Fee Paid For Client Referral Services Is A Normal Business Payment And Not FTS: ITAT Delhi

The Bench, consisting of Anubhav Sharma (Judicial Member) and Shamim Yahya (Accountant Member), held that the remittances made by the assessee to its intermediary for providing client referral services would not come within the scope of 'fees for technical services' (FTS) under Section 9(1)(vii) of the Income Tax Act, 1961 and that the same was a normal business payment.

During the assessment proceedings, the Assessment Officer (AO) opined that the amount debited as 'Consultancy Fee' by the assessee M/s Hemera India Pvt. Ltd. in its Profit and Loss Account was in the nature of 'fees for technical services', on which the assessee had not paid TDS. Hence, the AO made additions to assessee's income. Against this, the assessee filed an appeal before the Commissioner of Income Tax (Appeals) (CIT (A)). The CIT (A) held that the fee paid by the assessee to CCTL, a UK resident Company, for services of client referral, amounted to marketing and sales promotion services, which fell within the ambit of managerial and consultancy services. Therefore, the CIT (A) ruled that the amount paid for the said services was in the nature of 'fees for technical services', as defined under Explanation 2 to Section 9(1)(vii) of the Income Tax Act, 1961. The CIT (A) held that since the said services were utilized by the assessee for the purpose of business carried on in India, the amount of consultancy fee was deemed to accrue or arisen in India, and hence, it was chargeable to tax in India as 'fees for technical services'. Against the order passed by the CIT(A), the assessee filed an appeal before the ITAT.

The assessee M/s Hemera India Pvt. Ltd. submitted before the ITAT that the said amounts were paid by the assessee to CCTL for facilitating sale of agricultural goods by way of introduction of a client to the assessee. The assessee added that it was a normal business payment that was covered within the scope of Article 7 read with Article 5 of the DTAA between India and UK. The assessee averred that CCTL did not provide any managerial service to the assessee. The assessee contended that the services provided by CCTL were akin to advisory services provided by a non-resident. The assessee added that the amount paid to CCTL was based on the percentage of the worth of agricultural products sold to the clients referred to the assessee by CCTL.

The ITAT observed that in the case of CIT versus Grup Ism (P) Ltd. (2015), the Delhi High Court had ruled that where a non-resident agent of an assessee company acted as a liasioning agent for the assessee and received remuneration for each client solicited by it for the assessee, such services would not fall within the ambit of consultancy services. Thus, the High Court had held that the remittances made by the assessee to its liasioning agent would not come within the scope of 'fees for technical services' under Section 9(1)(vii) of the Income Tax Act.

The ITAT noted that the Delhi Bench of the ITAT in the case of Wellspring Universal versus JCIT (2015) had held that the commission in the hands of a non-resident cannot be considered as received or deemed to be received in India, or as accruing or arising, or deemed to accrue or arise to the assessee in India.

The ITAT, thus ruled that the said consultancy charges paid by the assessee to CCTL for introduction of clients would fall in the definition of payments made to an intermediary or a liasioning agent, for channelizing, arranging or soliciting work order.

The ITAT, hence ruled that the nature of the transaction between the assessee and CCTL was not of providing any technical service. The ITAT added that the payment made by the assessee was in the nature of a normal business payment made to an intermediary.

Therefore, the ITAT allowed the appeal of the assessee.

Case Title: M/s. Hemera India Pvt. Ltd. versus DCIT

Dated: 13.06.2022 (ITAT Delhi)

Representative for the Appellant/Assessee: Mr. Ranjan Chopra, FCA

Representative for the Respondent: Mr. Tufail Tahir, Sr. DR

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