ITAT Holds Customer Referral Commission Not Taxable as FTS Under India-Netherlands DTAA:

Mitsubishi Electric Europe B.V. is a company incorporated and tax resident in the Netherlands, was engaged in the business of sale of industrial, electrical and electronic equipment. It also received commission/referral fees from Mitsubishi Electric India Private Limited (MEI) for referring potential customers. For AY 2022-23, the assessee received Rs 2,96,41,107 as referral commission and disclosed the same as income not chargeable to tax in India under Article 5 read with Article 7 of the India-Netherlands DTAA.

During assessment proceedings, the AO treated the referral commission as Fees for Technical Services (FTS) under Section 9(1)(vii) of the Income Tax Act, 1961, as well as under Article 12 of the India-Netherlands DTAA. The DRP upheld the treatment, following which the AO passed the final assessment order dated 28 January 2025, making an addition of Rs 2,96,41,107 as FTS.

The assessee argued that the receipts were purely commission income for customer referrals. The assessee maintained that it did not provide any design, technical or consultancy services to MEI. The Tribunal observed that the assessee earned commission merely for referring potential customers and that the commission was linked to the sales made by MEI. The invoices contained customer details, commission rates and commission amounts, which were found to tally with the corresponding sales reports. The Tribunal found no evidence that the assessee provided any design or technical services to MEI.

Accordingly, the Tribunal held that the referral services did not constitute FTS under Article 12(5)(b) of the India-Netherlands DTAA or Section 9(1)(vii) of the Income Tax Act. The commission was held to constitute business income under Article 7 of the DTAA and, in the absence of a Permanent Establishment in India, was not taxable in India.