Sections 5, 9, 40(a)(i) and 195 of the Act; Article 7 of India-USA DTAA – As services were rendered outside India and payment was also made outside India, receipts of the foreign company were not within the scope of ‘total income’ in section 5(2) – Fee received for merely referring and introducing clients is business income which, in absence of PE in India, would not be chargeable in India – Besides, the services were not in the nature of managerial, technical or consultancy services

20. 
[2019] 107 taxmann.com 363 (Mum – Trib.) Knight Frank (India) (P) Ltd. vs. ACIT ITA No.: 2842 (Mum.) of 2017 A.Y.: 2012-13 Date of order: 12^th June, 2019;

Sections 5, 9, 40(a)(i) and 195 of the Act;
Article 7 of India-USA DTAA – As services were rendered outside India and
payment was also made outside India, receipts of the foreign company were not
within the scope of ‘total income’ in section 5(2) – Fee received for merely
referring and introducing clients is business income which, in absence of PE in
India, would not be chargeable in India – Besides, the services were not in the
nature of managerial, technical or consultancy services

FACTS

The assessee
was engaged in the business of rendering international real estate advisory and
property management services. During the course of the relevant year, the
assessee had paid referral fees to an American company (US Co) for introduction
of clients to the assessee. According to the assessee, the services rendered by
the US Co did not ‘make available’ any technical knowledge, experience, skill,
knowhow or processes to the assessee. Therefore, they were not in the nature of
‘Fees for included services’ in terms of Article 12 of the India-USA DTAA.
Since they were business profits of the US Co, in the absence of a PE in India
they could not be brought to tax in India.

However, the predecessor of the AO had, in
an earlier year, held that after retrospective amendment and insertion of
Explanation to section 9(2) of the Act, the income of a non-resident was deemed
to accrue or arise in India u/s 9(1)(v), (vi) or (vii)irrespective of whether
the non-resident had a place of business or business connection in India or
whether he had rendered services in India, and hence, the referral fee was taxable
in India. Following the order of his predecessor, the AO disallowed the fee u/s
40(a)(i) of the Act. The CIT(A) also followed the view held by his predecessor
CIT(A) and dismissed the appeal.

HELD

Sections 5 and 9 (post-2010 amendment)

Under section 5(2), income taxable in India
of a non-resident includes income received or deemed to be received in India
and income which has accrued or arisen, or is deemed to accrue or arise in
India.

Since the referral fee was paid outside
India, it was not received or deemed to be received in India. As regards
accrual, place of accrual would be relevant. Since the US Co had rendered the
services outside India, referral fee did not accrue or arise in India.

Section 9(1) in its clauses (i) to (vii)
deals with ‘income deemed to accrue or arise in India’. Clauses (ii) [salary
earned in India], (iii) [salary payable by government], and (iv) [dividend] are
not relevant in case of the US Co. Of the seven clauses, only the limb in
respect of ‘…directly or indirectly, through or from any business connection in
India…’ of clause (i) is relevant because the US Co had rendered services in
the course of its business. Explanation 1(a) to section 9(i) provides that if
all operations of a business are not carried out in India, only the income
reasonably attributable to the operations carried out in India shall be
taxable.

Since the US Co had rendered all its
services outside India, no part of referral fee could be attributed to any
operation in India. Hence, there was no income deemed to accrue or arise in
India. And, since the CIT(A) had based his conclusion on Explanation to section
9(2), which mentions clauses (v), (vi) and (vii), their applicability should be
examined. As clause (v) is in respect of ‘interest’, it is not relevant.
Similarly, clause (vi) deals with ‘royalty’, which is also not the case. Hence,
what needs to be examined is whether, in terms of clause (vii), the services
rendered were in the nature of managerial services, technical services or
consultancy services.

Managerial services

The US Co was referring or introducing
clients to the assessee. It did not provide any managerial advice or services.
Therefore, referral fee cannot be said to have been received for managerial
services.

Technical services

The US Co had not performed any services
which required special skills or knowledge relating to a technical field.
Therefore, referral fee cannot be said to have been received for technical
services.

Consultancy services

The US Co was using its skill and knowledge for
its own benefit and merely referring or introducing clients to the assessee. It
had not provided any consultation or advise to the assessee. Therefore,
referral fee cannot be said to have been received for consultancy services.

Make available

The service of referring or introducing a
client did not ‘make available’ any technical knowledge, experience, skill,
knowhow or processes to the assessee. Therefore, the receipt was not ‘Fees for
included services’ in terms of Article 12 of the India-USA DTAA.

Disallowance under section 40(a)(i)

As referral fee was business income of the
US Co, it was covered under Article 7 of the India-USA DTAA. And since the US
Co did not have a PE in India, referral fee was not chargeable to tax in India.
Hence, the assessee was not obligated to deduct tax at source u/s 195 from the
referral fee. Consequently, no disallowance u/s 40(a)(i) could be made.