In a move expected to boost crossborder business, the Authority for Advance Rulings (AAR) said in July that “referral fees” paid to overseas clients will not be subject to taxes in India.
The AAR set the precedent while ruling on questions raised by Cushman & Wakefield, a Singapore-based real estate consultant, on whether referral fees it received from its Indian arm would be taxed in India. The authority held that under the double tax avoidance agreement between the two countries, referral fees will not be taxed and that the domestic company is not required to withhold any tax under Section 195 of the Income Tax Act while making remittances.
According to the AAR, referral fees to foreign companies are not business income, royalty income or fees for technical services, and thus, not taxable.
“Although the AAR ruling is binding only between the foreign company and the tax department, it will create a persuasive precedent and benefit companies in several sectors like engineering and management consultancy, advertisement and real estate,” Titus & Co partner Diljeet Titus told Rediff.com.
The ruling should encourage companies to declare referral fees and become more transparent while “prompt[ing] others to seek similar exemptions as a lot of consultancy business comes to India on referral basis,” Titus said.
Under the Income Tax Act, domestic companies making payments to foreign entities are required to withhold part of the payment to deposit it later as tax.
