2022 (6) TMI 348 - AT - Income Tax

Nature of income - commission income received by the assessee from HDFC Asset Management Company - offshore distribution commission income - business income or nature of other income - HELD THAT - Revenue has sought to tax the said offshore distribution commission income only by treating the same to be having sufficient nexus / business connection with India, as the Mutual Funds distributed by the assessee were controlled and regulated by SEBI and RBI in India. In the present case, it is pertinent to note that the Revenue has sought to tax the offshore distribution commission income earned by the assessee by invoking the provisions of section 9(1)(i) of the Act and it is not the case of the Revenue that the income is taxable under any other provision of section 9 of the Act. Further, as noted above, for the purpose of treating the income as deemed to accrue or arise in India, it is relevant that the said income should be reasonably attributable‟ to the operations carried out in India. As, in the present case, all the operations of the assessee were carried out outside India, therefore, in such circumstances offshore distribution commission income earned by the assessee cannot be treated as being reasonably attributable‟ to any operation carried out in India. As the assessee conducts portfolio investments in Indian securities in its capacity as SEBI registered FII/FPI, conclusion of the learned CIT(A) that the offshore distribution commission income is in the nature of business income of the assessee does not require any interference. Thus, in view of the above factual and legal position, we do not find any infirmity in the impugned order passed by the learned CIT(A). As a result, grounds raised by the Revenue are dismissed. Applicability of correct rate of tax on interest income - Charging of tax on interest income received on rupee denominated bonds/government securities at correct rate - HELD THAT - As the issue pertains to applicability of correct rate of tax on interest income earned by the assessee and since the AO without recording any reasons has applied the rate of 15% under Article 11(2) of DTAA and has also not examined the basic facts regarding the nature of investment on which interest income is earned. Therefore, we deem it appropriate to remand this issue to the file of AO for de novo adjudication. The assessee is directed to furnish all the details of investments to the AO. We further direct that if it is found that the investment is made on eligible instruments specified in section 115 AD then benefit of lower rate of tax under section 115AD r.w.s. 194 LD of the Act be granted to the assessee. Thus, to this extent we endorse the findings of learned CIT(A).

Issues Involved:
1. Nature of commission income received by the assessee.
2. Taxability of commission income under the India-Singapore DTAA.
3. Applicability of the correct rate of tax on interest income received on rupee-denominated bonds/government securities.
4. Charging of education cess and higher education cess.

Issue 1: Nature of Commission Income
The primary issue pertains to whether the commission income received by the assessee from HDFC Asset Management Co Ltd is business income or other income. The assessee, a company incorporated in Singapore and a tax resident there, earned Offshore Distribution Commission Income by distributing Mutual Fund schemes launched by HDFC Asset Management Co Ltd. The assessee claimed this income as exempt under Article 12 of the India-Singapore DTAA, arguing it did not fall under the categories specified in Article 12(4) and did not satisfy the "make available" test. The Assessing Officer, however, treated this income as taxable under Article 23 of the DTAA, arguing it constituted a business connection in India. The learned CIT(A) upheld that the income was not fees for technical services and classified it as business income not taxable in India due to the absence of a permanent establishment.

Issue 2: Taxability of Commission Income under DTAA
The Revenue argued that the offshore distribution income had a sufficient nexus with India as the Mutual Funds were controlled and regulated by SEBI and RBI in India. The assessee contended that all services were rendered outside India, and thus the income should not be taxable in India. The Tribunal referenced Section 5(2) and Section 9 of the Income Tax Act, which state that income is taxable in India only if it is reasonably attributable to operations carried out in India. Since the assessee conducted all operations outside India, the offshore distribution commission income could not be deemed to accrue or arise in India. The Tribunal also cited the Supreme Court's decision in CIT vs Toshoku Ltd., which supported the assessee's position that income earned for services rendered outside India is not chargeable to tax in India.

Issue 3: Correct Rate of Tax on Interest Income
For the assessment year 2015-16, the assessee offered interest income received on rupee-denominated bonds/government securities to tax at 5% under Section 115 AD read with Section 194 LD of the Act. The Assessing Officer, however, applied a 15% tax rate under Article 11(2) of the DTAA. The learned CIT(A) directed the Assessing Officer to verify the assessee's claim and pass a suitable order. The Tribunal remanded this issue back to the Assessing Officer for de novo adjudication, instructing the assessee to furnish all investment details and directing that if the investments were eligible under Section 115 AD, the lower tax rate should be applied.

Issue 4: Charging of Education Cess and Higher Education Cess
The Revenue's appeal also questioned the computation of education cess and higher education cess. The learned CIT(A) directed the Assessing Officer to follow judicial precedents, which held that education cess and higher education cess are subsumed within the tax rate under the DTAA. The Tribunal found no infirmity in this direction and upheld the CIT(A)'s order.

Conclusion:
The Tribunal dismissed the Revenue's appeals for both assessment years, upholding the CIT(A)'s decisions that the offshore distribution commission income is not taxable in India and directing the Assessing Officer to verify the correct tax rate on interest income. The Tribunal also upheld the CIT(A)'s direction regarding the computation of education cess and higher education cess.

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