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TMI Blog2013 (1) TMI 796X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 - IT APPEAL NO. 2010 (MUM.) OF 2008 - - - Dated:- 18-1-2013 - D.K. Agarwal, Judicial Member And P.M. Jagtap, Accountant Member For the Appellant : P.J. Pardiwalla, Nitesh Joshi, K.K. Ved and H.P. Sutar For the Respondent : Narender Kumar ORDER P.M. Jagtap, Accountant Member This appeal filed by the assessee is directed against the order of learned CIT (Appeals)-31, Mumbai dated 14-01-2008. 2. The issue raised in ground No. 1 of this appeal relates to the addition of ₹ 4,22,23,050/- made by the AO and confirmed by the learned CIT (Appeals) on account of the payment claimed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y of the overhead expenses actually incurred by the assessee company without any profit element, the same did not constitute income of the assessee company. In support of this contention, reliance was placed on behalf of the assessee on the decision of Hon'ble Supreme Court in the case of P.H. Divecha v. CIT [1963] 48 ITR 222 as well as the decision of Hon'ble Calcutta High Court in the case of CIT v. Dunlop Rubber Co. Ltd. [1983] 142 ITR 493. 5. After considering the submissions made on behalf of the assessee on this issue as well as the material available on record, the learned CIT (Appeals) proceeded to examine the issue as to whether the payment made by the CLSAI to the assessee company was only reimbursement of cost and, therefore, not taxable in India as claimed by the assessee. In this regard, he noted that there was failure on the part of the assessee to prove that the money as was being collected in the name of reimbursement from the group company was actually spent. She also noted that the amount paid by CLSAI to the assessee company was claimed to be in the nature of contribution of its share towards expenses incurred by the assessee and as per the relevant ag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... learned CIT (Appeals) would not agree with the fact that the indirect overhead expenses were in the nature of reimbursement. It is submitted that the learned CIT (Appeals) also did not specifically require the assessee to furnish the evidence like relevant vouchers, global accounts etc. to further establish that the amounts received by it were in the nature of reimbursement of expenses and this evidence was sought by the learned CIT (Appeals) only on 11th January, 2008 which was Friday and the impugned order was passed on Monday i.e. 14th January, 2008 before the assessee could file the same. It is submitted that the assessee thus was not given sufficient time to collect the required supporting evidence and present the same before the learned CIT (Appeals) for her consideration. It is also submitted that the additional evidence now being filed by the assessee is relevant to support and substantiate its claim that the amount in question received from CLSAI represents a mere reimbursement of cost actually incurred without involvement of any profit element and the same being crucial to the issue under consideration, it should be admitted. 7. The learned DR has raised a strong objec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arned CIT (Appeals) on account of referral fees received by the assessee from CLSAI treating the same to be in the nature of fees for technical services. 10. During the year under consideration, CLSAI had paid an amount of ₹ 7,73,58,162/- to the assessee-company as Referral Fees . It was explained on behalf of the assessee company before the AO that it has business relationship with various financial institutions outside India which required services of a broker in relation to the investment activities carried out by such Institution in Indian capital market. It was submitted that the assessee referred such overseas institutional clients to CLSAI acting as India stock broker for which it received referral fees from CLSAI. It was contended that such fees received by the assessee from CLSAI was not in the nature of fees for technical services in terms of section 9(1)(vii) and the same, therefore, was not chargeable to tax in India. It was also submitted that the fees was in the nature of commission paid by Indian exporter to foreign agents and as per para 4 of CBDT Circular No. 23 dated 27th July, 1969, it was not taxable in India. The AO did not find merit in these content ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elling agents outside India. It was held that the commission amount earned by the non-resident for services rendered outside India could not be deemed to be income which was either accrued upon or arisen in India so as to bring the same to tax in India. 12. The learned CIT (Appeals) considered this issue in the light of submissions made on behalf of the assessee as well as material available on record. She referred to the referral fees agreement between the assessee-company and CLSAI and noted the essential features thereof as under : CLSA LTD has in the said agreement stated that it has contacts with a number of persons outside India who desire to purchase, sell or otherwise deal in securities listed or approved for trading on the NSE, and In the agreement it is also stated that CLSA Ltd. has referred, and may from time to time in the future refer to CLSI such persons outside India. Such persons referred by CLSA Ltd. to CLSI will require the transactions to be executed by CLSI and settled directly with its custodian. In consideration of CLSA HK referring these persons to CLSI, CLSI agrees to pay to CLSA Ltd., for each executed transaction in respect of the persons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... participation of the exhibitors in the exhibition in India. 