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Delhi Rules Customer Not FTS Under India-Netherlands DTAA for Mitsubishi Electric Europe
The () has delivered a significant ruling on the tax treatment of referral commissions paid to a foreign entity, holding that such payments do not constitute under the when no or is made available to the Indian payer. In a decision dated , a bench comprising Judicial Member Vikas Awasthy and Accountant Member Naveen Chandra allowed the appeal of (MEE) for , reversing the Assessing Officer’s (AO) classification of ₹2.96 crore received from (MEI) as FTS.
The ruling underscores the critical importance of the “make available” condition in and provides clarity for multinational enterprises structuring cross-border referral arrangements. The Tribunal emphasized that mere introduction of customers, without any or technical skills, falls outside the ambit of FTS and is instead taxable as only if the foreign entity has a in India.
Background of the Case
, a tax resident of the Netherlands, is engaged in the sale of industrial, electrical, and electronic equipment. During the relevant assessment year, MEE earned a from its Indian group company, MEI, for introducing potential customers. The commission was calculated as a fixed percentage—ranging from 3.6% to 5.1%—of the gross sales value of transactions between MEI and the referred customers. MEE disclosed the sum of ₹2,96,41,107 as income not chargeable to tax in India, invoking the protection of Articles 5 () and 7 () of the India-Netherlands DTAA.
The Assessing Officer, however, treated the commission as FTS under , as well as under . The AO reasoned that the referral activity involved a degree of technical or consultancy input that qualified as FTS. Aggrieved, MEE challenged the assessment before the .
Key Arguments and Evidence
MEE contended that the payments were purely commission for customer referrals and that it had not rendered any technical, consultancy, or managerial services to MEI. It argued that the “make available” requirement under Article 12(5)(b) of the DTAA was not satisfied because MEI did not acquire any technology, skill, or from the referral activity. The assessee submitted comprehensive documentation, including commission invoices, memoranda of understanding (MOUs) with MEI, sales reports, and email communications. The MOUs clearly specified the customers and the commission rates, while the invoices and sales reports demonstrated a direct correlation between the commission amounts and the sales made by MEI to the referred customers.
The Revenue, represented by CIT-DR , maintained that the referral service was integral to MEI’s business and involved technical expertise in identifying and evaluating potential clients. The AO had not, however, pointed to any specific or process that was transferred to MEI.
Tribunal’s Analysis and Observations
The examined the facts and the legal framework with precision. It noted that MEE’s role was limited to introducing customers, and the commission was computed as a fixed percentage of gross sales. The Bench observed: “In the instant case, we find that the assessee is earning for referring potential customers which is calculated at a fixed 3.6% to 5.1% percentage of gross sales value of sale made by MEI to the said customers. We do not find that the assessee is providing any services relating to design/technical or otherwise to MEI.”
Turning to the DTAA, the Tribunal scrutinized Article 12(5)(b), which defines FTS as payments made for technical or consultancy services that “make available” , experience, skill, , or processes, or involve the development and transfer of a . The Bench found that the Revenue had failed to establish the essential condition of “make available.” It stated: “We further find that the AO has nowhere established the essential condition to term a technical service as FTS, i.e., the fulfilment of the clause 'make available'. We find that there is no or the services rendered by the assessee has enabled the recipient of the service i.e., MEI to apply the technology independently.”
The Tribunal emphasized that the mere provision of a service—even if it requires some skill—does not automatically constitute FTS unless the service enables the recipient to independently apply the underlying technology. In this case, MEI did not acquire any new technical capability from the referral activity. Consequently, the commission did not fall within Article 12(5)(b) of the DTAA or Section 9(1)(vii) of the Income Tax Act.
Classification as and No
Having ruled out FTS treatment, the examined whether the commission could be taxed as under Article 7 of the DTAA. It held that the income was of MEE and, in the absence of a in India, was not taxable in India. The Tribunal directed the AO to give effect to the of the DTAA and to grant credit for in accordance with law.
Implications for International Tax Practice
This ruling is a welcome clarification for multinational groups that use referral or introduction arrangements without transferring technology. The decision reinforces that the “make available” test is a strict threshold—mere commercial introductions, even if they require some expertise in identifying customers, do not cross that line. Tax authorities cannot recharacterize commission payments as FTS merely because the foreign entity has specialized knowledge about the market or products.
The ’s reliance on documentary evidence—MOUs, invoices, and sales reports—highlights the importance of maintaining clear that demonstrate the nature of services and the basis of remuneration. For taxpayers, this judgment provides a strong precedent to resist FTS classification where no technical is imparted.
Conclusion
By allowing Mitsubishi Electric Europe’s appeal, the Delhi has reinforced the principle that must be interpreted according to their plain language, especially the “make available” condition in FTS articles. The decision serves as a reminder that the burden lies on the Revenue to prove that has been transferred. For legal professionals advising multinational enterprises, this case underscores the need to carefully document referral arrangements and to distinguish between genuine technical services and pure commission-based customer introductions. The ruling is likely to be cited in numerous disputes involving similar fact patterns under other DTAAs.
