2010 (2) TMI 1150 - AT - Income Tax

Summary

Issues Involved:
1. Deletion of addition made by AO amounting to Rs. 77,14,828/-.
2. Deletion of addition on account of Directors fee amounting to Rs. 1,34,150/-.
3. Taxability of front-end fees u/s 2[28A] of Income Tax Act and under Article 12 of DTAA.
4. Taxability of capital gains on the sale of shares located outside India.

Summary:

Issue 1: Deletion of Addition of Rs. 77,14,828/-
The revenue challenged the CIT[A]'s decision to delete the addition of Rs. 77,14,828/- made by the AO, who had treated the "Upfront Appraisal Fees" as interest income taxable under Article 12 of the DTAA between India and the UK. The CIT[A] concluded that the appraisal fee is not covered by the definition of interest u/s 2[28A] of the I.T. Act or Article 12[5] of the DTAA, as it is paid for preliminary consideration and not in respect of any moneys borrowed or debt incurred. The Tribunal upheld the CIT[A]'s decision, rejecting the revenue's appeal.

Issue 2: Deletion of Addition on Account of Directors Fee of Rs. 1,34,150/-
The AO had taxed the directors' fees received by the assessee from Indian companies as fees for technical services under Article 13(4) of the DTAA. The CIT[A] followed the Tribunal's order for the A.Y 1997-98, which held that such fees for attending meetings by nominee Directors do not constitute technical services. The Tribunal upheld the CIT[A]'s decision, rejecting the revenue's appeal.

Issue 3: Taxability of Front-End Fees
The AO treated the front-end fees as interest income under Article 12 of the DTAA. The CIT[A] held that the front-end fees have a direct nexus with the loans advanced and are taxable as interest income. The Tribunal upheld the CIT[A]'s decision, rejecting the assessee's cross objection.

Issue 4: Taxability of Capital Gains on Sale of Shares
The CIT[A] held that the capital gains from the sale of shares of an Indian company, even if sold outside India, are taxable in India u/s 9(1)(i) of the I.T. Act, as the shares constitute a capital asset situated in India. The Tribunal agreed with the CIT[A]'s reasoning and dismissed the assessee's cross objection.

Conclusion:
The Tribunal dismissed the revenue's appeals and the assessee's cross objections, upholding the CIT[A]'s decisions on all issues. The upfront appraisal fees and directors' fees were not taxable as interest or technical services, while the front-end fees and capital gains on the sale of shares were taxable in India.