2022 (11) TMI 405 - AT - Income Tax

TDS u/s 195 - nature and chargeability of the referral fee in US Dollars paid by assessee to M/s. CX Partners Pte Limited and M/s. Koi Structured Credit PTE Ltd. - HELD THAT - The charge of the AO is that having regard to Section 5(2)(b) read with section 9(1)(i) of the Act, the said income is includible in the scope of total income chargeable to tax in India. To put it differently, as per the AO, a 'referral fee' is deemed to accrue or arise in India, and therefore, the same is taxable in India. This has been inferred on the strength of the fact that the fee has been paid by the Indian Company after these companies had successfully referred five companies, which were situated in Singapore to invest in the assessee company to an extent of Rs. 370 crores. As concluded by the AO that the source of the fee is located in India. In addition to this, the understanding of AO was that said 'referral fee' was in the nature of 'fees for technical services'. The expression 'fees for technical services' finds meaning in Explanation 2 to Section 9(1)(vii) broadly speaking, the said Explanation prescribes that 'fees for technical services, means any consideration for rendering of any managerial, technical or other consultancy services, including the provision of services of technical or other personnel, but does not include consideration for any construction, assembling, mining or like project undertaken by the recipient or consideration which would be income of the recipient chargeable under the head 'salaries'. We may fruitfully refer to the scope of services rendered by these two companies to the assessee. Both the contract dt. 18.01.2016, which are reproduced hereinabove, clearly mentioned that services were required to be rendered by these persons for reference only and for that purpose, the agreement was entered between the parties for making the payment in US Dollars in the case of M/s. CX Partners Pte Limited and INR 16.96 million in US Dollars in the case of M/s. Koi Structured Credit PTE Ltd. In the said letter, it was categorically mentioned that the fee paid by the assessee would only be restricted to reference only and it was also mentioned that 'the reference fees' herein shall be payable by the company without any set-off, counterclaim withholding (including withholding tax) or deduction of any kind under any applicable laws in India . It is clear that the referral fees of INR 63.04 million US Dollars were required to be paid by the assessee to this company namely, M/s. CX Partners Pte Limited without withholding any tax after completion of the transaction and similarly, INR 16.96 million in US Dollars was to be paid to M/s. Koi Structured Credit PTE Ltd. without withholding any tax. Once the investments were made by a company situated outside India on the referral of these two companies, then the question arises was whether any sum paid by the assessee to the sisters concern of said M/s. CX Intermediate Capital Fund(I) Pte. Ltd. and M/s. Koi Structured Credit Pte. Ltd. can be termed as 'consultancy charges'. Admittedly, IDBI Bank is the lead manager and provides all consultancy for the issuance and subscription of debentures. Hence, it is not possible for us to accept the version of the Assessing Officer that the same services were provided by these two Singapore companies. Out of the five companies, which have invested a sum of Rs. 370 crores in the debentures, four companies have their registered offices and are residents of Singapore and only one company namely, Arch Reinsurance Limited, is located in Bermuda, Mumbai. M/s. CX Intermediate Capital Fund(I) Pte Ltd. and M/s. Koi Structured Credit Pte. Ltd. has provided the reference to these five companies for making the investment in the assessee company for which the assessee had paid the reference charges to these companies. No services were rendered in India by these two companies for facilitating the investment in the assessee company by these five companies. Merely reference of the 'consultancy charges' in the ledger of the assessee with respect to M/s. Koi Structured Credit Pte. Ltd. cannot be a ground to treat the charges paid by the assessee as consultancy charges as the assessee had produced the agreement with M/s. Koi Structured Credit Pte. Ltd. reproduced hereinabove clearly mentioned that the fees were payable by the company in relation to debentures. With respect to M/s. CX Intermediate Capital Fund(I) Pte Ltd., AO had mentioned that the charges paid by the assessee were in the nature of 'referral fees' only. The payment of referral fees by the assessee to M/s. CX Intermediate Capital Fund(I) Pte. Ltd. is further supported by the agreement and Form 15CB issued by the Chartered Accountant. In view of the above, we are of the opinion that the charges paid by the assessee were in the nature of 'referral fees' only. Merely because the assessee had refereed the fee was payable by the Indian Company to one of these two entities, consultancy charges cannot be a ground to hold that the nature of the payment was covered by Explanation 2 to section 9(1)(vii). Second limb of challenge by the Ld. DR was that the AO in the order had mentioned that there were PE of these two companies in Delhi - Hence, the order passed by the AO was correct. Though it is correct that AO had mentioned the existence of offices of these companies in Delhi, however, the AO had failed to bring on record anything except mentioning of office address and PAN number in the order. AO is required to bring on record form of activities, which were carried out by these companies in India. Merely existence of an office of one of the sister concerns of these companies is not sufficient for the AO to conclude that the investor company or M/s. CX Intermediate Capital Fund(I) Pte. Ltd. and M/s. Koi Structured Credit Pte. Ltd. had control in India - Assessee was not required to withhold the tax at source as there was no situs of services rendered in India and further, these services were not in the nature of FTS. Hence, we find no fault in the reasoning given by CIT(A). Thus, the appeal of the Revenue fails. Appeal of the Revenue is dismissed.

