Customer Referral Services Without Technical Know-How Not FTS Under India-Netherlands DTAA: Delhi ITAT

The Delhi Income Tax Appellate Tribunal (ITAT) on 30 September held that commission earned for referring potential customers does not qualify as Fees for Technical Services (FTS) under Article 12(5)(b) of the India-Netherlands DTAA where the referral activity does not involve making technical knowledge, skill or know-how available to the Indian entity.

A Bench comprising Judicial Member Vikas Awasthy and Accountant Member Naveen Chandra allowed Mitsubishi Electric Europe B.V.'s appeal for Assessment Year 2022-23 against the treatment of Rs. 2.96 crore received from Mitsubishi Electric India Pvt. Ltd. as FTS. It observed:

“We further find that the AO has nowhere established the essential condition to term a technical service as FTS, i.e., the fulfilment of the clause 'make available'. We find that there is no transfer of technology or the services rendered by the assessee has enabled the recipient of the service i.e., MEI to apply the technology independently.”

Mitsubishi Electric Europe B.V., a Netherlands tax resident engaged in the sale of industrial, electrical and electronic equipment, earned referral commission from its Indian group company for introducing potential customers. The commission was calculated as a percentage of gross sales made by Mitsubishi Electric India to customers referred by it.

For Assessment Year 2022-23, Mitsubishi Electric Europe disclosed Rs. 2,96,41,107 as income not chargeable to tax in India under the India-Netherlands DTAA, claiming protection under Articles 5 and 7.

The Assessing Officer treated the referral commission as FTS under the Income Tax Act as well as the DTAA. Mitsubishi Electric Europe contended that the payments were purely commission for customer referrals and that it had not provided any technical or consultancy services to the Indian entity. It also argued that the “make available” requirement under Article 12(5)(b) was not satisfied.

The Tribunal noted that Mitsubishi Electric Europe had furnished commission invoices, memoranda of understanding with Mitsubishi Electric India, sales reports and email communications. The MOUs specified the customers and commission rates, which ranged from 3.6% to 5.1% of gross sales. The invoices and sales reports contained customer-wise details and showed a correlation between the commission amounts and sales made by Mitsubishi Electric India. The Bench observed:

“In the instant case, we find that the assessee is earning commission income for referring potential customers which is calculated at a fixed 3.6% to 5.1% percentage of gross sales value of sale made by MEI to the said customers. We do not find that the assessee is providing any services relating to design/technical or otherwise to MEI.”

Further, the Bench examined the “make available” requirement under Article 12(5)(b), which covers technical or consultancy services where technical knowledge, experience, skill, know-how or processes are made available, or a technical plan or design is developed and transferred.

It found that the Revenue had not established any transfer of technology or shown that the referral activity enabled Mitsubishi Electric India to independently apply any technology. Therefore, it held that the commission did not qualify as FTS under Article 12(5)(b) of the India-Netherlands DTAA or Section 9(1)(vii) of the Income Tax Act.

The Tribunal also held that the commission constituted business income and was not taxable in India in the absence of a permanent establishment. It directed the Assessing Officer to give effect to the beneficial DTAA provisions and grant TDS credit in accordance with law.

Accordingly, the ITAT allowed the appeal.

Counsel for the Assessee: Ananya Kapoor, Advocate

Counsel for the Revenue: Shalini Verma, CIT-DR