The Hindu Business Line : Are referral fees taxable?

Tax obligations for foreign companies have to be considered under the Indian income-tax law over a wide canvas. Under Section 5 of the I-T Act, 1961, a non-resident’s total income includes all income, from whatever source derived, which is received or is deemed to be received in India by or on behalf of such person. Section 9 brings to tax income arising from business connections in India. Royalty is considered for taxation under Explanation 2 to Section 9(1)(vi). It can also cover intellectual property being exploited in India. Will there be tax on utilisation of trademark in India?

In the alternative, can Section 9(1)(vii) be invoked to tax fees for technical services (FTS)? Can the Indian tax authorities take advantage of the provisions for taxing foreign companies in India under the relevant Double Taxation Avoidance Agreement (DTAA)? Can a foreign company be fettered under Section 195 by holding the resident payer responsible for TDS?

All these complicated questions came up for discussion before the Authority for Advance Ruling (AAR) in the Cushman & Wakefield (S) Pvt. Ltd (In re 172 Taxman 179) case.

Referral services

CWS, a Singapore-based company engaged in the business of rendering real-estate services of all kind, had developed a relationship with certain international clients. It provided referral services on a global basis to other C&W offices in various countries. Each serving C&W company was liable to pay a referral fee to the referring group company in respect of such reference.

There were international fee-sharing rules for this purpose. CWS and CWI, an Indian company, entered into an agreement, as per which, CWS shall refer/recommend potential customers desirous of obtaining real-estate consultancy and associated services in India to CWI which, in turn, will pay CWS a percentage of amount charged by it on the referred customers as referral commission after realising the full amount from the customers. The question posed before the AAR was whether the referral fees paid by CWI to CWS attracted tax liabilities under the Indian law.

The Revenue built up cogent arguments to show that the smokescreen of so-called references has been raised by way of a collusive arrangement between CWS and CWI. Payment of hefty ‘referral fee’ at 30 per cent was totally unjustified. There was no independent evidence to prove the rendering of services by CWS. The entire arrangement appeared to have been designed for the avoidance of income-tax in India.

Royalty income?

The Revenue also submitted that the referral fees can be termed as royalty income. ‘Commercial information’ was being given by CWS to the Indian associate enterprise and this is squarely covered by the definition of ‘royalty’ in Section 9(1)(vi) Explanation to Clause (iv) of the Act.

The definition was the same even as per Article 12 of the DTAA with Singapore. The payment was for the use or right to use commercial information as well as for the use or the right to use the trademark, Cushman and Wakefield, by CWI.

It can be termed as brand royalty also. The Revenue also roped in the argument about the ‘arm’s length character’ of the payment requiring the application of transfer pricing rules.

The counsel for CWS resolutely and successfully repelled the arguments of the Revenue. The AAR pointed out that the Singapore company did not carry out any business activity in India.

There was no real and intimate relationship between the trading activities carried on outside India by CWS and the activities in India which contributed to the earning of income. CWS merely made a referral to the Indian associate from Singapore.

It is open to the prospective customer to utilise the services of CWI or not. The preconditions for deeming income under Section 9(1)(i) were not satisfied. If no obligation existed under the Act, additional charge for taxation of income cannot be created under the DTAA.

The AAR also held that providing information, concerning commercial experience did not mean providing ‘bland commercial information’. CWS did not keep a database, nurtured by commercial experience, relating to real-estate services.

Referral fees for introducing customers cannot amount to royalty income. Nor was any intellectual property involved. There was no question of sharing commercial experience or skills with CWI.

A trademark?

Trademark meant a symbol or a logo chosen to represent a company or a product. The recipient of the consideration should be either the owner of the trademark or its registered holder. No trademark or brand name can be said to have been allowed to be used by CWS which bears the same trade name.

Nor can the referral fees be attributable to transmission of technical knowledge, experience, skills etc. This also rules out the question of FTS in this case. Section 195 applied only if there was chargeable income. The AAR held that the referral fees were not taxable under the Indian law.

(The author is a former Chief Commissioner of Income-Tax. blfeedback@thehindu.co.in)