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

The assessee is Mitsubishi Electric Europe B.V., a Netherlands tax resident who was engaged in the business of sale of industrial, electrical and electronic equipment. It also received commission or referral fees from its group company, Mitsubishi Electric India Pvt. Ltd. (MEI), for referring potential customers. The commission was calculated at a fixed percentage of the gross sales made by MEI to customers referred by the assessee.

For Assessment Year 2022-23, the assessee disclosed commission income of Rs. 2,96,41,107 as income not chargeable to tax in India under the India-Netherlands DTAA, relying upon Articles 5 and 7 of the Treaty. However, during assessment proceedings, the AO treated the said commission as Fees for Technical Services under Section 9(1)(vii) of the Income Tax Act as well as Article 12 of the India-Netherlands DTAA. The DRP upheld the treatment and the AO consequently made an addition of Rs. 2,96,41,107.

Before the Tribunal, the assessee submitted that it had only referred potential customers to MEI and had not provided any design, technical or consultancy services. In support, it produced commission invoices, memoranda of understanding, sales reports and email communications. The invoices contained customer details, commission rates and amounts, while the sales reports provided customer-wise details that tallied with the corresponding invoices.

The Tribunal found that the assessee earned commission at a fixed rate of 3.6% to 5.1% of the gross sales made by MEI to the referred customers. The invoices and sales reports established the nature and computation of the commission, and there was no material demonstrating that the assessee had provided any design or technical service to MEI.

The Tribunal held that the AO had failed to establish the essential “make available” condition. There was no transfer of technology, technical knowledge, skill or know-how, nor had the assessee enabled MEI to independently apply any technology in the future. Therefore, the referral services could not be characterised as FTS under Article 12(5)(b) of the DTAA or Section 9(1)(vii) of the Act.

The Tribunal consequently held that the commission constituted business income in the hands of the assessee. Since the assessee did not have a Permanent Establishment in India, such business income was not taxable in India under Article 7 of the India-Netherlands DTAA.