23 Articles 5, 7 of Indo-Swiss DTAA – Referral fee received by Dubai branch of a Swiss company from its India branch for referring an Indian resident client was ‘commission’ – since such fee was not attributable to PE in India of the Taxpayer, it was not taxable in India.

ACTS
The Taxpayer was an entity incorporated in, and tax-resident of, Switzerland. The Taxpayer was a member of a global banking group providing various financial services globally. With permission of RBI, the Taxpayer had established a branch in India (“India Branch”). The Taxpayer also had a branch in Dubai. (“Dubai Branch”).

Dubai Branch had referred an Indian resident client to India Branch. India Branch handled the assignment and in accordance with global policy of the group, paid half of the fee to Dubai Branch as referral fee. The Taxpayer contended that referral fee received by Dubai Branch was ‘business income’. Since Dubai Branch did not have a PE in India, in terms of Article 5 of Indo-Swiss DTAA fee was not liable to tax in India. According to the AO, since the referral fee was payable in connection with a transaction between India Branch and referred client, it was in the nature of ‘fee for technical services’ and not ‘business income’. Hence, in terms of section 5(2)(b), read with section 9(1)(i) of the Act, referral fee was taxable in India since it was deemed to accrue or arise in India.

According to the DRP, Dubai Branch referred the client and it had no PE in India. Such income could not be attributed to activity of India Branch1.

HELD
–    Mere fact that the fee was payable by India Branch to Dubai Branch, after execution of the work was no ground to determine the nature of the payment.

–    In concluding that the ‘referral fee’ is in the nature of ‘commission’ to be taxed as ‘business income’ and not as ‘fees for technical services’ the DRP has referred and relied upon the decisions in Cushman & Wakefield (S) Pte. Ltd., 305 ITR 208(AAR) and CLSA Ltd., vs. ITO (International Taxation), 56 SOT 254(Mum) by the DRP. The tax authority has not brought any contrary decision.

–    The tax authority has not countered the contention of the Taxpayer that Dubai Branch had no PE in India and also that PE in India of the Taxpayer, i.e., India Branch, had no role to play in the performance of the referral activity in question.
–    Since the referral activity was undertaken outside India, and since PE of the Taxpayer had no role to play in the referral activity, the referral fee earned by Dubai Branch could not be considered to be attributable to PE in India of the Taxpayer. Therefore, the DRP was right in applying Article 7 of Indo-Swiss DTAA and holding the referral fee as non-taxable in India.

1  Though the decision has not made any mention, it may be noted that Article 7(1) of Indo-Swiss DTAA contains only limited force of attraction.