Commission Earned On Distribution Of Indian Mutual Fund Outside India, Not Taxable: ITAT Mumbai

The Bench, consisting of Pramod Kumar (Vice President) and Sandeep Singh Karhail (Judicial Member), held that merely because the Mutual Funds distributed were controlled and regulated by SEBI and RBI in India, the commission earned by the assessee/distributor cannot be taxed in India, since the said income was not 'reasonably attributable' to any operation carried out in India.

The assessee Credit Suisse (Singapore) Ltd. is a company incorporated in Singapore and is a tax resident of Singapore. The assessee is registered as a Foreign Institutional Investor with the Securities and Exchange Board of India (SEBI). The assessee conducts portfolio investments in Indian securities in its capacity as a SEBI registered Foreign Institutional Investor (FII) / Foreign Portfolio Investor (FPI).

The assessee entered into an Offshore Distribution Agreement with HDFC Asset Management Co. Ltd. As per the Distribution Agreement, the assessee agreed to distribute Mutual Fund schemes launched by HDFC Asset Management Co. Ltd., with a view to procure subscriptions for such schemes from investors outside India. Under the said Agreement, the assessee was required to create awareness about the schemes and identify potential investors from amongst its clients.

The assessee earned Offshore Distribution Commission from HDFC Asset Management Co. Ltd. in the relevant financial year, on which the assessee claimed exemption under Article 12 of the India-Singapore DTAA.

The Assessing Officer (AO) held that the commission received by the assessee was not Fees for Technical Services. The AO ruled that the assessee was operating as a distributor of an Indian fund, i.e., HDFC Mutual Fund, which is controlled and regulated by SEBI and the Reserve Bank of India (RBI) in India. Thus, the AO ruled that since the location, control and management of the fund was situated in India, it constituted a business connection in India, and therefore the offshore distribution income earned by the assessee had sufficient nexus with India.

Therefore, the AO ruled that the commission income received by the assessee was taxable in India under Article 23 of the India-Singapore DTAA read with Section 5(2) of the Income Tax Act, 1961. Accordingly, the AO made certain additions to the assessee's income. Against this order, the assessee filed an appeal before the Commissioner of Income Tax (Appeals) (CIT(A)).

The CIT(A) held that the Offshore Distribution Commission earned by the assessee was in the nature of business income and thus, in the absence of a permanent establishment in India, it was not taxable in India in view of Article 7 of the India-Singapore DTAA. Therefore, the CIT(A) deleted the additions made by the AO. Against the order passed by the CIT(A), the revenue department filed an appeal before the ITAT.

As per Article 7 of the India-Singapore DTAA, the business profits of a Singaporean enterprise shall be taxable only in Singapore, unless the enterprise carries on business in India through a permanent establishment. Article 23 of the India-Singapore DTAA deals with taxation of income not expressly mentioned in the DTAA.

Section 5(2) of the Income Tax Act, 1961 provides that any income which is received or is deemed to be received in India, or which accrues or arises or is deemed to accrue or arise in India, shall be included in the total income of a non-resident person.

The revenue department submitted before the ITAT that HDFC Mutual Fund is regulated and controlled by SEBI and RBI in India. Thus, the revenue department contended that the offshore distribution income earned by the assessee had sufficient nexus with India and, therefore, was taxable in India.

The assessee Credit Suisse (Singapore) Ltd. contended that it sold products of HDFC Asset Management Co. Ltd. in Singapore and that all the services were rendered by the assessee outside India. The assessee added that no service was rendered within India and thus, the offshore distribution income was not taxable in India.

The ITAT observed that Section 5(2) of the Income Tax Act provides that the total income of a non-resident includes all income from whatever source derived, which is received or deemed to be received in India, or which accrues or arises or is deemed to accrue or arise in India.

The ITAT noted that as per Section 9(1)(i) of the Income Tax Act, all income accruing or arising, whether directly or indirectly, through or from any business connection, property, asset or source in India, or through the transfer of a capital asset situated in India, shall be deemed to accrue or arise in India.

The ITAT further observed that as per Explanation 1(a) to Section 9(1)(i) of the Income Tax Act, only that portion of the income shall be deemed to accrue or arise in India for the purpose of taxation under the Income Tax Act which is 'reasonably attributable' to the operations carried out in India.

The ITAT noted that the assessee company is a non-resident for the purpose of the Income Tax Act. The ITAT observed that the assessee distributed Mutual Fund schemes launched by HDFC Asset Management Co. Ltd., with a view to procure subscriptions from investors outside India, for which it earned Offshore Distribution Commission.

The ITAT ruled that the assessee did not carry out any operation in India for the purpose of earning Offshore Distribution Commission. The ITAT observed that the revenue department sought to tax the said commission received by the assessee merely on the ground that the Mutual Funds distributed by it were controlled and regulated by SEBI and RBI in India, and thus the said commission was deemed to accrue or arise in India under Section 9(1)(i) of the Income Tax Act.

The ITAT held that an income can be deemed to accrue or arise in India only if the said income is 'reasonably attributable' to the operations carried out in India. The ITAT held that since all the operations were carried out by the assessee outside India, therefore, the Offshore Distribution Commission earned by it could not be held to be 'reasonably attributable' to any operation carried out in India.

The ITAT noted that the Supreme Court in the case of CIT versus Toshoku Ltd. (1980) had ruled that the commission amounts earned by a non-resident assessee for services rendered outside India cannot be deemed to be an income that has either accrued or arisen in India.

The ITAT upheld the order of the CIT(A) that since the assessee conducted portfolio investments in Indian securities in its capacity as a SEBI registered FII/FPI, the Offshore Distribution Commission earned by the assessee was a 'business income', and thus, in the absence of a permanent establishment in India, it was not taxable in India.

Thus, the ITAT dismissed the appeal filed by the revenue department.

Case Title: Dy. Commissioner of Income Tax versus Credit Suisse (Singapore) Ltd.

Dated: 06.06.2022 (ITAT Mumbai)

Representative for the Appellant: Mr. Milind Chavan, Sr. DR

Representative for the Respondent: Mr. Percy Pardiwala a/w Mr. Paras Savla

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