The New Delhi Bench of the Income Tax Appellate Tribunal (ITAT) has ruled that mere customer referral without any transfer of technology or ‘make available’ of technical know-how falls outside the Fees for Technical Services (FTS) ambit under Article 12(5)(b) of the India-Netherlands DTAA and Section 9(1)(vii) of the Income Tax Act.
The ITAT clarified that where a foreign entity earns commission solely for referring customers to its Indian associated enterprise, without rendering any technical or consultancy service and without ‘making available’ any technical knowledge, skill, know-how or process to the recipient, the receipts do not constitute ‘Fees for Technical Services’ under Article 12(5)(b) of the India-Netherlands DTAA or Section 9(1)(vii) of the Income Tax Act, and are taxable only as business income under Article 7, which requires the existence of a Permanent Establishment in India.
The Division Bench comprising Vikas Awasthy (Judicial Member) and Naveen Chandra (Accountant Member) noted that the assessee earns commission at fixed rates ranging between 3.6% to 5.1% of the gross sales value of sales made by Mitsubishi Electric India Private Limited (MEI) to the referred customers, and does not provide any services relating to design, technical or otherwise to MEI. The commission invoices raised on MEI contain only the customer’s name, rate of commission and commission amount, which tallies with the sales reports submitted by MEI.
The Tribunal observed that the AO had nowhere established the essential condition to term a technical service as FTS, namely, the fulfilment of the ‘make available’ clause under Article 12(5)(b) of the DTAA. The Tribunal further observed that there is no transfer of technology, and the services rendered by the assessee have not enabled MEI to apply any technology independently.
Briefly, the assessee, Mitsubishi Electric Europe B.V., is a company incorporated and tax-resident in the Netherlands, and is engaged in the business of sale of industrial, electrical and electronic equipment. It earns commission/referral fees from its Indian group company, Mitsubishi Electric India Private Limited (MEI), at a fixed percentage of the gross sale value of sales made by MEI to customers referred by the assessee.
For Assessment Year 2022-23, the assessee filed its return of income declaring NIL income and disclosed the commission of INR 2.96 crores received from MEI as ‘income not chargeable to tax as per DTAA’ under Article 5 read with Article 7 of the India-Netherlands Tax Treaty. The Assessing Officer issued a draft assessment order treating the said commission as ‘Fees for Technical Services’ (FTS) under the Act as well as the Netherlands Treaty, and the Dispute Resolution Panel (DRP) upheld the draft order. The AO thereafter passed the final assessment order making an addition of INR 2.96 crores to the assessee’s income as FTS.
