DCIT (IT) 2(1)(1), MUMBAI vs. CREDIT SUISSE (SINGAPORE) LTD., MUMBAI

The brief facts of the case pertaining to this issue, as emanating from record are: The assessee is a company incorporated in Singapore under the Singapore Companies Act. The assessee is a tax resident of Singapore and accordingly, is entitled to the beneficial provisions of India Singapore Double Taxation Avoidance Agreement („DTAA’). The assessee is registered as Foreign Institutional Investor („FII‟) with Securities and Exchange Board of India („SEBI’) and conducts portfolio investments in Indian securities in its capacity as SEBI registered FII/FPI. For assessment year 2014–15, assessee filed its return of income on 29/11/2014 declaring total income of Rs. 26,05,54,889. During the year under consideration, the assessee has carried out transactions in equity shares, GDRs, FCCBs, IDRs, Exchange Traded Derivatives, Debt Securities, Mutual Fund etc. The assessee and HDFC Asset Management Co Ltd had entered into a Offshore Distribution Agreement dated 06/09/2011 pursuant to which the assessee agreed to distribute Mutual Fund schemes launched by HDFC Asset Management Co Ltd, with a view to procure subscriptions for such schemes from investors outside India. As per the Agreement, the assessee creates awareness about the schemes of funds, and identifies investors from amongst its clients and procures subscriptions to units in the schemes of the funds. Under the Agreement, the assessee also ensure that the subscriptions are made in accordance with and on the terms and conditions set out in the offer

During the year under consideration, the assessee, inter-alia, earned Offshore Distribution Commission Income of Rs. 16,38,81,445 from HDFC Asset Management Co Ltd, which was claimed as exempt under Article 12 of DTAA. During the course of assessment proceedings, assessee was asked to give justification for exemption claimed under the provisions of DTAA. In reply, assessee submitted that commission income received by it does not fall in the category (i) or (iii) of Article 12(4) of DTAA. Further, assessee submitted that it has neither provided any technology to HDFC Asset Management Co Ltd nor made available any technical knowledge, experience, skill, know-how or process. Thus, „make available‟ test is also not satisfied in the present case. Therefore, Offshore Distribution Commission Income is exempted from tax in India under Article 12 of the DTAA. The assessee further submitted that even if offshore distribution commission income is regarded as „business income’ of assessee in India, such income would not be taxable in India under Article 7 of the DTAA in the absence of assessee‟s permanent establishment in India. The Assessing Officer vide order dated 16/02/2018 passed under section 144C(3) r.w.s. 143(3) of the Act observed that assessee is carrying out distribution activity of products of HDFC Mutual Fund, which are regulated by SEBI in India and since

The learned CIT(A) vide impugned order dated 29/07/2019 upheld the conclusion of the Assessing Officer that the offshore distribution income is not fees for technical services. The learned CIT(A) further held that offshore distribution income earned by the assessee is in the nature of business income and in the absence of permanent establishment is not taxable in accordance with Article 7 of DTAA. The learned CIT(A) by further referring to the decision of Co-ordinate Bench of Tribunal in Credit Suisse AG in held that offshore distribution

During the course of hearing, Shri Milind Chavan, learned Departmental Representative by vehemently relying upon the order passed by the Assessing Officer submitted that the HDFC Mutual Fund in which assessee has dealt is regulated and controlled by SEBI and RBI in India, which creates sufficient nexus of offshore distribution income with India and thus the said income is taxable in India.

On the other hand, Shri Percy Pardiwala, learned Sr. Counsel appearing for the assessee submitted that the assessee sells products of HDFC Asset Management Co Ltd in Singapore. All the services were rendered by the assessee outside India and no service was rendered within India. Thus, the offshore distribution income is not taxable in India. The learned Sr. Counsel by referring to the decision of Hon‟ble Supreme Court in CIT vs Toshoku Ltd., [1980] 125 ITR 525 (SC) submitted that the offshore distribution income earned by the assessee, in the present case, is similar in nature to agency commission income, which was held to be not chargeable to tax in India in the aforesaid decision since the non- resident taxpayer did not carry out any business operation in India and the income was earned for services rendered outside India.

