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Facts
The Revenue's appeal challenges the CIT(A)'s order deleting additions made by the Assessing Officer (AO) on account of referral fees and reimbursement of expenses. The assessee, a UK-based bank, received a referral fee for introducing a client to a group company and also sought reimbursement for expenses incurred on behalf of group entities.
Held
The Tribunal held that the referral fees received by the assessee were in the nature of commercial services and not 'Fees for Technical Services' (FTS) under the Act or the DTAA. Similarly, reimbursements of specific and actual expenses incurred by the assessee on behalf of other group entities were not income chargeable to tax.
Key Issues
Whether the referral fees and reimbursement of expenses received by the assessee are taxable as 'Fees for Technical Services' under the Income Tax Act and the applicable DTAA.
Sections Cited
143(3), 144C(3), 9(1)(vii), 9(1)(i), 9(1)(vi), 9(1)(vii), 92CA(3), Article 12 of India-USA DTAA
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Income Tax Appellate Tribunal, “I” BENCH MUMBAI
Before: SHRI AMIT SHUKLA & SHRI GIRISH AGRAWAL
O R D E R
PER GIRISH AGRAWAL, ACCOUNTANT MEMBER:
This appeal filed by the Revenue is against the order of ld. CIT(A)- 56, Mumbai vide order, dated 02.04.2025, passed against the assessment order by ld. DCIT (IT) 2(2)(2), Mumbai u/s. 144C(3) r.w.s. 143(3) of the Income-tax Act, 1961 (hereinafter referred to as the “Act”), dated 05.02.2018, for AY 2014-15.
Grounds taken by the revenue are reproduced as under: 1. "Whether, on the facts and in the circumstances of the case and in law, for the issue of expenses of Rs. 3,77,38,994/-, the CIT(A) has erred in relying on Para 16 of ITAT's order for A.Y. 2011-12 and Para 8 of ITAT's order for A.Y. 2012-13 & 2013-14 as the orders u/s. 143(3) r.w.s. 144C(3) for A.Y.s 2011-12, 2012-13 & 2013-14 never examined the issue of 'Royalty' for the reimbursement received from HSBC Securities and Capital Markets (India) Private Limited (HSCH).”
"Whether, on the facts and in the circumstances of the case and in law, the CIT(A) has erred to delete the addition made by A.O in the head of reimbursement of expenses of Rs. 12,73,81,469/-received from HSBC Electronic Data Processing (India) Private Limited (HDPI) taxed as fees for technical services (FTS).” 3. "Whether, on the facts and in the circumstances of the case and in law, the CIT(A) has erred to delete the addition made by A.O. in the head of reimbursement of expenses of Rs. 1,80,12,196/- received from HSBC Software Development (India) Private Limited (HSDI) taxed as fees for technical services (FTS).”
Brief facts of the case are that assessee is a bank incorporated in United Kingdom (UK) and is a tax resident of UK. It provides various banking and financial services worldwide. It also provides support services such as Information Technology (IT), research support, global product management, etc., to HSBC group entities. Return of income was filed on 28.11.2014, total income at Rs.76,63,03,359/- which was revised on 23.03.2016, with revised total income at Rs.79,36,92,773/-. A reference was made to the ld. Transfer Pricing Officer (TPO) for computation of arm’s length price (ALP) of international transactions entered into by the assessee with its AEs. Accordingly, ld. TPO vide order u/s.92CA(3), dated 27.10.2017 accepted the ALP of the transactions reported by the assessee and no adjustment was proposed. A draft assessment order u/s. 143(3) r.w.s. 144C(1) of the Act was passed by the ld. AO on 29.12.2017. Assessee requested the ld. AO to finalize the assessment order based on the draft order. Thus, final assessment order u/s. 143(3) r.w.s. 144C(3) of the Act was passed on 05.02.2018 by assessing the total income at Rs.97,68,25,432/- after making addition towards receipt of referral fee of Rs.3,77,38,994/- and reimbursement of expenses from HSBC Software Development (India) Private Limited (‘HSDI’) and HSBC Electronic Data Processing (India) Private Limited (‘HDPI’) of Rs.1,80,12,196/- and Rs.12,73,81,469/-, respectively.
HSBC Bank Plc AY 2014-15 4. Facts relating to ground no.1 are that assessee has received a sum of Rs.3,77,38,994/- as consideration for introducing Unilever Plc (collectively referred to as ‘Unilever’) to HSCI (a group company engaged inter alia in providing merchant banking services in India). In other words, HSCI had paid a referral fee to the assessee for introducing Unilever Plc to HSCI. Briefly, Unilever wanted to increase its equity stake in an Indian Company through a voluntary offer and hence, needed the services of a merchant banker in India. Given that HSCI is registered as a merchant banker in India, assessee introduced Unilever to HSCI and was paid referral fee of Rs.3,77,38,994/- by HSCI.
