In a recent decision, the Mumbai Bench of the Income Tax Appeal Tribunal (the “Court“) ruled that commission income received by a non-resident distributor of mutual funds from an Indian company may not be taxed in India, if all business transactions are carried out by the non-resident distributor outside India. India.
Credit Suisse (Singapore) Limited (the “Taxpayer“) is a tax resident of Singapore and is entitled to the beneficial provisions of the India-Singapore Agreement for the Avoidance of Double Taxation (the “Singapore DTAA“). The taxpayer is registered as a Foreign Institutional Investor (“FII”) with the Securities and Exchange Board of India (the “SEBI“) and makes portfolio investments in Indian securities. The Taxpayer and HDFC Asset Management Company Limited (“HDFC India“) has entered into an offshore distribution agreement (the “OK“) dated September 6, 2011, under which the taxpayer agreed to distribute mutual funds launched by HDFC India to obtain subscriptions from investors outside India.
During the 2014-15 taxation year, the Taxpayer, among others, received commission income of approximately INR 163 million from HDFC India. This income was treated as tax exempt in the tax return under Section 12 of the Singapore DTAA on the basis that the taxpayer did not supply technology to HDFC India or make available technical knowledge, experience, skills, know-how or process. Further, the Taxpayer argued that even though the commission was considered business income of the Taxpayer in India, such income could not be taxed in India under Section 7 of the Singapore DTAA because the Taxpayer had no permanent establishment in India. The tax agent disagreed and found that the taxpayer was distributing HDFC India products controlled and regulated by SEBI and the Reserve Bank of India, and therefore there was a commercial connection and/or sufficient connection between the source of income and India, which made the income taxable in India. The Commissioner of Income Tax (Appeals) held that while the commission income was not in the nature of fees for technical services, it was in the nature of business income, but given that the taxpayer did not have a permanent establishment in India, the commission income was not taxable in India. The tax authorities appealed to the Court.
Based on the facts and an analysis of the representations made by the Taxpayer, the Tribunal concluded that:
- Section 5(2) of the Income Tax Act 1961 (the “IT law“) provides that the total income of a person who is a non-resident includes all income from whatever source which is received or deemed to be received in India; or accrues or arises or is deemed to accrue or arise in India for the assessed.
- Section 9 of the Information Technology Act specifies that all income generated or arising, directly or indirectly, by or from:
- any business relationship in India,
- any asset or source in India, or
- the transfer of a fixed asset located in India
shall be deemed to originate or arise in India. Further, Explanation 1 of Section 9(1)(i) of the Computers Act provides that in the case of a business not wholly conducted in India, only that part of the income which is reasonably attributable to operations conducted in India India is deemed to be born or born in India.
- Since the Taxpayer is a distributor of HDFC India’s products outside India, he did not carry on any commercial activity in India. The commission was earned solely for services performed outside India (in Singapore), and therefore the tax officer cannot say that this income is reasonably attributable income because it has neither accrued nor occurred in India.
- The Court followed the Toshoku Ltd. case decided by the Supreme Court of India (follow this link for a copy of the decision) in which it was held that commission amounts earned by a non-resident for services performed outside India cannot be regarded as income accrued or generated in India.
This Tribunal decision is a welcome decision for taxpayers engaged in litigation on similar issues. That said, the issue of taxation of offshore services and income earned abroad has been the subject of litigation in various Indian courts.
In the Ishikawajima-Harima (our update on a similar article here), the Supreme Court of India has ruled that the concept of territorial nexus is fundamental in determining the taxation of any income in India. Thus, income from offshore services performed outside India will not be taxable in India simply because the activities are rendered in connection with an Indian project. After this decision, explanations for the purposes of Section 9(1)(v) of the IT Act (dealing with interest income), Section 9(1)(vi) of the IT Act (dealing with royalty income) and IT 9(1)(vii) (dealing with charges for technical services) have been specifically added to provide that interest income, royalty income and charges for technical services of a non-resident shall be deemed to have accrued or arise in India, whether the non-resident has a residence, place of business or commercial connection in India, or whether the non-resident has rendered services in India.
In the Vodafone Also (read more), the Supreme Court ruled that the Indian tax authorities did not have territorial jurisdiction to tax the offshore transaction, and therefore the taxpayer was not liable to withhold Indian taxes. The Supreme Court observed that in the absence of a connection between the transaction and India, the provisions of Section 195 of the Computers Act relating to withholding tax compliance obligations would not apply. In order to overcome the impact of the Supreme Court’s decision, the Finance Act 2012 amended Article 9 of the IT Act with retroactive effect to provide that if an asset, being a share or participation in a company or an entity incorporated or incorporated outside India, derives its value, directly or indirectly, substantially from an asset situated in India, the gains arising from the transfer of such share or interest will be taxable in India. Further, Section 195 of the Computers Act has also been retrospectively amended to clarify that it applies to all persons including non-residents whether or not the non-resident is present in India . No such changes have yet been made with respect to commission income from services performed outside India. In these circumstances, it is likely that the Inland Revenue would prefer to appeal to the Mumbai High Court against the Tribunal’s decision.
The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.