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Income Tax Appellate Tribunal, “H”, BENCH
Before: SHRI R.C.SHARMA, AM & SHRI PAWAN SINGH, JM
O R D E R PER: R.C. SHARMA, A.M. These are the appeals filed by the assessee against the separate orders of the ld. CIT(A)-05, Mumbai dated 21/08/2015 for the A.Y. 2010- 11 and 2011-12 respectively in the matter of order passed U/s 143(3) of the Income Tax Act, 1961 (in short, the Act).
Grievance of the assessee in both the years pertains to disallowance of claimed deduction on account of commission paid to Newmark Knight Frank U/s 40(a)(i) of the Act.
2 & 5051/Mum/2015 M/s Knight Frank (India) P Ltd. Vs DCIT 3. Rival contentions have been heard and record perused. Facts in brief are that Newark Knight Frank is company located at USA. The above company had referred certain clients to the assessee and the assessee had earned brokerage from those clients and paid a referral fees to Newark Knight Frank. The assessee in its submissions stated that Newark Knight Frank has not rendered any services in India it has only referred the clients, whatever the services it has rendered are out of India and hence no TDS was deducted. The A.O. considered it as an income for rendering services in India and as the assessee had not deducted any TDS, the A.O. added the entire amount. By the impugned order, the ld. CIT(A) confirmed the action of the A.O., against which the assessee is in further appeal before the ITAT.
The ld AR of the assessee placed on record the order of the Tribunal in assessee’s own case for the A.Y. 2012-13 in order dated 12/06/2019 wherein exactly similar issue was decided by the Tribunal in favour of the assessee.
We have gone through the order of the Tribunal dated 12/06/2019 as well as orders passed by the lower authorities and found that the commission paid outside India was disallowed by the A.O. by invoking provisions of Section 40(a)(i) of the Act on the place that tax was not deducted at source. There is no dispute to the fact that the services were rendered outside India and payment was also made outside India.
3 & 5051/Mum/2015 M/s Knight Frank (India) P Ltd. Vs DCIT Exactly similar issue was decided by the Tribunal vide order dated 12/06/2019 in assessee’s own case for the A.Y. 2012-13 wherein the Tribunal has held as under:
“9. We shall now deliberate upon the scope of taxability of the referral fees that was received by the foreign concern, namely Newmark & Company Real Estate Inc., New York, USA from the assessee during the year under consideration. As per Sec. 5(2) of the Act, the total income of a non- resident includes income from whatever source derived which viz. (i). is received or is deemed to be received in India in such year by or on behalf of such person; or (ii). accrues or arises or is deemed to accrue or arise to him in India during such year. Admittedly, as the assessee had made the payment of referral fees to the foreign concern outside India, therefore, the said amount cannot be said to have been “received” in India. Insofar, the “income deemed to be received in India” is concerned, we find that the same is defined in Sec. 7 of the Act. As per Sec. 7, the income „deemed to be received‟ takes within its sweep viz. (i). the annual accretion in the previous year to the balance at the credit of an employee participating in a recognized provident fund, to the extent provided in rule 6 of Part A of the Fourth Schedule; (ii). the transferred balance in a recognized provident fund, to the extent provided in sub-rule (4) of rule 11 of Part A of the Fourth Schedule; and (iii). the contribution made, by the Central government or any other employer in the previous year, to the account of an employee under a pension scheme referred to in Sec. 80CCD. Accordingly, the payment of referral fees by the assessee to the foreign concern cannot be “deemed to be received” in India. As regards the income which “accrues or arises in India”, the place of accrual of income, and not its source would be relevant for determining the same. As the referral fees was received by the foreign concern for rendering of its services abroad for referring or introducing a customer to the assessee, therefore, the same cannot be characterised as income accrued or arisen 4 & 5051/Mum/2015 M/s Knight Frank (India) P Ltd. Vs DCIT to the assessee in India. Now, we come to the last limb of Sec. 5(2) i.e “income deemed to accrue or arise in India”. We find that the “income deemed to accrue or arise in India” is defined in Sec. 9(1) of the Act, which is spread over seven clauses viz. clause (i) to clause (vii). A perusal of clause (i) of Sec. 9(1) provides, that all 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 from any asset or source of income in India, or through the transfer of a capital asset situate in India, shall be deemed to accrue or arise in India. On a scrutiny of clause (i), the only relevant aspect of the said clause which could have any bearing on determining the „deemed accrual or arising‟ of the referral fees in the hands of the foreign concern in the case before us, is the “.....direct or indirect business connection in India”. A perusal of “Explanation 1(a)” of clause (1) to Sec. 9(1) reveals, that 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. Now, in the case before us, as the referral fees was earned by the foreign concern, viz. Newmark & Company Real Estate Inc., New York, USA, for their services or operations which were fully carried out outside India, therefore, no part of the said fees received could be attributed or held as having been “deemed to have accrued or arisen” to the said foreign concern in India. Our aforesaid view is supported by the judgment of the Hon’ble Supreme Court in the case of CIT Vs. Toshoku Ltd. (1980) 125 ITR 525 (SC). In the aforesaid judgment, the Hon‟ble Apex Court after deliberating on the scope of clause (a) of the Explanation to Sec. 9(1)(i), while adjudicating the issue pertaining to taxability of commission income that was paid by an Indian exporter to a foreign agent, had observed as under:
