2015 (6) TMI 419 - AT - Income Tax

TDS liability u/s 195 - Payment towards Arranger s fee payable to HSBC, Hongkong - whether such a fees paid to the arranger can be termed as interest within the meaning of section 2(28A) or fees for technical services for service within the meaning of section 9(1)(vii)? - Held that - In this case arranging of a loan cannot be equated with lending of managerial services at all. It is also not in the nature of consultancy services because, Arranger did not provide any advisory or counselling services. The Arranger was not involved in providing control, guidance or administration of the credit facility nor it was involved in day-today functioning of the assessee in overseeing the utilisation or administration of the credit facility. It was not in charge of entire or part of the transaction of arranging services, hence, it cannot be termed as managerial or consultancy services within the meaning of section 9(1)(vii). Accordingly, the Arranger fee cannot be held to be taxable u/s 9(1)(vii) also and therefore, no TDS was deductible on such payment. Thus, the finding of the ld. CIT(A) that the payment of Arranger fees entails deduction of tax at source u/s 195 is reversed and we hold that assessee was not liable to deduct TDS on payment of Arranger fee to HSBC, Hongkong. - Decided in favour of assessee.

Summary

Issues Involved:
1. Whether the arranger's fee paid to HSBC, Hong Kong is taxable as interest income under section 2(28A) of the Income Tax Act, 1961.
2. Whether the arranger's fee paid to HSBC, Hong Kong is taxable as fees for technical services under section 9(1)(vii) of the Income Tax Act, 1961.

Detailed Analysis:

1. Taxability of Arranger's Fee as Interest Income under Section 2(28A):

The primary issue was whether the arranger's fee paid to HSBC, Hong Kong for arranging a loan facility is taxable as interest income under section 2(28A) of the Income Tax Act, 1961. The assessee argued that the arranger's fee does not fall within the ambit of "interest" as defined under section 2(28A). The definition of "interest" under section 2(28A) includes any service fee or other charges in respect of money borrowed or debt incurred. The CIT(A) held that the arranger's fee is in the nature of interest income as it is paid in terms of the loan agreement and is directly linked to the loan disbursed to the borrower.

However, the Tribunal found that the arranger's fee is not paid to the lender but to a third party (HSBC, Hong Kong) for arranging the loan. The fee is akin to brokerage or commission and is not a compensation for the use of money borrowed. The Tribunal concluded that the arranger's fee does not meet the definition of "interest" under section 2(28A) as it is not paid in respect of money borrowed or debt incurred by the borrower from the lender. Therefore, the assessee was not liable to deduct tax on such payment under section 195.

2. Taxability of Arranger's Fee as Fees for Technical Services under Section 9(1)(vii):

The second issue was whether the arranger's fee is taxable as fees for technical services under section 9(1)(vii) of the Income Tax Act, 1961. The CIT(A) held that the arranger's fee is in the nature of service fee for managing and arranging the finance, which constitutes managerial or consultancy services, and thus falls within the purview of fees for technical services under section 9(1)(vii).

The Tribunal, however, referred to previous decisions, including the case of Credit Lyonnais v. ADIT, where it was held that arranger's fee for arranging funds does not amount to fees for managerial or consultancy services. The Tribunal opined that arranging a loan cannot be equated with providing managerial or consultancy services, as the arranger does not provide advisory or counseling services, nor does it manage or control the credit facility. Therefore, the arranger's fee does not fall within the definition of fees for technical services under section 9(1)(vii).

Conclusion:

The Tribunal concluded that the arranger's fee paid to HSBC, Hong Kong is neither taxable as interest income under section 2(28A) nor as fees for technical services under section 9(1)(vii) of the Income Tax Act, 1961. Consequently, the assessee was not liable to deduct tax at source under section 195 on the payment of arranger's fee. The appeal filed by the assessee was allowed, and the order of the CIT(A) was reversed.

Order:

The appeal filed by the assessee is allowed, and the order was pronounced in the open court on 10th June, 2015.