Fees paid for client referral services are normal commercial payment and not FTS: ITAT Delhi


The Delhi Bench of ITAT ruled that fees paid by the assessee to a non-resident for providing client introduction services would fall within the definition of payments made to an intermediary and cannot be considered a technical service.

The bench, composed of Anubhav Sharma (judicial member) and Shamim Yahya (accounting member), considered that the payments made by the assessee to its intermediary to provide client referral services would not fall within the scope of the “fee for technical services” (FTS) under section 9(1)(vii) of the Income Tax Act 1961 and that it was a normal commercial payment.

During the valuation process, the valuation agent (AO) estimated that the amount debited as “consulting fee” by the valuate M/s Hemera India Pvt. ltd. in his profit and loss account was of the nature of “fees for technical services”, on which the assessee had not paid TDS. Therefore, the AO made additions to the assessee’s income. Against this, the assessee filed an appeal with the Commissioner of Income Tax (Appeals) (CIT(A)). The CIT(A) found that the fees paid by the assessee to CCTL, a UK resident company, for client referral services amounted to marketing and sales promotion services, which fell under management and advice. Accordingly, CIT(A) held that the amount paid for said services was in the nature of “technical service fees”, as defined in Explanation 2 of Section 9(1)(vii) of the Income Tax Act 1961. The CIT(A) held that since the said services were used by the assessee for the purposes of a business activity in India, the amount of the consultancy fee was deemed to have accrued or arisen in India and, therefore, it was taxable in India. as “fees for technical services”. Against the order issued by the CIT(A), the assessee appealed to the ITAT.

The assessee M/s Hemera India Pvt. ltd. argued before ITAT that the said amounts were paid by the assessee to CCTL to facilitate the sale of agricultural products by introducing a client to the assessee. The assessee added that this was a normal commercial payment which fell within the scope of Article 7 read together with Article 5 of the DTAA between India and the UK. The assessee asserted that CCTL did not provide any management services to the assessee. The assessee argued that the services provided by CCTL amounted to consulting services provided by a non-resident. The assessee added that the amount paid to CCTL was based on the percentage of the value of agricultural products sold to customers referred to the assessee by CCTL.

The ITAT observed that in the case of CIT v Grup Ism (P) Ltd. (2015), the Delhi High Court had ruled that where a non-resident agent of a rated company acts as a liaison for the rated and receives remuneration for each client he solicits for the rated, such services do not would not fall under the consultancy services. Thus, the High Court had ruled that payments made by the assessee to his liaison officer did not fall within the scope of “fees for technical services” under section 9(1)(vii) of the Act. relating to income tax.

ITAT noted that the Delhi bench of ITAT in the case of Wellspring Universal vs. JCIT (2015) had ruled that commission in the hands of a non-resident cannot be deemed to be received or deemed to be received in India, or to be earned or arising, or deemed to be earned or arising for the assessed person in India.

The ITA thus ruled that said consulting fees paid by the assessee to CCTL for the introduction of clients would fall within the definition of payments made to an intermediary or a liaison agent, to channel, organize or solicit an order of work.

The ITAT therefore ruled that the nature of the transaction between the assessee and CCTL was not to provide a technical service. ITA added that the payment made by the assessee was in the nature of a normal commercial payment made to an intermediary.

Accordingly, the ITAT allowed the assessee’s appeal.

Case title: M/s. Hemera India Pvt. Ltd vs. DCIT

Date: 13.06.2022 (ITAT Delhi)

Representative of the Appellant / Assignee: Mr. Ranjan Chopra, FCA

Respondent’s Representative: Mr. Tufail Tahir, Sr. DR

Click here to read/download the order

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