13. The learned CIT (Appeals) then proceeded to consider the issue as to whether the amount received by the assessee as referral fees from CLSAI constituted fees for technical services u/s 9(1)(vii) of the Act. She noted that as per sub-clause (b) of clause (vii) where FTS is paid by a person who is a resident in India, the income shall be deemed to accrue or arisen in India. She then referred to the definition of FTS given in Explanation 2 to section 9(1)(vii) according to which FTS means any consideration including any lump sum consideration for rendering of any managerial, technical or consultancy services. According to the learned CIT (Appeals), the services provided by the assessee in the form of referring clients to CLSAI would amount to rendering market and sales promotion services which are covered in the bracket of managerial and consultancy services and the same, therefore, would fall in the definition of FTS. She held that the amount received by the assessee from CLSAI under the referral agreement thus was chargeable to tax in India as fees for technical services. In support of this conclusion, the learned CI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was held to be for technical and consultancy services assessable in India being income deemed to accrue or arise in India. 14. The learned CIT (Appeals) held that the decision of Hon'ble Supreme Court in the case of Toshoku Ltd. (supra) cited on behalf of the assessee was distinguishable on facts since it was a case where the Japanese company did not carry on any activity whatsoever in India and all its activity was outside the Indian territories having no extension in India. She held that the assessee in the present case, on the other hand, was passing on its business to the Indian counter part and collecting referral fees only after the business transaction is matured and executed. She also noted that in the case of Toshoku Ltd. (supra), the Japanese party was the agent of the assessee whereas the assessee in the present case by its own admission in the referral agreement was not an agent of CLSAI. She held that the assessee, therefore, was not even entitled for the benefit of Board Circulars relied upon by it as the same were applicable only in case of foreign agents of Indian exporters. The learned CIT (Appeals) thus held that the referral fees received by the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 391 (Delhi). He also relied on the decision of Hon'ble Supreme Court in the case of Carborandun Co. v. CIT [1977] 108 ITR 335 in support of the assessee's case on this issue. As regards the decision of Authority for Advance Ruling in the case of Ravi Malhotra, In re [2006] 284 ITR 564/155 Taxman 101 (AAR - New Delhi) relied upon by the learned CIT (Appeals) in his impugned order, he submitted that the same is contrary to the decision of Hon'ble Supreme Court in the case of Carborandun Co. (supra) as well as to the relevant provisions of the Act and the same, therefore, cannot be relied upon to decide the issues against the assessee. 16. The learned DR, on the other hand, strongly relied on the impugned order of the learned CIT (Appeals) on this issue submitting that elaborate reasons have been given by the learned CIT (Appeals) while confirming the addition made by the AO on this issue. He submitted that the amount in question on account of referral fees was received by the assessee for providing market services as rightly pointed out by the learned CIT (Appeals) in his impugned order. He submitted that without any expertise and knowledge in the field, nobody would c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... context is that the amount of referral fees received by it is not in the nature of fees for technical services. 18. The learned counsel for the assessee further submitted when the matter was refixed for clarification before us that the concept of source of income has been explained by the Hon'ble Supreme Court in the case of Performing Right Society Ltd. v. CIT [1977] 106 ITR 11 at page 22 and 23 of the report. He contended that the decision of the Authority for Advancing Ruling in the case of Rajiv Malhotra (supra) relied upon by the Revenue in this regard is wrong as Explanation 1(a) to section 9(1)(i) has not been considered while rendering the said decision which clearly envisages that some portion should be carried on in India to say that the corresponding income accrues or arises in India. He submitted that this aspect has been considered by the Mumbai Bench of the Tribunal in the case of Addl. DIT(IT) v. Star Cruise India Travel Services (P). Ltd. [2011] 46 SOT 173/12 taxmann.com 242 wherein the Tribunal has declined to follow the decision of Authority for Advance Ruling in the case of Rajiv Malhotra (supra). He contended that what is relevant in this context to deci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... olved in the present case has to be decided with reference to the relevant provisions of domestic law and not on the basis of treaty as done in the various judicial pronouncements cited by the learned counsel for the assessee. 