At the outset, it was brought to the notice of the Bench that this identical issue had come up before the Co-ordinate Bench of ITAT in assessee’s own case for A.Y.2011-12, A.Y. 2012-13 and A.Y.2013-14. The relevant extract of the ITAT’s orders is reproduced as under:- AY 2011-12 ‘16. In the present case as well, referral fees has been received by the assessee on account of the referral made by assessee for the potential rendering of services by HSCI to the prospective client so referred. In the activity carried out by assessee (for which it has earned referral fee from HSCI), there is no element of managerial, technical or consultancy function discharged by assessee. In fact, the services are nothing but commercial services. Accordingly, the referral fees received from HSCI cannot be construed as ‘Fees for Technical Services’ under Explanation 2 to Section 9(1)(vii) of the Act and, therefore, not subject to tax under Section 9(1)(vii) of the Act. Since neither Section 9(1)(i) or Sections 9(1)(vi) and 9(1)(vii) of the Act bring this income within the scope of the taxing provisions, the referral fees received by the assessee from HSCI cannot be deemed to accrue or arise in India under Section 9 of the Act. Hence, such income is not taxable within the provisions of DTAA in light of the interpretation given as per Memorandum of Understanding concerning ‘Fees for Technical Services’ in Article 12 of India-USA DTAA. In view of the above discussion, we direct the Assessing Officer to delete the said
AY 2012-13 and AY 2013-14 ‘8. As could be seen from the observations of the Tribunal hereinabove, in assessment year 2011-12 as well, the assessee had referred a global client to HSCI in relation to a transaction of increasing equity stake in the Indian entity of the global client through a voluntary offer and HSCI acted as a merchant banker to the global client in relation to such transaction. Thus, it is very much clear that material facts relating to the issue in dispute in assessment year 2011-12 as well as the impugned assessment year are more or less identical, except the change in the global client. In the impugned assessment year, HSCI provided identical nature of services to Siemens AG which was earlier provided to ABB (Switzerland) in assessment year 2011-12. That being the case, respectfully following the aforesaid decision of the co-ordinate bench in assessee’s own case, we hold that the referral fee received by the assessee is not in the nature of FTS either under the provisions of domestic law or under the DTAA. Accordingly, the assessing officer is directed to delete the addition.’ 5.1. The facts of the case before us are identical to those on which judicial pronouncements have been extracted above, except for variation in the quantum. Nothing contrary has been brought on record. Accordingly, respectfully following the decisions of the Co-ordinate Bench in favour of assessee in appeals for AY 2011-12, 2012-13 and 2013-14, we uphold the findings arrived at by the ld. CIT(A) whereby addition made by the ld. Assessing Officer of Rs.3,77,38,994/- are deleted. Ground no.1 raised by the revenue is dismissed.
Ground nos. 2 and 3 relates to reimbursement of expenses received HSDI and HDPI of Rs.1,80,12,196/- and Rs.12,73,81,469/-, respectively, taxed as fees for technical services (FTS). Ld. A.O. held that assessee failed to prove the nature of expenses incurred towards social security and statutory contribution cost in UK. Further, he mentioned that primary onus is on the assessee to establish the genuineness and nature of transactions. According to him, since assessee has not satisfactorily proved that alleged reimbursement of expenses has no nexus with IT cost, the same are treated as FTS for rendering IT related and other services.
5.1. Response filed by the assessee on the observations made by the ld. Assessing Officer is tabulated below for ready reference: Observations of ld. AO Response by the Assessee The assessee has not replied to the The Appellant submits that the specific questions regarding details of allegation that the Appellant has not salary, employee wise with scope of replied to specific questions is work, duration of stay in India, incorrect. The specific details nature of services provided, service regarding reimbursement of expenses request from client company, etc. were sought vide notice dated 10 October 2017. In response to the same, the Appellant vide submissions dated 3 November, 2017 has provided the copy of invoices. Further, the allegation of AO regarding non-submission of month- wise or employee-wise break-up is baseless since the said details were never sought by the AO in first place. In fact, the Appellant in its submissions dated 3 November 2017 had clearly explained the factual matrix of reimbursement of expenses including the fact that the said
HSBC Bank Plc AY 2014-15 employees are working under the supervision and control of HSDI and HDPI and also the salary cost of the said employees is borne by these entities. However, the social security cost of such employees was first paid by the Appellant and then the same was reimbursed by HSDI and HDPI.