We have considered the rival submissions and perused the material available on record. At the outset, it is pertinent to note certain provisions of the Act, which are relevant in order to decide the issue at hand. Section 5(2) of the Act provides that the total income of a person who is non-resident includes all income from whatever source derived, which is received or deemed to be received in India; or accrues or arises or is deemed to accrue or arise in India to the assessee. Further, section 9 elaborates the expression “Income deemed to accrue or arise in India”. As per section 9(1)(i) of the Act, all the income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source in India, or through the transfer of a capital asset situated in India shall be deemed to accrue or arise in India. Explanation 1 to section 9(1)(i) of the Act, further provides as under:

In the present case, it is not in dispute that the assessee is non- resident for the purpose of the Act. It is also not in dispute that the assessee earns offshore distribution commission income by distributing Mutual Fund schemes launched by HDFC Asset Management Co Ltd, with a view to procure subscriptions for such schemes from investors outside India. It is further not in dispute that assessee does not carry out any operation within India for the purpose of earning offshore distribution commission income. The 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.

Before concluding, it is relevant to note that the following observations of Hon‟ble Supreme Court in Toshoku Ltd. (supra):

Further, 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 Credit Suisse (Singapore) Ltd. ITA No.6098/Mum./2019 ITA no.7262/Mum./2019 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.

In the result, appeal by the Revenue for assessment year 2014–15 is dismissed. ./2019 Assessment Year – 2015–16

The Revenue, in its appeal for the assessment year 2015–16, has raised following grounds:–

The issue arising in ground nos. 1 and 2 raised in Revenue‟s appeal pertaining to deletion of addition of commission income received by the assessee from HDFC Asset Management Co Ltd. is similar to Revenue‟s appeal for assessment year 2014-15. Thus, our findings/conclusion in Revenue‟s appeal being for assessment year 2014-15 shall apply mutatis mutandis. Accordingly, ground nos. 1 and 2 raised in Revenue‟s appeal are dismissed.

The issue arising in ground No. 3 pertains to charging of tax on interest income received on rupee denominated bonds/government securities at correct rate.

The brief facts of the case pertaining to this issue, as emanating from record are: The assessee had offered interest income of Rs. 15,82,11,520 received on rupee denominated bonds/government securities to tax at the rate of 5% under section 115 AD read with section 194 LD of the Act. However, the Assessing Officer vide order dated 29/01/2019 passed under section 144C(3) r.w.s. 143(3) of the Act computed the tax on such interest income at the rate of 15% under Article 11 (2) of DTAA, which increased the gross tax liability of the assessee by Rs 1,71,10,570. The learned CIT(A) vide impugned order

As the issue pertains to applicability of correct rate of tax on interest income earned by the assessee and since the Assessing Officer 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 Assessing Officer for de novo adjudication. The assessee is directed to furnish all the details of investments to the Assessing Officer. 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). Since we are remanding this issue to the file of Assessing Officer for de novo adjudication, which causes no prejudice to the interest of the Revenue, ground No. 3 raised in Revenue‟s appeal becomes academic in nature in the present case and is accordingly dismissed.

As regards ground No. 4 raised in Revenue‟s appeal, same pertains to charging of education cess and higher education cess. As, the learned CIT(A) vide impugned order merely directed the Assessing Officer to Credit Suisse (Singapore) Ltd. ITA No.6098/Mum./2019 ITA no.7262/Mum./2019 follow the judicial precedents on this issue, wherein it has been held that education cess and higher education cess is subsumed within the tax of 10% under Double Taxation Avoidance Agreement, we find no infirmity in the impugned order passed by learned CIT(A) on this issue.

In the result, appeal by the Revenue for assessment year 2015–16 is dismissed. Order pronounced in the open court on 06/06/2022