Commission income earned by non-resident is not taxable in India
Facts of the Case:
The Assessee is a company incorporated in Singapore and is a tax resident of Singapore. The Assessee was registered as Foreign Institutional Investor (‘FII’) with Securities and Exchange Board of India (‘SEBI’) and undertakes portfolio investments in Indian securities in its capacity as FII.
The Assessee and HDFC Asset Management Co Ltd (resident in India) had entered into an Offshore Distribution Agreement pursuant to which the Assessee agreed to distribute Mutual Fund schemes launched by HDFC Asset Management Co Ltd to procure subscriptions for such schemes from investors outside India against which the Assessee earned offshore distribution commission income of Rs. 16,38,81,445 from HDFC Asset Management Co Ltd.
Assessee contented that the commission income is not covered under Article 12 of DTAA along with, the same can not be taxed as business income in India as per Article 7 of DTAA since Assessee has no Permanent Establishment in India.
However, Assessing Officer (AO) view was that the HDFC Mutual Fund, in which Assessee had dealt, is regulated and controlled by SEBI and RBI in India, which creates sufficient nexus (Business connection) of offshore distribution income in India. Therefore, in such a case income is taxable under section 5(2) read along with Sec.9(1)(i) of Income Tax Act (IT Act) and also under Article 23 of DTAA (India- Singapore Treaty).
AO’s view was challenged by the Assessee before Ld. CIT(A) and Ld. CIT(A) upheld the decision in favor of Assessee by stating that offshore distribution commission income earned by the Assessee is in the nature of business income as per IT Act and in the absence of permanent establishment the same is not taxable in accordance with Article 7 of DTAA.
Hence this appeal before ITAT:
Whether the commission income received by the Assessee is in the nature of Business Income or Other Income?
Whether such income is taxable in India as per Article 23 of DTAA read with Sec.9(1)(i) of Income Tax Act?
Hence ITAT Held:
As per Sec.5 of IT Act, income which deemed to accrue or arise in India shall be taxable in hands of Non-Resident. Further section 9 of IT Act elaborates the expression “Income deemed to accrue or arise in India”.
As per the provisions of Explanation 1(a) to Sec.9(1)(i) of Income Tax Act, only that portion of the income which is ‘Reasonably Attributable’ to the operations carried out in India shall be deemed to accrue or arise in India.
Since, all the operations of the Assessee were carried out outside India, therefore, in such circumstances offshore distribution commission income earned by the Assessee cannot be treated as being ‘Reasonably Attributable’ to any operation carried out in India. Hence, such Income is not taxable as per Article 23 of DTAA read along with Sec.9(1)(i) of IT Act.
Further, the Assessee is engaged as FII registered with ‘SEBI’ and conducts portfolio investments in Indian securities which makes offshore distribution commission income earned by the Assessee a Business Income. Hence, the decision of Ld. CIT(A) was upheld.