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Income Tax Appellate Tribunal, Hyderabad ‘A’ Bench, Hyderabad
Before: Shri Rama Kanta Panda & Shri Laliet Kumar
PER LALIET KUMAR, J.M. This appeal is filed by the Revenue, feeling aggrieved by the order passed by the Learned Commissioner of Income Tax (Appeals)-4, Hyderabad, dated 24.01.2019 for the AY 2016-17, on the following grounds :
“1. The ld.CIT(A) erred in deleting the addition made towards disallowance of PF contribution of employees deposited beyond due date of respective Act. 2. The ld.CIT(A) erred in deleting the addition made towards referral fee paid to Singapore companies which is in the nature of commission. 3. The ld.CIT(A) erred in deleting the addition made towards referral fee paid to Singapore companies without appreciating that the Singapore companies are having their Permanent Establishment in India.”
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Before us, the Ld. DR for the Revenue had drawn our attention to paragraph 4 of the order passed by the AO, wherein the AO had mentioned that assessee had paid the reference charges of Rs.6,33,50,000/- to M/s. CX Partners Pte Limited and consultancy charges of Rs.1,69,60,000/- to M/s. Koi Structured Credit Pte. Ltd. without deduction of tax at source.
The Assessing Officer had issued notice calling upon the assessee as to why the amount paid by the assessee to these concerns be not disallowed in view of Section 195 read with Explanation 2 to section 9(1)(vii) of the Act.
In response thereto, the assessee had filed the submission before the Assessing Officer wherein he had submitted that the amounts were paid by him to these two concerns in relation to the issuance of debentures as the sister concerns of these two concerns have made the investment of Rs.370 crores in its company. It was submitted by the assessee that out of receipt of Rs.370 crores, Rs.8 crores were paid as reference fee to the above said two companies. Further, it was submitted that the reference services rendered by these two companies were not in the nature of ‘technical services’ and further submitted that those services were rendered outside the country. Therefore, there was no occasion to deduct the tax at source. It was further submitted that the services rendered by these two Singapore based concerns do not fall within the ambit of ‘fee for technical services’.
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The ld.DR had drew our attention to Explanation - 2 to Section 9(1)(vii) of the Act which clearly mentions that the ‘fee for technical services’ would include managerial, technical or consultancy services and the services rendered by the said Singaporean companies to the assessee would fall within the scope of ‘fee for technical services’.
The ld.DR further drawn our attention to the paragraphs 4.3 and 4.6 of the assessment order where the ld.AO has mentioned as under :
“4.3. As per copy of the ledger, the amounts were paid on 22.01.2016 and narration of the payments made to the above stated Singapore concerns is as under:- CX partners Pte.Ltd. A/C Being amount payable to CX partners Pte.Ltd. A/C towards referral fee and out of pocket expenses payment purpose – Rs.6,33,50,000/- Koi Structured Credit Pte.Ltd. Being amount payable to M/S. KOI STRUCTURED CREDIT PTE.Ltd. towards the fee letter consultancy charges payment purpose -
Rs.1,69,60,000/- 4.6. The assessee has submitted that M/s.CX Intermediate Capital Fund I PTE Ltd has made an investment of Rs. 100 Crores in the assessee company and its PAN is AAFCC1647R. This company is assessed with DCIT Intl Tax, Circle 1 (1) (1), Delhi, CX Intermediate Capital Fund is a closed private equity fund managed by CX Partners Mezzanine, CX Partners Mezzanine is a private equity general partner firm headquartered in New Delhi, India. The payment of Rs.6,33,50,000/- is made to CX Partners Pte Ltd. which is a sister concern of the investor, CX Intermediate Capital Fund I PTE Ltd. From the above news item and the structure of group companies, it is very clear that the payment of the ‘claimed referral fee’ is paid to the group company and the investor and its parent company have their PEs in India. Same is the case with M/S. Koi Structured Credit Pte. Ltd. which has PE in India, whose PAN is AAFCK3743G and is assessed with DCIT Intl Taxn, Circle 3(1)(2), Delhi. This establishes the payments are made to Singapore entities whose control is in India and hence the provisions of Section 195 are applicable.”
