2019 (5) TMI 733 - AT - Income Tax

Income accrued in India - Referral fees received by the assessee from Credit Suisse Securities (India) Pvt. Limited - constitute Fees for Technical services - Indo- Swiss DTAA HELD THAT - As decided in assessee's own case 2018 (2) TMI 969 - ITAT MUMBAI 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 . - Decided in favour of assessee Taxability of interest paid by assessee to its head office - income attributable to head office and liable to tax in India - Article- 7(2) of India - Switzerland Tax Treaty - function carried out, assets deployed and the risk assumed by the head office - Whether interest attributed to India Branch shall be part of business income of Indian Branch whereas the interest attributable to head office would be taxable under domestic source of rule of taxation u/s 9(1)(v) and is liable to tax in India? - HELD THAT - As in Sumitomo Mitsui Banking Corporation 2012 (4) TMI 80 - ITAT MUMBAI held that wherein Indian Branch of foreign bank paid interest to head office and other overseas branches of the Foreign Bank, on advances received by it, said interest is neither deductable in the hand of Indian Branch or chargeable to tax in the hand of head office and overseas branches being all single entity. Similar contention as raised by AO in the present case that provision of section 9(1)(v) prescribed that interest payable by PE in India being income deemed to accrue or arise in India is chargeable to tax. The Special Bench further held that such interest payable by PE to head office being payment made to self does not give rise to income i.e. chargeable to tax in India as held by Hon ble Supreme Court in Kikabhai Premchand 1953 (10) TMI 5 - SUPREME COURT and the question of bringing the said income to tax by relying on the provision of section 9(1)(v), therefore, does not arise. The interest paid to head office of the assessee bank by its branch which constitute its PE in India is not deductible as expenditure under the domestic law being payment to self, the same is taxable by determine the profit attributable to the PE which is taxable in India as per the provision of Article 7(2) 7(3) of Indo-Japanese Tax Treaty r.w. paragraph-8 of Protocol which are more beneficial to the assessee. It was also held that the said interest, however, cannot be taxed in India in the hands of assessee bank, a foreign enterprises being payment made to self which cannot give rise to the income i.e. taxable in India as per the domestic law. The observation made by AO that interest payment made to head office is attribution to the interest income of head office as provided under Article-7(2) of India - Switzerland Tax Treaty on the basis of function carried out, assets deployed and the risk assumed by the head office is misconceived.

Summary

Issues Involved:

1. Taxability of referral fees received by the appellant.
2. Classification of referral fees as Fees for Technical Services.
3. Taxability of interest paid by the Mumbai Branch to its Head Office.
4. Initiation of penalty proceedings under section 271(1)(c) of the Act.

Issue-wise Detailed Analysis:

1. Taxability of Referral Fees:

The appellant contended that the referral fees received through its Dubai and Singapore branches from an Indian company should not be deemed to accrue or arise in India under section 5(2)(b) read with section 9(1)(i) of the Income Tax Act. The Tribunal referred to the appellant's own case for Assessment Year 2011-12, where it was held that the referral fees were not taxable in India as they were not attributable to a Permanent Establishment (PE) in India, as per Article 7 of the Indo-Swiss Double Taxation Avoidance Agreement (DTAA). The Tribunal upheld this view, noting that the referral activity was conducted outside India and the appellant's PE in India had no role in it. Therefore, the referral fees were not taxable in India.

2. Classification of Referral Fees as Fees for Technical Services:

The Assessing Officer had classified the referral fees as Fees for Technical Services under section 9(1)(vii) of the Act. However, the Tribunal disagreed, citing past judgments (Cushman & Wakefield, CLSA Ltd., and Star Cruise India Travel Services) that similar referral fees were considered as commission income and not Fees for Technical Services. The Tribunal concluded that the referral fees in question were indeed commission income and not taxable as Fees for Technical Services.

3. Taxability of Interest Paid by the Mumbai Branch to its Head Office:

The Assessing Officer had considered the interest paid by the Mumbai Branch to its Head Office as income attributable to the Head Office and thus taxable in India. The Tribunal referred to the Special Bench decision in Sumitomo Mitsui Banking Corporation vs. DCIT, which held that such interest payments are neither deductible nor taxable as they are payments to oneself. The Tribunal also cited the Supreme Court's ruling in Kikabhai Premchand, which supports the view that payments to oneself do not give rise to taxable income. Consequently, the Tribunal ruled that the interest payments were not taxable in India.

4. Initiation of Penalty Proceedings under Section 271(1)(c):

The Tribunal did not specifically address the initiation of penalty proceedings under section 271(1)(c) of the Act in detail, but given that the primary grounds of appeal were decided in favor of the appellant, it can be inferred that the basis for penalty might no longer be valid.

Conclusion:

The Tribunal allowed the appeals for both Assessment Years 2013-14 and 2014-15, ruling in favor of the appellant on all grounds. The referral fees were not deemed to accrue or arise in India, were not classified as Fees for Technical Services, and the interest paid to the Head Office was not taxable. The principle of consistency was applied, following previous rulings in the appellant's favor.