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TMI Blog2012 (9) TMI 647X X X X Extracts X X X X X X X X Extracts X X X X ..... nts 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. - IT APPEAL NO. 1058 OF 2011 - - - Dated:- 9-7-2012 - S.J. VAZIFDAR and M.S. SANKLECHA, JJ. JUDGMENT S.J. Vazifdar, J. This is an appeal under section 260-A of the Income Tax Act, 1961, against the order of the Income Tax Appellate Tribunal dated 25th February, 2010, in respect of the assessment year 1998-99, dismissing the appellant's Income-tax Appeal No. 1987/Mum/2006 and the respondent's cross-objections. 2. The appeal is admitted on the following substantial question of law : "Whether the ITAT erred in deleting the addition made by the Assessing Officer amounting to Rs. 77,14,828/- on account of up front appraisal fees under section 143(3) of Act ?" 3. The respondent is a statutory company established under the laws of of the United Kingdom. It filed its return of income for the assessment year 1998-99 on 5th August, 1999, declaring an income of Rs. 13,17,82,890/-. After taking in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erest as defined in Article 12 or in the nature of fees for technical services as defined in Article 13 of "The Convention Between The Government Of The Republic Of India And The Government Of The United Kingdom Of Great Britain And Northern Ireland For The Avoidance Of Double Taxation And The Prevention Of Fiscal Evasion With Respect To Taxes On Income And Capital Gains" (hereinafter referred to as "the DTAA"). 7. Mr. Suresh Kumar, the learned counsel appearing on behalf of the appellant firstly submitted that the upfront appraisal fees (hereinafter referred to as "the fee") fall within the definition of "interest" under Section 2(28A), which reads as under :- " Definitions. - In this Act, unless the context otherwise requires. .............. (28A) "interest" means interest payable in any manner in respect of any moneys borrowed or debt incurred (including a deposit, claim or other similar right or obligation) and includes any service fee or other charge in respect of the moneys borrowed or debt incurred or in respect of any credit facility which has not been utilised;" 8. The submission is not well founded. The fee is not payable in respect of any moneys borrowed o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mittedly, the respondent was entitled to appraise the project and decide whether or not to sanction the credit facilities. In some cases, it decided to sanction the same and in some cases, it decided not to do so. Obviously, the terms and conditions in respect of the credit facilities would come into effect only upon and in the event of the respondent deciding to sanction the credit facility and the applicant agreeing to avail of the same. The payment of the said fee was fixed and mandatory and neither dependent upon nor connected with the loans advanced. It had to be paid even if the loan transaction was not entered into. It did not vary even if the loan transaction was entered into. The fact that a single agreement was entered into, therefore, would make no difference. 13. It is pertinent to note that it was not the department's case that the upfront appraisal fee was a camouflage for interest. Indeed, even the assessment order does not suggest the same. The facts on record militate against the same. The assessment order itself recognises the fact that the respondent examined the creditworthiness of the Indian companies and its projects for which the loans were required. 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ms. In other words, the income must arise out of, on account of a debt-claim. It is important to note the difference between the debt-claim itself and any accretion thereto, such as interest. Once this distinction is noted, it is easy to appreciate that the price realised upon the sale of the debt-claim itself is not interest. Interest arises from and on the terms of the debt-claim/security and would be on revenue account. The sale proceeds upon a transfer or assignment of the security arise not from but on account of and represents the debt claim/security itself." The observations apply equally to Article 12(5) of the India-UK DTAA. The differences between the two Articles are not material to the ambit of the term "interest" for the purpose of this case. The upfront appraisal fee is not income from a debt-claim. It is the debt itself. It is rightly not even suggested that it arises out of or on account of a debt-claim. The said fee, therefore, does not fall within the ambit of Article 12(5) of the DTAA. 17. Mr. Suresh Kumar then submitted that the said fee falls within Article 13(4)(c) of the DTAA, which reads as under :- " ARTICLE 13 - Royalties and Fees for Technical Ser ..... X X X X Extracts X X X X X X X X Extracts X X X X
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