HSBC BANK PLC,MUMBAI vs. DCIT (IT) 2(2)(2), MUMBAI

The captioned appeal by the assessee is directed against the order of CIT(A)-15, Mumbai dated 31.08.2016, pertaining to the Assessment Year 2011- 12, which in turn has arisen from the order dated 29.05.2015 passed by the Assessing Officer, Mumbai under Section 143(3) r.w.s 144C(3) of the Income-tax Act, 1961 (in short 'the Act').

In this appeal, assessee has raised the following Grounds of appeal :-

Briefly put, the relevant facts are that the appellant assessee is a company incorporated in the UK and is engaged in the business of providing banking and financial services to individuals and commercial organizations across the world. The assessee also provides support services such as Information Technology (IT), research support, global product management, etc., to its group entities and, it does not have any office or place of business in India. During the assessment proceedings, the Assessing Officer held that certain payments received, viz. (a) reimbursement of expenses; (b) referral fee; and, (c) protection fees from the Indian entity as ‘Fees for Technical Services’ under the Act as well as under provisions of India-UK Double Taxation Avoidance Agreement (DTAA). The stand of the assessee was that none of the 3 HSBC Bank Plc Technical Services’ and that since the assessee did not have a Permanent Establishment (PE) in India, hence, such receipts are not taxable in India. This is the precise area of difference between the assessee and the Revenue, which is manifested in the Grounds of appeal enumerated above.

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 its claim, the assessee 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.

The ld. DR appearing for the Revenue, on the other hand, relied upon the orders of the authorities below and submitted that the onus is on the assessee to produce all the evidences of expenditure and that this onus is clearly not discharged by the assessee.

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 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.

Here, we would also like to refer to the judgment of A P Moller Maersk AS (supra). In that case, issue related to a foreign company engaged in shipping business, which was a tax resident of Denmark; that it had agents working for it who booked cargo and acted as clearing agents for the assessee; and, that in order to help all its agents across the globe, the assessee had set up and maintained a global telecommunication facility called Maersk net system which was a vertically integrated communication system. The agents would pay for 5 HSBC Bank Plc the usage of system on a pro-rata basis. According to the assessee, it was merely a system of cost sharing and the payments received by the assessee from its agents in India were in the nature of reimbursement of expenses. The Assessing Officer, however, did not accept this contention and held that the amounts paid by the three agents to the assessee were in the nature of ‘Fees for Technical Services’ liable to tax in India under Article 13(4) of the Double Taxation Avoidance Agreement between India and Denmark; and, accordingly taxed it at 20% as per Section 115A of the Act. The Tribunal accepted the plea of the assessee and the Hon'ble High Court dismissed the Department's appeal holding that the Tribunal had rightly observed that the Maersk-net- communication-system was an automated software based communication system which did not require the assessee to render any technical services; that it was merely a cost sharing arrangement between the assessee and its agents to efficiently conduct its shipping business; and, that it was a part of the shipping business and could not be captured under any other provisions except under the DTAA. The Hon'ble High Court, dismissing the appeal of the Department, held as under:

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 assessee. The assessee succeeds accordingly on this Ground of appeal.

Ground of appeal no. 2 pertains to the action of Assessing Officer in treating the fee for corporate finance and advisory services, i.e. referral fee of `3,12,93,500/- received by the Assessee from HSBC Securities and Capital (India) Private Ltd (HSCI) as ‘Fees for Technical Services’. This action has also been affirmed by the CIT(A).

The Ld. DR, on the other hand, relied upon the orders of the authorities below and submitted that this income is in the nature of ‘Fees for Technical Services’ as per the definition provided under the Act and the DTAA.

We have carefully considered the rival submissions, perused the relevant material, including the orders of the lower authorities as well as the case laws referred at the time of hearing. During the year under consideration, the assessee had received a sum of `3,12,93,500/- as consideration for introducing ABB Switzerland (client of Assessee) to HSCI. In other words, HSCI had paid a referral fee to assessee for introducing ABB to HSCI. Briefly, ABB Switzerland wanted to increase its equity stake in ABB Ltd. India through a voluntary offer and hence needed the services of a merchant banker in India. As per Section 9 of the Act, income earned by a non-resident is taxable in India if, inter-alia, the non-resident has a business connection in India and the income arises through or from the business connection; or it is in the nature of royalty or ‘Fees for Technical Services’. Factually speaking, in 8 HSBC Bank Plc India.

