Referral fees is equivalent to export commission & therefore, cannot be regarded as FTS – Mum ITAT

CLSA Ltd v ITO (Intl Taxation) [ITA No. 2010 (MUM.) OF 2008 dtd 18.01.2013] (Mum ITAT)


Assessee is a Company incorporated in Hongkong and belongs to the CLSA Group of companies. During the year, CLSA India (CLSAI) paid an amount of Rs. 7,73,58,162 to the assessee-company as “Referral Fees”. Before the AO, it was explained that it has business relationship with various financial institutions outside India which required services of a broker in relation to the investment activities carried out by such Institution in Indian capital market. It was submitted that the assessee referred such overseas institutional clients to CLSAI acting as India stock broker for which it received referral fees from CLSAI. The AO held that the fees was in the nature of fees for technical services received by the assessee and the same, therefore, was chargeable to tax in its hands in India. Assessee’s contentions:

  • Fees received from CLSAI was not in the nature of fees for technical services in terms of section 9(1)(vii)
  • Such fees was in the nature of commission paid by Indian exporter to foreign agents and as per para 4 of CBDT Circular No. 23 dated 27th July, 1969, it was not taxable in India.
  • Reliance was placed on Mumbai ITAT in the case of Addl. DIT(IT) v. Star Cruise India Travel Services (P). Ltd. [2011] 46 SOT 173 wherein the Tribunal has declined to follow the decision of AAR in the case of Rajiv Malhotra. The issue in this case is similar relating to taxability of cruise package money received by the non-resident assessee from India through Star India. It was held that when no business operations are carried out in India, even if a non-resident has a business connection in India, no part of income of such business can be deemed to have accrued or arisen in India.

Tax Authority’s arguments:

  • The situs of the source of relevant income is required to be determined according to the general principles of law. The referral fees as per the terms and conditions of the agreement was payable to the assessee only after the referred client has executed transactions through CLSAI and has made full and final payment of brokerage for the said transactions to CLSAI.
  • Referral fees arose out of the payment of brokerage made by the clients to CLSAI in India and the source of the said income for the assessee thus was execution by the referred clients of transaction in India through CLSAI.
  • Services provided by the assessee in the form of referring clients to CLSAI would also amount to rendering market and sales promotion services which are covered in the bracket of managerial and consultancy services and the same, therefore, would fall in the definition of FTS.
  • Reliance was placed on the decision of AAR in the case of International Hotel Licensing Co., In re [2007]288 ITR 534 wherein it was held that amount received by non resident applicant from Indian Hotel in connection with marketing and business promotion activity conducted outside India cannot be treated as mere reimbursement of cost and expenses and there being real and intimate relation between the business activities carried on by the applicant outside India and the activities of the hotel owner in India, the amount received would be taxable in India being in the nature of fees for technical services as defined in section 9(1)(vii).
  • Referral fees paid by CLSAI to the assessee was for services utilized for the purpose of business carried on in India and irrespective of the place where the said services were rendered, the amount of referral fees should be deemed to accrue or arisen in India.


  • A similar issue came up for consideration before the Hon’ble Delhi High court in the case of Eon Technology (P.) Ltd. [2011] 343 ITR 366 wherein the assessee company in India which was engaged in the business of development and export of software had paid commission to its holding company in U.K., namely, ETUK on sales and amounts realized on export contracts procured by ETUK for the assessee. Since ETUK was not rendering any service or performing any activity in India itself, commission income could not be said to have accrued, arisen to or received by ETUK in India.
  • The amount was paid to the assessee by CLSAI on account of referral fees for referring the international clients and going by the nature of services rendered by the assessee qua CLSAI, it cannot be said that the real and intimate relation exists between the activities carried on by the assessee outside India and the activities of CLSAI in India.
  • Moreover, going by the nature of services rendered by way of referring the international clients to CLSAI, the assessee cannot be said to have rendered any technical, managerial or consultancy services as envisaged in Explanation 2 to section 9(1)(vii) as held by the AAR in the case of Cushman and Wakefield (S) Pte Ltd., In re [2008] 305 ITR 208 (AAR – New Delhi). It was held that no activity except that by making a referral fees from Singapore to the Indian company had been done in India and, therefore, the referral fees remitted by Cushman India to the applicant was neither received nor deemed to be received by the applicant in India. Further, no expertise or knowhow was made available to Cushman India by the applicant by reason of rendering service of managerial, technical or consultancy nature and in the absence of any sort of durability or permanency of result of rendering of services, referral fees paid by the Indian company was not fees for technical services u/s 9(1)(vii).

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