Giving a relief to companies who procure clients on referral basis, the Authority for Advance Ruling has held that 'referral fees' paid to overseas clients will not be subject to taxes in India.

"The receipt on account of the referral fee arising to the applicant would not be taxable in India...," the AAR said while giving a ruling in a reference made by Singapore-based real estate consultant Cushman & Wakefield Pte.

"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," senior partner of the corporate law firm Titus and Co., Diljeet Titus, said.

Describing the AAR ruling as a positive one, he said, it will encourage companies to declare referral fees and become more transparent in their dealings with foreign entities.

The AAR ruling comes in wake of the questions raised by Singapore-based Cushman & Wakefield whether the referral fees paid to it by the Indian arm would be taxed in India.

While giving the ruling in favour of the Singapore company, the authority held that under the Double Tax Avoidance Agreement between the two countries, the referral fees will not be taxed in India and also the domestic company will 'not be required to withhold any tax under the Section 195 of I-T Act while making remittances'.

The AAR ruling, Titus said, 'will prompt others to seek similar exemption as lot of consultancy business comes to India on referral basis.'

Giving the ruling the AAR has also clarified that domestic entity Cushman & Wakefield will not have to withhold tax while making payments to the overseas company.

Under the Income Tax Law, the domestic companies making payment to foreign entities are required to withhold part of the payment, to be later deposited with the exchequer as tax. 

Justifying its ruling, the AAR said that referral fees paid to foreign companies cannot be taxed in India as such payments do not fall within the purview of business income, royalty income or fees for technical services.

Rejecting the contention of the I-T department, referral fee was being paid by the Indian company to avoid payment of taxes in India, the AAR said as the authenticity of the referral service was not in question, the authority could not give any decision on it.

Under the provisions of the I-T Act, foreign companies can seek advance rulings on the matters related with future tax obligations. The ruling, once given, remains binding on the foreign company as well as the I-T department.