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Facts
The assessee, a non-resident residing in Dubai for 30 years, received referral fees of Rs. 19,28,994/- from BNP Paribas for introducing high net worth clients for their Wealth Management Product. The AO and CIT(A) treated this income as 'fees for technical services' under Section 9(1)(vii) and taxable in India, rejecting the assessee's argument that the services were rendered outside India without any Permanent Establishment or business connection in India.
Held
The Tribunal held that the referral fees received by the assessee constituted business income. Since the assessee is a non-resident who rendered services from Dubai and lacks a Permanent Establishment or business connection in India, this income does not accrue or arise in India under Section 9(1) or 9(1)(vii). The services of providing client references and information do not qualify as 'managerial, technical, or consultancy services' as per Explanation 2 to Section 9(1)(vii). Therefore, the addition confirmed by the CIT(A) was deleted.
Key Issues
Whether referral fees received by a non-resident for introducing high net worth clients to an Indian bank are taxable in India as 'fees for technical services' under Section 9(1)(vii) of the Income Tax Act, considering the absence of a Permanent Establishment or business connection.
Sections Cited
143(3), 147, 133(6), 194J, 195, 9(1), 9(1)(vii), Article 7 of India UAE DTAA, Article 14 of India UAE DTAA
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Income Tax Appellate Tribunal, ‘SMC‘ BENCH
आदेश / O R D E R PER AMIT SHUKLA (J.M): The aforesaid appeal has been filed by the assessee against order dated 28/07/2023 passed by CIT (A)-55, Mumbai for the quantum of assessment passed u/s. 143(3) r.w.s. 147 for the A.Y.2011-12. 2. In the grounds of appeal assessee has challenged the validity of reopening u/s.147 and on merits has challenged the
2 ITA No.3281/Mum/2023 Shri Ashok Bablani taxing of referral fees / commission of Rs.19,25,994/- earned by the assessee who is a non-resident from BNP Paribas as ‘income deemed to accrue or arise in India u/s.9(1) of the Act. 3. The brief facts are that assessee is a non-resident has been staying in Dubai for the last 30 years. Since assessee was not resident of India and did not have any source of income in India and accordingly, he was not required to file any return of income in India. In the NMS Cycle-1 for not filing of return of income and that assessee has earned income which is chargeable to tax u/s.194J/195 on the payment received from BNP Paribas was not declared and accordingly, notice u/s.148 dated 08/05/2017 was issued and served through e-mail. In response, he filed its return of income dated 11/09/2017 declaring income of Rs.4,67,940/-. 4. In response to show-cause notice for taxing of referral fees of Rs.19,28,994/- received from BNP Paribas, assessee submitted that he has been residing in Dubai since last 30 years and in order to increase the base of high net worth clients business of BNP Paribas, the bank requested the assessee to provide referrals of various persons residing in Dubai. The assessee only use to provide details of those persons alongwith their contact numbers and e-mail ID to participate in the Wealth Management Product introduced by the said bank and in return assessee used to get some referral fees for the same from the bank. It was further submitted that assessee is neither resident of India nor
3 ITA No.3281/Mum/2023 Shri Ashok Bablani has any fixed base or permanent establishment in India, therefore, income of referral fees is not taxable in India. 5. The ld. AO sought information from BNP Paribas u/s.133(6) for explaining the nature of services provided by the assessee. In response, BNP Paribas has forwarded the copy of agreement entered into with the assessee wherein following points were noted by him:- “1. The agreement is made between the assessee and BNP Paribas Investment Services India Pvt. Ltd registered under the Indian Companies Act and having its registered office at French Bank Building, 62, Homji Street, Fort, Mumbai-1. 2. The agreement Is termed as "Consultancy Service Agreement entered into on 20th June 2008. 3. The agreement states that by virtue of his/her activities and business connections, the Consultant has a network among companies and individuals who may be potentially interested by the services of BNPPISIPL 4. BNPPISIPL hereby engages the consultant, and the consultant hereby agrees, to provide to BNPPISIPL, on a no-exclusive basis, consultancy services whereby the Consultant will introduce new prospective wealth management Clients to BNPPISIPL 5. Fee & Payment In respect of the Services, during the term of this Agreement in respect of all clients directly introduced by the consultant and accepted by BNPPISIPL, the Consultant shall be entitled to receive a quarterly service fees at the rate of 25% of the Net Investment Revenue from the services as at the end of Fee Period, provided that Minimum Asset Value Is maintained by such Accepted Client.” 6. The ld. AO concluded that the services provided by the assessee is a consultancy fees liable to be taxed as u/s. 9(1)(vii)(b) of the Act as income is deemed to accrue or arise in
