Commission received by FII/FPI from Indian Mutual Funds not taxable in India: ITAT

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  • Last Updated on 10 June, 2022

Indian Mutual funds; business income

Case Details: DCIT v. Credit Suisse (Singapore) Ltd. - [2022] 139 taxmann.com 145 (Mumbai-Trib.)

Judiciary and Counsel Details

    • Pramod Kumar, Vice-President & Sandeep Singh Karhail, Judicial Member
    • Percy PardiwalaParas Savla for the Applicant.
    • Milind Chavan, Sr. DR for the Respondent.

Facts of the Case

The assessee was a Singapore-based company incorporated under the Singapore companies act and registered as Foreign Institutional Investor (‘FII’) with the Securities and Exchange Board of India (‘SEBI’). It conducts portfolio investments in Indian securities in its capacity as SEBI registered FII/FPI.

During the year, the assessee and HDFC Asset Management Company had entered into an offshore Distribution agreement. As per the agreement, the assessee would create awareness about the scheme of funds, identify investors from amongst its clients, and procure subscriptions to units in the scheme of the funds.

Assessee earned offshore distribution commission income from HDFC Asset Management Company which was claimed as exempt under Article 12 of DTAA.

The Assessing Officer (AO) held that the assessee was operating as a distributor/lead manager of HDFC Mutual Fund, an Indian fund, which is controlled and regulated by SEBI and RBI in India. Thus, location control and management of the fund is situated in India, which constitutes a business connection in India. Accordingly, AO taxed the commission income under article 23 of DTAA read with section 5 of the Income-tax Act.

On appeal, the CIT(A) deleted the additions made by the AO. Aggrieved revenue filed the instant appeal before the Tribunal.

ITAT Held

The Tribunal held that section 5(2) provides that the total income of a non-resident person includes all income from whatever source derived, which is received or deemed to be received in India; or accrues or arises or is deemed to accrue or arise in India to the assessee.

Further, section 9 elaborates the expression “Income deemed to accrue or arise in India”. As per provision of Explanation 1(a) to section 9(1)(i), it is only that portion of the income which is ‘reasonably attributable’ to the operations carried out in India that shall be deemed to accrue or arise in India for the purpose of taxation.

AO sought to tax the offshore distribution commission income earned by the assessee by invoking the provisions of section 9(1)(i). To treat the income as deemed to accrue or arise in India, it is relevant that the said income should be ‘reasonably attributable’ to the operations carried out in India.

In the instant case, all the operations of the assessee were carried out outside India. In such circumstances, offshore distribution commission income cannot be treated as being ‘reasonably attributable’ to any operation carried out in India.

Further, the offshore distribution commission income of assessee was in the nature of ‘business income’ and such income could not be taxable in India in the absence of assessee’s permanent establishment in India.

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