It is also not set out that why the The Appellant submits that it has employees on the payroll of assessee provided IT related support services are deputed in India with HSDI to HSDI and HDPI which has been offered to tax in the return of income. Apart from said income, the Appellant has also received reimbursement of expenses from above-mentioned entities. In the assessment order, the AO has wrongly clubbed the income offered to tax with the reimbursement of expenses despite the fact that the reimbursement of expenses have no nexus with the IT related services provided by the Appellant and the Appellant had filed specific response vide letter dated 3 November 2017 relating to the said fact that the said reimbursement of expenses are not related to the IT support services. Despite submitting specific details/information, the AO has failed to distinguish the income from IT related services (which has been HSBC Bank Plc AY 2014-15 offered to tax) and reimbursement of expenses (which is not chargeable to tax). Further, the AO has failed to prove as to how the IT related services and reimbursement of expenses are related to each other or how the reimbursement of expenses qualifies to be FTS. Accordingly, the action of the AO is based on mere surmises and conjectures.
Assessee submitted that this legacy issue has been decided by the Co-ordinate Bench of ITAT, Mumbai in assessee’s own case for Assessment Year 2008-09, 2010-11, 2011-12, 2012-13 and 2013-14. Relevant extract from ITAT order for AY 2011-12 is reproduced an under: ‘4. Ground of appeal
no. 1 pertains to the action of Assessing Officer as well as CIT(A) in treating the reimbursement of expenses incurred by the assessee on behalf of HSBC Electronic Data Processing India Private Limited (HDPI) as taxable in the hands of the assessee. The assessee has submitted that the payment received by it from HDPI is mere cost reimbursement towards payments made by the assessee. The same do not represent the assessee's income and has no nexus to the IT enabled services being provided by the assessee to HDPI. In order to support is claim, the assesse filed sample copies of the invoices raised by the assessee on HDPI's UK Branch which pertains to cost reimbursements (i.e. reimbursement of payroll, rent, other miscellaneous expenses) and invoices raised by the assessee on HDPI for social security related payments of the seconded employee. Such reimbursement of expenses has no nexus with the IT related services rendered by the assessee to HDPI, which has been taxed in the hands of the assessee. 5…… 6……
7. We have carefully considered the rival submissions and perused the material on record. We are inclined to uphold the grievance of the assessee. The reimbursement received by the assessee are in respect of HSBC Bank Plc AY 2014-15 specific and actual expenses incurred by the assessee and do not involve any mark-up and the assessee has furnished sufficient evidence to demonstrate the incurring of said expenses. There is thus, no good reason to make any addition to the income in respect of the reimbursement of expenses. The action of the CIT(A), as the Learned Representative rightly contends, is based on pure surmises and conjectures. 8…….
Quite clearly, payments by way of reimbursement of expenses incurred on behalf of the payer cannot be construed as income chargeable to tax in the hands of the payee, a proposition which is approved by the Hon'ble Bombay High Court in the case of Siemens Aktiongesellschaft (supra) In view of the above discussion, we direct the Assessing Officer to delete the disallowance of expenses sustained by the CIT(A) and hold that no part of reimbursement of expenses received by the assessee on the facts of this case be treated as income of the assesses. The assessee succeeds accordingly on this Ground of appeal
.’ 6.1. Further, we note that ld. CIT(A) stated that this issue has also been decided at the first appellate stage for Assessment Year 2020-21 by placing reliance on the co-ordinate bench decisions for Assessment Year 2008-09, 2010-11, 2011-12, 2012-13 and 2013-14 in assessee’s own case. Relevant extract of first appellate order of AY 2020-21 as stated by ld. CIT(A) is reproduced as under: “6.7 With regard to this issue, respectfully following the decision of Hon'ble Mumbai Tribunal in favour of the appellant in A.Y. 2008-09, 2010-11, 2011-12, 2012-13 and 2013
14. I find that these principles are equally applicable for this issue in this year also. Therefore, the A.D. is directed to delete the addition of Rs. 10,06,66,731 and Rs. 4,15,27,759, This ground (No.2 and 3) of appeal is treated as allowed."
The facts of the case before us are identical to those on which judicial pronouncements have been extracted above, except for variation in the quantum. Nothing contrary has been brought on record. Accordingly, respectfully following the decisions of the Co-ordinate Bench in favour of assessee in appeals for AY 2008-09, 2010-11, 2011- 12, 2012-13 and 2013-14, we uphold the findings arrived at by the ld.
HSBC Bank Plc AY 2014-15 CIT(A) whereby additions made by the ld. Assessing Officer of Rs. 1,80,12,196/- and Rs. 12,73,81,469/- are deleted. Ground nos. 2 and 3 raised by the revenue are dismissed.
In the result, appeal of the revenue is dismissed.
Order is pronounced in the open court on 13 February, 2026 Sd/- Sd/- (Amit Shukla) (Girish Agrawal) Judicial Member Accountant Member
Dated: 13 February, 2026 Ankit, Sr.P.S. Copy to : 1. The Appellant 2. The Respondent 3. DR, ITAT, Mumbai 4. Guard File 5. CIT BY ORDER,
(Dy./Asstt.Registrar) ITAT, Mumbai