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Based on the above said finding of the Assessing Officer, the ld.DR had made two submissions : (1) that the services rendered by these two Singapore companies were not in the nature of ‘refence fee’ and (2) that these two companies are having control in India, therefore, the provisions of section 195 are applicable. Further, it was submitted by the ld. DR that the services rendered by these two companies to the assessee were in the nature of ‘consultancy services’ and therefore, the assessee was bound to deduct the TDS on the said amount paid by the assessee and therefore, the AO had added back the amount of Rs.8,03,10,000/- to the income of the assessee.
8. The ld.DR had submitted that the ld.CIT(A) has not considered the above said categorical finding of the AO and ld.CIT(A) had granted the relief to the assessee. Our attention was drawn to the order of the ld.CIT(A), more particularly, to paragraphs 5.3 to 5.6 which are the following effect.
“5.3. I have carefully considered the assessment order, grounds of appeal and AR’s submissions in this regard. The AO in the assessment order held that the appellant has paid an amount of Rs.8 crores as ‘referral fee’ to M/s. CX partners pte Limited, Singapore and to M/s. Koi structured Credit pte. Ltd. Singpore to acquire the capital fund of Rs.370 crores by way of debentures. The liaison services were carried out by a non-resident agent outside India. The question arises whether the amount paid to liaison services rendered by a Nonresident outside India will be taxed in India or not. 5.4 Section 5 of the Income tax Act defines the income which is chargeable under the Act. In the case of Non-resident income received or deemed to be received in India or income accruing or arising or deemed to accrue or arise in India from whatever source is chargeable. Since the income is received outside India, it cannot be said to be received, accrue, or arise in India. 5.5 Section 9 gives the income which is deemed to accrue or arise in India. The income in the case of the recipient does not arise through or from any property or asset or from transfer of asset in India, the receipt of the sum does not carry out any part of his business or profession in India either directly or through any person in India. All the services are rendered outside India and even the deliverables in the form of patent are specific for territories outside India. Therefore, no parts of the business of 5 ITA.No.1791/Hyd/2019 recipient for which payments are received are carried out in India or have territorial nexus with India. Therefore, no parts of recipient for which payments are received are carried out in India. Hence, income of the payee cannot be deemed to arise or accrue in India. The income of the payee was therefore not chargeable under the Act. 5.6 If the sum is not chargeable to tax, it cannot be held as inadmissible under sec. 40(a)(i) of the Act for failure to deduct as there was no obligation under chapter XVII B for deduction of tax at source.”
Per contra, the ld. AR for the assessee had submitted that with reference to these two companies, the assessee had received an investment of Rs.370 crores from the following five companies. The details of investments made by these companies along with designated banks are given as under :
Sl.No. Name of the Company Name of the designated bank 1. CX Intermediate Capital Kotak Mahindra Bank Ltd Fund I PTE Limited 2. KOI Structured Credit Standard Chartered Bank PTE Limited 3. Samena India Credit Citi Bank (Singapore) Pvt. Ltd 4. DMI Income Fund PTE Standard Chartered Bank Limited 5. Arch Reinsurance Custodian Bank, Deutsche Bank Limited, Bermuda AG, DB House, Hazarimal, Somani Marg, Mumbai
The ld.AR further submitted that all these five companies are not residents of India. The Corporate Tax Division - Controller of Income-Tax, Singapore has issued a certificate in favour of M/s. CX Intermediate Capital Fund I PTE Ltd, certifying that the said company is a resident of Singapore (Pg 90 of the Paper Book.). Similarly, the ld.AR had also drawn our attention to Page 91 whereby the SEBI had issued a Certificate of Registration in favour of M/s. KOI Structured Credit PTE Ltd on 03.09.2014 as a Foreign Portfolio Investor. This company is also having a registered office in Singapore and the same is clear from 6 ITA.No.1791/Hyd/2019 its profile at Page 98 of the paper book. M/s. Samena India Credit (Singapore) Pvt. Ltd is a company incorporated in Singapore and this company was also granted a Certificate of registration by SEBI recognized as a Foreign Portfolio Investor, vide certificate dt.18.04.2016. Similarly, DMI Income Fund PTE Limited was also recognized as Foreign Portfolio Investor vide certificate dt.23.04.2015 issued by the SEBI and is also a company registered in Singapore and doing business thereof. The fifth company that invested in assessee company on account of referral made by these two companies was Arch Reinsurance Limited, which is located in Bermuda with the SEBI registration number INBRF042815.