4 ITA No.3281/Mum/2023 Shri Ashok Bablani India. He also presumed that nowhere agreement provided that services have been rendered from outside India. Ld. AO further held that Article 7 of India UAE DTAA was also applicable as it is also business profit. He further relied upon the decision of AAR in the case of Rajeev Malhotra reported in 284 ITR 564 and taxed the referral fee amounting to Rs.19,28,994/- u/s.9(1). 7. The ld. CIT(A) after noting the terms of consultancy services agreement observed and held as under:- From the terms of services and payments of fees incorporated in consultancy services agreement, it is clear that the appellant was to do research, prospecting, to select and to certify potential wealth management clients of known integrity for BNP Paribas's products and services. The appellant was also to provide BNP Paribas about market appraisal, research on prospective clients together with information on track record and creditworthiness of such clients. The appellant was also to arrange meetings between the officers of BNP Paribas and prospective clients and also provide the list of prospective client profile on a continuous basis. For providing such services, the appellant was to receive quarterly service fee @ 25% of net investment revenue from providing such services. These fees were to be paid by BNP Paribas only when minimum asset value of Rs.20,00,00,000/- was maintained by the accepted client. If minimum asset value of Rs.20,00,00,000/- was not maintained by the accepted client at the end of each quarter, the fee in respect of such accepted client was Nil. Thus, the appellant got referral fees for (i) making research, prospecting, selecting and certifying potentially wealth management clients (ii) providing market appraisal, information on track record and creditworthiness of such clients on a continuous basis and (iii) arranging meeting between the officers of BNP Paribas and prospective clients. During the appellate proceedings, the appellant has provided the list of 5 clients (not the complete list of clients) namely, Venkat Manian, Karthick Narayanan, Arun Bablani, Binal Bhatia and Mrs. Shweta Notani Bakhru. The appellant has also
5 ITA No.3281/Mum/2023 Shri Ashok Bablani provided the client profile research made through the website "linkedin" in respect of those 5 potential wealth management clients. The evidences available on records show that the appellant had carried out research about the potential wealth management clients and after research, the appellant selected and certified such potential clients to BNP Paribas and also provided BNP Paribas with market appraisal of research on such clients. The clients were accepted by BNP Paribas. Those clients maintained minimum asset value of Rs.20,00,00,000/- at the end of each quarter. For providing such kind of services by the appellant, BNP Paribas has paid consultancy services fees to the appellant. The appellant was engaged by the BNP Paribas as consultant and the consultant had agreed to provide consultancy services. Thus, from the terms of consultancy service agreements the referral fees received by the appellant are in nature of fees received for providing consultancy services. 6.3.4 Now a question arises whether consultancy fees are taxable in India or not. In the case of the appellant, the appellant received consultancy fees (referral fees) for providing a list of potential wealth management clients, which were selected after doing research and were certified by the appellant. The appellant also provided the market appraisal and research on such prospective clients to BNP Paribas on continuous basis. On the basis of the list provided by the appellant BNP Paribas accepted such prospective clients and the accepted clients maintained minimum asset value of Rs.20,00,00,000/- on quarterly basis. On fulfillment of the terms and conditions of the agreement, the appellant was paid consultancy fees @ 25% of the net investment revenue from the accepted clients. The meaning of "Fees for Technical Services" has been explained in Explanation 2 to Section 9(1)(vii) of the IT. Act. As per the Explanation, fees for technical services means any consideration for rendering of any managerial, technical or consultancy services but it does not include consideration for any construction, assembly, mining or like project undertaken by the recipient or consideration which would be salary income of the recipient. In the case of the appellant, the appellant received
6 ITA No.3281/Mum/2023 Shri Ashok Bablani consultancy fees as per the terms and conditions mentioned in consultancy services agreement entered into by the appellant with BNP Paribas. After research, prospecting and selection of potential wealth management clients, the appellant carried out market appraisal to obtain information on track records and creditworthiness of such clients The appellant referred those clients to BNP Paribas The BNP Paribas accepted those clients and those clients maintained minimum asset value of Rs.20,00,00,000/- at the end of each quarter. Thus, on fulfillment of terms and conditions of the consultancy services agreement, the appellant received consultancy fees from BNP Paribas. The consultancy services mentioned in the explanation can be technical or non technical in nature. The nature of the consultancy services provided by the appellant was non technical consultancy services. Thus, as per the Explanation 2 to Section 9(1)(vii) of the IT Act, the consultancy services provided by the appellant are covered under "Fees for Technical Services" and therefore, the consultancy fees received by the appellant are taxable u/s.9(1)(vii) of the 1.T. Act. 8. He also referred to the decision of the Hon’ble Supreme Court in the case of GVK Industries vs. ITO reported in 54 taxmann.com 347 and the decision of AAR in the case of Rajiv Malhotra and certain other decisions and finally confirmed the said addition in the following manner:-