The second aspect of the same question is whether the commission amounts credited in the books of the statutory agent can be treated as incomes accrued, arisen, or deemed to have accrued or arisen in India 5 & 5051/Mum/2015 M/s Knight Frank (India) P Ltd. Vs DCIT to the non-resident assessees during the relevant year. This takes us to s. 9 of the Act. It is urged that the commission amounts should be treated as incomes deemed to have accrued or arisen in India as they, according to the Department, had either accrued or arisen through and from the business connection in India that existed between the non- resident assessees and the statutory agent. This contention overlooks the effect of cl. (a) of the Explanation to cl. (i) of sub-s. (1) of s. 9 of the Act which provides that in the case of a business of which all the operations are not carried out in India, the income of the business deemed under that 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. If all such operations are out in India, the entire income accruing therefrom shall be deemed to have accrued in India. If, however, all the operations are not carried out in the taxable territories, the profits and gains of business deemed to accrue in India through and from business connection in India shall be only such profits and gains as are reasonably attributable to that part of the operations carried out in the taxable territories. If no operations of business are carried out in the taxable territories, it follows that the income accruing or arising abroad through or from any business connection in India cannot be deemed to accrue or arise in India [See CIT vs. R.D. Aggarwal & Co. (1965) 56 ITR 20 (SC) and Carborandum Co. vs. CIT (1977) 108 ITR 335 (SC) which are decided on the basis of s. 42 of the Indian IT Act, 1922, which corresponds to s. 9(1)(i) of the Act].
In the instant case, the non-resident assessees did not carry on any business operations in the taxable territories. They acted as selling agents outside India. The receipt in India of the sale proceeds of tobacco remitted or caused to be remitted by the purchasers from abroad does not amount to an operation carried out by the assessees in India as contemplated by cl. (a) of the Explanation to s. 9(1)(i) of the Act. The commission amounts which were earned by the nonresident assessees for services rendered outside India cannot, therefore, be deemed to be incomes which have either accrued or arisen in India. The High Court was, therefore, right in answering the question against the Department.”
As the facts involved in the case before us i.e pertaining to taxability of referral fees paid by the assessee to the foreign concern, for the services rendered by it abroad, are more or less similar to the facts as were there in the case before the Hon‟ble Apex Court, therefore, we respectfully follow the same and conclude that the referral fees received by the foreign concern in the case before us, cannot in so far clause (i) to Sec. 9(1) is 6 & 5051/Mum/2015 M/s Knight Frank (India) P Ltd. Vs DCIT concerned, be held, to have „deemed to accrued or arisen in India‟. As regards clause (ii), clause (iii) and clause (iv) of Sec. 9(1), it is observed that as the same are in context of income by way of (i). salaries earned in India; (ii) income by way of salary payable by the government; and (iii). dividend paid by an Indian company, respectively, therefore, the same are not relevant in the backdrop of the facts involved in the case before us.
We shall now advert to the remaining three clauses of Sec. 9(1) viz. clause (v); clause (vi); and clause (vii). As the “Explanation” to Sec. 9(2) of the Act, as had been relied upon by the A.O/CIT(A) for concluding that the referral fees received by the foreign concern was liable to be included in the income of the foreign concern in India, therefore, we have purposively segregated the said clauses for necessary deliberations. At this stage, we may herein observe, that in case if the referral fees received by the foreign concern is found to fall within either of the aforementioned three clauses i.e clause (v), clause (vi) or clause (vii), then the „Explanation‟ to Sec. 9(2) would come into play, and the income of the foreign concern shall be deemed to have accrued or arisen in India, irrespective of the fact viz. (i). the foreign concern had a residence or place of business or business connection in India, or not; or (ii). the foreign concern had rendered services in India, or not. As regards clause (v) to Sec. 9(1), we find that as the same refers to income by way of “interest income”, which is not the case before us, therefore, the same would not be relevant. Insofar clause (vi) to Sec. 9(1) is concerned, again we find that as the same deals with income by way of “royalty”, which again is not the case before us, therefore, the same also will have no bearing on the adjudication of the lis before us. Now, we come to the last clause i.e clause (vii) to Sec. 9(1), which we find is in regard to income by way of “fees for technical fees”. As the definition of “fees for technical fees” as envisaged in “Explanation 2” of Sec. 9(1)(vii) takes within its sweep consideration received by an assessee for rendering of certain services viz. (i). managerial services; (ii). technical services; and (iii). consultancy services, therefore, in the backdrop 7 & 5051/Mum/2015 M/s Knight Frank (India) P Ltd. Vs DCIT of the same, the nature of services rendered by the foreign concern to the assessee would require some deliberation, for deciding, as to whether the referral fees received by the foreign concern from the assessee would fall within the realm of either of the aforementioned three services, or not :
(A). Managerial services :
(i). We are of the considered view that referral services rendered by the foreign concern viz. Newmark & Company Real Estate Inc., New York, USA, abroad for referring/introducing a customer to the assessee, cannot be bracketed as management services provided by the said foreign concern to the assessee. Admittedly, as the foreign concern was neither acting as a manager or dealing with the administration, nor controlling the policies or scrutinising the effectiveness of the policies, therefore, it did not perform any supervising function whatsoever. Accordingly, as the foreign concern was only rendering its services abroad for referring or introducing customers to the assessee, and was not rendering managerial advice or management services, therefore, the referral income received by the said foreign agency from the assessee cannot be held to have been received by it for rendering any managerial services.