It was submitted by the ld.AR that all these five companies which have invested in the assessee company were doing their business outside India. However, they are recognized as Foreign Portfolio Investors by the SEBI.
It was submitted by the ld.AR that M/s. CX Partners PTE Ltd and M/s.KOI Structured Credit PTE Ltd are not Indian based companies and are having their offices in Singapore only.
It was submitted that the learned Assessing Officer had no material /evidence / information to conclude that they are doing business from India and having business control within the geographical location in Delhi. Ld.AR had drawn our attention to the agreement entered between the assessee and these two companies on page No.48 of the paper book, wherein the respective scope of duties and remuneration of these two companies was mentioned as under :
7 ITA.No.1791/Hyd/2019 18th January 2016
CX Partners Pte Limited 20 Bendemer Road NO.3-12 Cyberhub building Singapore-339 9914
Attention : Mr. Sameer chawla Dear Sir, Sub: Referral Fee Letter
We refer to the capital raising plan of INR 4,000,000,000(rupees Four Billion) through the issue of INR denominated rated and listed non-convertible debentures(the “Debentures”) by the company.
We are writing this Letter to record the agreement between us in relation to the referral fees payable by the Company in relation to the issuance of the Debentures.
Under this letter, the company agrees to pay to CX Partners Pte Limited a referral fee of INR 63.04 million in US dollars at the exchange rate prevalent on the date of payment due upon successful subscription of the Debentures and out of pocket expenses, if any, incurred at actual.
The role of CX Partners Pte Limited would be limited to referring the investors to the company and that CX partners Pte Limited would not act as solicitor or agent or provide any services (incl. financial services) with respect to raising of the capital by the Company.
The referral 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. This letter shall be governed by an construed accordance with the laws of India.
Similar to that effect is the agreement dated 18.01.2016 at page 54 of paper Book is reproduced hereinbelow :
“We refer to the capital raising plan of INR 4,000,000,000 (Rupees Four billion) through the issue of INR denominated rated and listed non-convertible debentures (the “Debentures”) by the Company. We are writing this letter to record the agreement between us in relation to the fees payable by the Company in relation to the issuance of the Debentures.
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Under this letter, the Company agrees to pay to Koi Structured Credit Pte Limited a fee of INR 16.96 million in US Dollars at the exchange rate prevalent on the date of payment due upon successful subscription of the Debentures. The fees herein shall be payable by the Company without any set-off, counterclaim, withholding or deduction of any kind. The fetter shall be governed by and construed in accordance with the laws of India. Please indicate agreement to the terms of this Letter by signing and returning the enclosed copy of this Letter.”
Ld. AR had submitted that out of the total debentures issued by the assessee for Rs.400 crores, only five parties, namely 1) CX Intermediate Capital Fund I Pte Ltd. 2) Samena India Credit (Singapore) Pvt. Ltd. 3) KOI Structured Credit PTE Ltd. 4) Arch Reinsurance Limited and 5) DMI Income Fund Pte Ltd. have contributed a sum of Rs. 370 crores, which were referred to these two companies. It was the further contention of assessee that none of the services were rendered in India, and therefore, the assessee was not in obligation to deduct the TDS as per section 195(1) of the Act.