As discussed above, there is no income-tax on individuals in UAE, therefore, the appellant cannot take benefits of India-UAE treaty in respect of consultancy fees received from BNP Paribas. 6.2.8 As discussed above, the appellant being a non resident had provided non technical consultancy services, in the nature of Fees for Technical Services by providing list of potential wealth management clients to BNP Paribas. The appellant is a non- resident. The consultancy fees being "Fees for Technical Services were received by the appellant from BNP Paribas and the source of consultancy fee was in India. Therefore, irrespective of any business connection or Permanent Establishment in India or
7 ITA No.3281/Mum/2023 Shri Ashok Bablani services being rendered in UAE, the consultancy fee deemed to accrue or arise in India. As per Article 4 of the India UAE treaty, as no income tax is levied on individuals, therefore, the fees for technical services are not taxable in UAE. Once consultancy fees received by the appellant are not taxable in UAE, the appellant cannot take benefits of India-UAE treaty. Thus, the consultancy service fees of Rs.19,28,994/- received by the appellant from BNP Paribas are held as "Fees for Technical Services" taxable in India u/s.9(1)(vii) of the I.T. Act. The A.O. was justified in making addition of Rs. 19,28,994/- in respect of referral fees (consultancy fees) received by the appellant. Accordingly, ground. no. 2 of appeal is dismissed.” 9. We have heard both the parties and also considered the relevant finding given in the impugned orders. The only issue is, whether the referral fees received by the assessee from BNP Paribas is taxable u/s.91(1)(vii) as ‘fee for technical services’. It is not in dispute that assessee is a non-resident and has been staying in Dubai for the last 30 years. As per the agreement with BNP Paribas, assessee was engaged as a consultant to provide new prospective wealth management clients to BNP Paribas and in respect of such services for introduction and whenever such referral is accepted, assessee shall be entitled to receive formal service fees @25% of the Net Investment Revenue from the services as at the end of Fee Period, provided that Minimum Asset Value is maintained by such Accepted Client. The ld. CIT (A) has observed that assessee had to do research, prospecting, to select and to certify potential wealth management clients of known integrity for BNP Paribas's products and services. However, to fall in the category of ‘fee for technical services’,
8 ITA No.3281/Mum/2023 Shri Ashok Bablani there has to be rendering of services in the nature of any managerial, technical or consultancy services. Now, whether referring of high net worth clients to BNP Paribas can be reckoned as consultancy services? Nowhere the agreement provides, what is the nature of consultancy or in which field of investment assessee might be providing consultancy to the clients of BNP Paribas or to BNP Paribas itself. Getting the referral fees for giving reference of high net worth clients which BNP Paribas used to scrutinize and examine itself and if those persons subscribed to the products of BNP Paribas and continue to maintain that asset value, then some kind of fee of the net investment revenue was to be earned by the assessee. Nowhere has it been provided that assessee would be providing any such services of giving consultation to the BNP Paribas or its clients to make investment and on which product. Neither the terms of agreement as noted by the ld. CIT (A) nor anywhere else it has been brought on record that assessee was rendering consultancy services for the investment to the clients on behalf of BNP Paribas. Albeit, the agreement purely to introduce new prospective high net worth clients and to provide information about those clients to BNP Paribas. There is nothing which requires skill of consultancy to be provided either to the clients of BNP Paribas or to bank itself. Providing information about high net worth individuals and giving that reference does not amount to consultancy as envisaged u/s. 9(1)(vii). Thus, it will not come in the category of ‘fees for technical services’ under 9(1)(vii).
9 ITA No.3281/Mum/2023 Shri Ashok Bablani 10. Further, receiving of referral fee for giving reference of HNI is nothing but in the nature of business income of the assessee. For taxing the business income, either the assessee must have business connection in India or some kind of PE in India from where assessee might have rendered the services or earned the referral fee. Assessee has made reference of Dubai based clients from Dubai and then BNP Paribas used to approach them for selling their products and services. Since there is no FTS clause in India-UAE DTAA and Article 14 is not applicable because it is applicable to independent personnel services which provides list of professional services rendered in the capacity of professionals and admittedly assessee does not fall in the category of such professionals. Thus, it can only be covered under Article 7 whereby business income can be taxed provided assessee had PE or business connection in India. Accordingly, we hold that assessee’s referral fees is business income which is not taxable in India, because no income has accrued or arose in India in terms of Section 9(1) or under 9(1)(vii). Accordingly, addition confirmed by the ld. CIT(A) is deleted. 11. In the result, appeal of the assessee is allowed on merits. Since we have allowed the appeal on merits, issue of validity of reopening is treated as academic. 10. In the result, appeal of the assessee is allowed. Order pronounced on 16th Apr, 2024. Sd/- Sd/- (GAGAN GOYAL) (AMIT SHUKLA) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai; Dated 16/04/2024
10 ITA No.3281/Mum/2023 Shri Ashok Bablani KARUNA, sr.ps Copy of the Order forwarded to : 1. The Appellant 2. The Respondent. 3. CIT 4. DR, ITAT, Mumbai 5. Guard file. //True Copy// BY ORDER,
(Asstt. Registrar) ITAT, Mumbai