Summary

Issues Involved:
1. Deletion of addition towards disallowance of PF contribution of employees deposited beyond due date.
2. Deletion of addition towards referral fee paid to Singapore companies, categorized as commission.
3. Deletion of addition towards referral fee paid to Singapore companies having Permanent Establishment (PE) in India.

Issue-wise Detailed Analysis:

1. Deletion of addition towards disallowance of PF contribution of employees deposited beyond due date:
This issue was not elaborated in the judgment, suggesting it may not have been a focal point in the appeal. The primary discussion centered around the referral fees paid to Singapore companies.

2. Deletion of addition towards referral fee paid to Singapore companies, categorized as commission:
The Revenue argued that the referral fees paid by the assessee to M/s. CX Partners Pte Limited and M/s. Koi Structured Credit Pte. Ltd. should be classified as "fees for technical services" under Explanation 2 to Section 9(1)(vii) of the Income Tax Act. The Assessing Officer (AO) disallowed the payments due to the absence of tax deduction at source (TDS) under Section 195.

The assessee contended that the referral services were not technical services and were rendered outside India, thus not attracting TDS provisions. The Commissioner of Income Tax (Appeals) [CIT(A)] agreed with the assessee, noting that the services did not accrue or arise in India and were not chargeable under the Act.

The Tribunal reviewed the agreements and concluded that the services were limited to referring investors and did not constitute consultancy services. The Tribunal referenced the case of DCIT vs. M/s. Credit Suisse AG, where similar referral fees were treated as business income and not as fees for technical services. The Tribunal upheld the CIT(A)'s decision, affirming that the referral fees were not taxable in India and no TDS was required.

3. Deletion of addition towards referral fee paid to Singapore companies having Permanent Establishment (PE) in India:
The Revenue claimed that the Singapore companies had a PE in India, necessitating TDS on the referral fees. The AO cited the existence of office addresses and PAN numbers of related entities in India as evidence of control.

The assessee provided certificates of residency from Singapore authorities and SEBI registrations, demonstrating that the companies were non-residents with no business operations in India. The Tribunal found that the AO failed to substantiate the claim of PE with concrete evidence of business activities in India. It ruled that merely having an office address and PAN number was insufficient to establish a PE.

The Tribunal concluded that the services were rendered outside India, and the referral fees were not in the nature of fees for technical services. Therefore, the assessee was not required to withhold tax at source, and the CIT(A)'s decision was upheld.

Conclusion:
The appeal by the Revenue was dismissed, with the Tribunal affirming that the referral fees paid to the Singapore companies were not taxable in India and no TDS was required. The Tribunal found no fault in the CIT(A)'s reasoning and upheld the deletion of the additions made by the AO.