In rebuttal, the ld.DR for the Revenue had submitted that even presuming that the contention of the assessee is correct, then also, the assessee was having PE and business connection in India and therefore, in view of the Explanation 2 to Section 9(1) (viii) of the Act, the assessee was deducting TDS at the time of making the payment to these two entities.
We have heard the rival submissions and perused the material available on record. As per the aforesaid discussion, the short controversy before us relates to the nature and chargeability of the referral fee of INR 63.04 million in US Dollars paid by assessee to M/s. CX Partners Pte Limited and M/s.Koi Structured
9 ITA.No.1791/Hyd/2019 Credit PTE Ltd. The charge of the Assessing Officer 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 Assessing Officer, 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. Hence, it was concluded by the Assessing Officer 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) of the Act; 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 of INR 63.04 million 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
10 ITA.No.1791/Hyd/2019 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.
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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.
However, with respect to M/s. CX Intermediate Capital Fund(I) Pte Ltd, the Assessing Officer in para 4.3. 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) of the Act. In this context, the co-ordinate Bench of the Tribunal, in the case of DCIT vs M/s Credit Suisse AG (ITA No.1247/Mum/2016 dt.09.02.2018) at Paras 7 and 8 had held as under :
12 ITA.No.1791/Hyd/2019 “7……………………………….. In this context, the Authority for Advance Rulings in the case of Cushman & Wakefield(S) Pte. Ltd., (supra) has dealt with a somewhat similar situation, wherein the applicant was a resident of Singapore, who had earned commission from an India based entity for having referred customers. As per the Authority for Advance Rulings, such ‘referral fee’, being in the nature of ‘commission’ was to be treated as being in the nature of ‘business income’; both, under the Act as well as under the Indo-Singapore Double Taxation Avoidance Agreement (DTAA), and not as ‘fees for technical services’. To the similar effect is the decision of the Mumbai Tribunal in the case of CLSA Ltd., (supra) wherein also referral fee earned by a non- resident assessee from an India based entity for referring certain international clients was held not to be in the nature of ‘fees for technical services’ within the meaning of Section 9(1)(vii) of the Act. Notably, the aforesaid decisions have also been referred and relied upon by the DRP 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’. In the course of hearing before us, no decision to the contrary has been brought out by the Revenue. For all the said reasons, we are unable to uphold the stand of the Assessing Officer that the impugned ‘referral fee’ was a consideration in the nature of ‘fees for technical services’.
Another factual aspect which is not in dispute is that CSDB has no PE in India and also the fact that assessee’s PE in India i.e., Mumbai bank branch had no role to play in the performance of the referral activity in question. Neither the discussion in the draft assessment order and nor in the course of hearing before us any credible assertions to the contrary has been brought out by the Revenue. Thus, considering that the referral activity was undertaken outside India and assessee’s Mumbai branch (PE) had no role to play in the performance of the referral activity, the referral fee of Rs.18,27,90,578/- earned by CSDB could not be construed to be attributable to assessee’s PE in India and thus, the DRP rightly applied Article 7 of Indo Swiss Double Taxation � Avoidance Agreement (DTAA) and held the same to be non-taxable in India. The aforesaid conclusion of the DRP is hereby affirmed. Therefore, considering the short point on the basis of which the DRP has allowed the plea of the assessee, we dispose of the aforesaid appeal by affirming the ultimate direction of the DRP. Thus, Revenue fails in its appeal”
Hence, respectfully following the decision in the case of Credit Suisse (supra), the appeal of the Revenue is required to be dismissed on this ground.
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However, the 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. Assessing Officer 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. The 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 the ld.CIT(A). Thus, the appeal of the Revenue fails.
In the result, the appeal of the Revenue is dismissed.
Order pronounced in the Open Court on 20th September 2022.