2012 (9) TMI 647 - HC - Income Tax

Addition on up front appraisal fees - India-UK DTAA - Article 13(4)(c) v/s Article 7 - CIT(A) deleted the addition - Held that - The entire appraisal process was to enable the respondent to take a decision as to whether the credit facilities ought to be advanced to the applicants or not. The respondent did not thereby or even while doing so, impart any technical or consultancy services to the applicants. Thus the upfront appraisal fee constitutes fees for technical services within the meaning of Article 13(4)(c) is unsustainable as said fees did not constitute payment in consideration of the respondent rendering any technical or consultancy services to the applicant/borrowers. Submission of the appellant that the upfront appraisal fees fall within the definition of interest under Section 2(28A) is not well founded as the fee is not payable in respect of any moneys borrowed or debt incurred. It is the debt itself. If any money was payable in respect thereof, it could have been held to be interest. However, admittedly, no amount was paid by the applicants in respect of the said fee. As the income on account of the upfront appraisal fees was business income and as the respondents did not have a permanent establishment in India, the same could not be charged to tax in India under Article 7 of the DTAA - against revenue.

Summary

Issues Involved:
1. Whether the upfront appraisal fees received by the respondent fall within the definition of "interest" under Section 2(28A) of the Income Tax Act, 1961.
2. Whether the upfront appraisal fees are taxable as "income from other sources."
3. Whether the upfront appraisal fees constitute "fees for technical services" under Article 13(4)(c) of the India-UK Double Taxation Avoidance Agreement (DTAA).
4. Whether the upfront appraisal fees should be considered as business income and its taxability under Article 7 of the DTAA.

Issue-wise Detailed Analysis:

1. Definition of "Interest" under Section 2(28A):
The appellant contended that the upfront appraisal fees should be classified as "interest" under Section 2(28A) of the Income Tax Act, 1961. The court examined the definition, which includes any service fee or other charge in respect of moneys borrowed or debt incurred or in respect of any credit facility which has not been utilized. The court found that the fee is not payable in respect of any moneys borrowed or debt incurred. It is the debt itself. No amount was paid by the applicants in respect of the said fee. The court further clarified that the fee could not be considered a service fee or other charge in respect of moneys borrowed or debt incurred or any credit facility which has not been utilized, as the fee was charged irrespective of whether the loan was sanctioned or not.

2. Taxability as "Income from Other Sources":
The Joint Commissioner of Income-tax (JCIT) had classified the upfront appraisal fees under the head "Income from other sources." The court noted that the JCIT considered the receipts to be either interest as defined in Article 12 or in the nature of fees for technical services as defined in Article 13 of the DTAA. However, the court found that the fee was charged prior to and independent of any loan transaction, and it was not connected to the loan transaction itself. Therefore, it could not be classified as income from other sources under the definitions provided.

3. Classification under Article 13(4)(c) of the DTAA:
The appellant argued that the upfront appraisal fees should be classified as "fees for technical services" under Article 13(4)(c) of the DTAA. The court examined whether the fees constituted payment for rendering technical or consultancy services. It was found that the appraisal process was solely for the respondent's decision-making on whether to grant the loan, and no technical or consultancy services were rendered to the applicants. The court emphasized that the respondent did not impart any technical knowledge, experience, skill, know-how, or processes to the applicants. Therefore, the fees did not fall under the definition of "fees for technical services" as per Article 13(4)(c) of the DTAA.

4. Business Income and Taxability under Article 7 of the DTAA:
The court upheld the findings of the CIT (Appeals) that the income from the upfront appraisal fees was business income. Since the respondent did not have a permanent establishment in India, the income could not be charged to tax in India under Article 7 of the DTAA. The court referenced its judgment in The Director of Income Tax v. M/s. Credit Suisse First Boston (Cyprus) Ltd., which dealt with similar provisions in the India-Cyprus DTAA, to support this conclusion.

Conclusion:
The appeal was dismissed, and the court concluded that the upfront appraisal fees did not fall within the definitions of "interest" or "fees for technical services" and were rightly classified as business income. Since the respondent did not have a permanent establishment in India, the income could not be taxed in India under the DTAA. No order as to costs was made.