(ii). Technical services :
(a). As the foreign agency viz. Newmark & Company Real Estate Inc., New York, USA, was only rendering referral services to the assessee, and was not undertaking or performing any “technical services” where special skills or knowledge relating to a technical field were required, therefore, it can safely be concluded that the referral fees received by the foreign agency from the assessee was not towards technical fees.
(iii). Consultancy fees :
8 & 5051/Mum/2015 M/s Knight Frank (India) P Ltd. Vs DCIT (a). As the foreign agency by using its skill, business acumen and knowledge which was acquired by it for its own benefit, was only referring customers to the assessee, therefore, it cannot be said that it was providing any consultancy services to the assessee. In fact, the term „consultant‟ refers to a person, who is consulted and who advises or from whom information is sought. In our considered view, the foreign concern had not provided any consultation or advise to the assessee, but in fact was only referring or introducing customers to it. Accordingly, we are of the considered view, that as the foreign concern was not providing any consultancy services to the assessee, therefore, the referral fees received by the assessee cannot be held as consultancy fees.
On the basis of our aforesaid observations, we are of the considered view, that as the referral fees received by the foreign concern viz. Newmark & Company Real Estate Inc., New York, USA, from the assessee, was neither towards managerial, technical or consultancy services, hence the same cannot be characterised as receipt of income towards „fees for technical services‟ by the said foreign concern.
We thus are of the considered view, that as the income received by the foreign concern viz. Newmark & Company Real Estate Inc., New York, USA, from the assessee was neither income in the nature of „interest‟ as set out in Sec. 9(1)(v) of the Act; or income in the nature of „royalty‟ as set out in Sec. 9(1)(vi) of the Act; or income by way of „fees for technical services‟ as set out in Sec. 9(1)(vii) of the Act, therefore, the “Explanation” to Sec. 9(2), as had been made available on the statute vide the Finance Act, 2010, w.r.e.f 01.06.1976, would not come into play. Accordingly, we are of the considered view that as the referral fees received by the foreign concern from the assessee does not fall within the realm of the scope of “total income” of the said foreign concern viz. Newmark & Company Real Estate Inc., New York, USA, as envisaged in Sec. 5(2) of the Act, therefore, no obligation u/s 195 was cast upon the assessee to have deducted tax at
Alternatively, we find that no obligation was cast upon the assessee to deduct tax at source on the amount of Rs. 24,62,357/- that was paid to the foreign concern viz. Newmark & Company Real Estate Inc., New York, USA, towards referral fees, for the reason viz. (i) that, as the services rendered by the foreign concern for introducing a client did not did not “make available” any technical knowledge, experience, skill, know-how or processes to the assessee, therefore, the same did not fall within the realm of “Fees for included services” as envisaged in Article 12 of the India-USA, DTAA; and (ii). that, as the aforesaid payment made to the foreign concern for the services which were rendered entirely in USA, constituted its business profits within the meaning of Article 7 of the India-USA DTAA, therefore, in the absence of any Permanent Establishment (for short „PE‟) of the said foreign concern in India, the said amount could only be brought to tax in USA. As such, we are of the considered view, that even as per Sec. 90(2) of the Act, in pursuance of the beneficial provisions of the IndiaUSA DTAA, as the referral fees received by the foreign concern was not taxable in India, therefore, no obligation was cast upon the assessee to have deducted any tax at source on the said payment. Accordingly, for the said reason also no disallowance u/s 40(a)(i) of the referral fees of Rs. 24,62,357/- was called for in the hands of the assessee.
Accordingly, in terms of our aforesaid observations the order of the CIT(A) is set aside and, the disallowance of Rs. 24,62,357/- made by the A.O is vacated.”
As the facts and circumstances during both the years under consideration are same, respectfully following the order of the Tribunal in assessee’s own case for the A.Y. 2012-13 order dated 12/06/2019, we do not find any merit in the disallowance so made by the A.O.
Order pronounced in the open court on 23rd December, 2019.