The AAR in the case of Cushman & Wakefield (S) Pte Ltd., In Re (supra) which was subsequently relied upon in Real Resourcing Ltd. (supra), it has been held that the referral fee did not amount to "royalty" within the meaning of Explanation 2 to section 9(1)(vi) of the Act as there was no imparting of information regarding commercial knowledge or experience. Consideration for information concerning industrial, commercial and scientific experience could be regarded as "royalty" only if it was received for imparting know-how and the like. The referral fee received by the applicant from the Indian affiliate for introducing customers was not royalty income, nor was there any intellectual property involved as there was no sharing of commercial experience or skill with the Indian affiliate.

Our coordinate bench in the case of CLSA Ltd. (supra) has examined a similar issue. In the said case, the Assessing Officer held that referral fees was in the nature of fees for technical services received by the assessee and, therefore, the same was chargeable to tax in India. The Revenue therein, relied on Section 5(2) read with Section 9(1) of the Act to contend that the source of the referral fees being the execution of transactions in India through Indian entity on behalf of the referred clients, the right to receive the referral fees arose in India only and, therefore, the income on account of the referral fees was chargeable to tax in India in the hands of the assessee as per the specific provisions contained in Section 5(2)(b) read with Section 9(1)(i) of the Act being the income deemed to accrue or arise in India. The Tribunal held that referral fees received by assessee from Indian company for referring

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 the 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 addition sustained by the CIT(A), and assessee succeeds on this Ground of appeal.

Ground of appeal no. 3 relates to protection fee amounting to `1,33,36,290/- received from HSBC Asset Management India Pvt Ltd (AMIN) as ‘Fees for Technical Services’.

Before us, Learned Representative for the assessee has explained that 10 HSBC Bank Plc AMIN provides portfolio management and other services to its clients. The services by AMIN to its customers aim to provide personalized portfolio management services to select clientele depending on the investor’s risk appetite, growth expectations and personal investment requirements. In August 2007, AMIN launched a close-ended capital guaranteed product in India from HSBC. In connection with this, AMIN appointed the assessee to provide services relating to provision, maintenance, calculation and publication of the dynamic portfolio methodology on each valuation day. In support of its contention about the issue in hand, the Learned Representative relied on the following judgments:

The Ld. DR, on the other hand, relied upon the orders of the authorities below and submitted that this income is in the nature of ‘Fees for Technical Services’ as per the definition provided under the Act and the DTAA.

We have carefully considered the rival submissions, perused the relevant material, including the orders of the authorities below as well as the case laws referred at the time of hearing. During the year under consideration, the assessee had received a sum of `3,12,93,500/- as consideration for providing services, as a protection fee for guaranteed portfolio performance. From the discussion in the orders of the lower authorities, the material on record and the explanations of the Learned Representative, it is noted that AMIN provides portfolio management and other services to its clients in connection with the HSBC Capital Guard Portfolio, a scheme, which targets to provide principal protection to the 11 HSBC Bank Plc Dynamic Portfolio Methodology with calculated exposure to Performance Assets, Safe Assets and Exit Assets. The scheme seeks to generate capital appreciation by investing in equity/equity related securities while endeavouring to protect the downside by investing in debt/money market instruments/funds. In order to achieve this objective, the exposure to debt is dynamically rebalanced in an attempt to provide downside protection while at the same time maximizing the equity exposure within a defined protection level. In connection with the above scheme, AMIN had appointed the assessee to provide services relating to provision, maintenance, calculation and publication of the Dynamic Portfolio Methodology on each valuation day. Based on the data and information provided by AMIN, assessee creates a model portfolio using the Dynamic Portfolio Methodology and computes the value of the Performance Asset, the Safe Asset and the Exit Asset on the valuation day. Further, the assessee provides rebalancing data (assuming the notional amount of securities that can be bought and sold) which could be used by AMIN for managing the scheme based on the Dynamic Portfolio Methodology. It is not possible for AMIN to independently apply the methodology used by the assessee for providing the aforesaid services. Additionally, the assessee could be liable to pay AMIN an amount equal to the Gap Risk (as defined in the agreement) if at any time before the final valuation day, the Synthetic Portfolio level is less than the Reference Level.

In this context, we think it appropriate to refer to the decision rendered in the case of De Beers India Minerals Pvt. Ltd. (supra). In the said case, the Dutch company performed services using technical knowledge and expertise and it had given data, photographs and maps to assessee but they did not make available technical expertise, skill or knowledge in respect of collection

In light of the above legal position, we find that services provided by the assessee do not make available any technical knowledge, experience, skill

Insofar as Ground of appeal no. 4 is concerned, it relates to charging of interest under Section 234B of the Act which is consequential in nature and does not require any specific adjudication.

In the result, the appeal of the assessee is allowed, as above.