20. We have considered the rival submissions and also perused the relevant material on record. We have also gone through the various judicial pronouncements cited by the learned representatives of both the sides in support of their respective stand. The issue that is involved in this case for our consideration is whether the referral fees received by the assessee who is a non-resident in India from CLSAI is chargeable to tax in India. In this regard, the learned CIT (Appeals) has relied on the provisions of section 5(2) read with section 9(1) of the Act to hold that the source of the referral fees being the execution of transactions in India through CLSAI on behalf of the referred clients, the right to receive the referral fees arose in India only and the income on account of the referral fees thus was chargeable to tax in India in the hands of the assessee as per the specific provisions contained in section 5(2)(b) read with section 9(1)(i) of the Act bei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng. The relevant observations as recorded by the Tribunal in paragraph No. 20 of its order are reproduced below : However, the observations so made by Prof. Land, and the ruling rendered Authority for Advance Ruling in the case of Rajiv Malhotra (284 ITR 564), did not have the benefit of examining the impact of Explanation 1(a) to section 9(1)(i) of the Act. As a matter of fact, in Rajiv Malhotra, In re [2006] 155 Taxman 101 (AAR - New Delhi), the Authority for Advance Ruling does observe that the facts that the agent renders services abroad in the form of pursuing and soliciting the participants and that the commission is remitted to him abroad are wholly irrelevant for the purpose of determining the situs of his income but then this observation overlooks the fact that in terms of Explanation 1(a) to section 9(1)(i), in the case of a business of which all the operations are not carried out in India, the income of the business deemed under this clause to accrue or arise in India shall be only such part of the income as is reasonably attributable to the operations carried out in India but then since no part of the operations was carried out in India, no part of assessee' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and is not equivalent to carrying on business, but a relationship between the business carried on by non-resident, which yields profits and gains and some activity in India, which contributes directly or indirectly to the earning of those profits or gains. It was held that the business connection must be real and intimate from which the income had arisen directly or indirectly. 23. The learned CIT (Appeals) in her impugned order has also treated the referral fees received by the assessee from CLSAI as fees or technical services u/s 9(1)(vii) of the Act. In this regard, she has relied on the definition of the term fees for technical services given in Explanation 2 to section 9(1)(vii) according to which FTS means any consideration including any lumpsum consideration for the rendering of any managerial, technical or consultancy services. She has also held that the services provided by the assessee in the form of referring clients to CLSAI amount to marketing and self promotion services which are in the nature of managerial and consultancy services. In support of this conclusion, she had relied on the decision of Hon'ble Authority for Advancing Ruling in the case of Internat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... order, the applicant was a non-resident company. It was a subsidiary of Luxembourg entity engaged in the business of promoting enterprises by conducting international advertising/marketing and sales programs for Marriot chains of hotel to promote them in the foreign markets. While Marriot entered into various agreements with an Indian Company (owner) for setting up its hotel projects in India, the applicant also entered into an agreement with the owner called International Marketing Program Participation Agreement (IMPPA).The IMPPA provided that the owner would participate in the marketing business promotion programmes and the applicant would provide, inter alia, space in magazines, newspaper and other printed/electronic media outside India. The consideration that the owner would pay to the applicant was described as an annual contribution equal to 1.5% of the gross revenues of the hotel by way of reimbursement of expenses that the applicant would incur for conducting and coordinating the international marketing activities for Marriot chains of hotel. Pursuant to the IMPPA, the applicant was also to provide certain special programmes to all hotels in the Marriot chains known as Mar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch as the amount in question was paid to the assessee by CLSAI on account of referral fees for referring the international clients and going by the nature of services rendered by the assessee qua CLSAI, it cannot be said that the real and intimate relation exists between the activities carried on by the assessee outside India and the activities of CLSAI in India. Moreover, going by the nature of services rendered by way of referring the international clients to CLSAI, the assessee cannot be said to have rendered any technical, managerial or consultancy services as envisaged in Explanation 2 to section 9(1)(vii) as held by the Authority for Advance Ruling in the case of Cushman and Wakefield (S) Pte Ltd., In re [2008] 305 ITR 208/172 Taxman 179 (AAR - New Delhi) cited by the learned counsel for the assessee wherein a similar issue was involved. 25. In the case of Cushman and Wakefield (S) Pte. Ltd. (supra), the applicant was a foreign company incorporated in Singapore. It was engaged in the business of rendering services in connection with acquisition, sales and dealings in real estate and other services such as, advisory and research facilities management, project management etc ..... X X X X Extracts X X X X X X X X Extracts X X X X
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