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TMI Blog2010 (2) TMI 1150X X X X Extracts X X X X X X X X Extracts X X X X ..... al Organisation for the purpose of sec.115JB of the Income Tax Act. For the relevant assessment year the assessee company filed its return of income declaring an income of ₹ 13,78,82,890/-. During the assessment proceedings u/s.143[3] of the Act, AO observed that the directors fees of ₹ 1,34,150/- is received from the Indian companies on account of financial assistance/services rendered to these Indian companies and the assessee claimed that the said fees would constitute its business income and the same is exempt as the assessee company does not have P.E. in India. The AO relied upon the order of his predecessor for the A.Y 1997-98 and held that the said fees are taxable under Article 13(4) of DTAA between India and UK as fees for technical services @ 15%. 4. Aggrieved, assessee filed an appeal before the CIT[A] who allowed the same by following the order of the Tribunal in the assessee s own case for the A.Y 1997-98 in I.T.A.No.581/M/02 dated 28/6/2005, wherein it was held as under: We have considered the rival submissions and perused the material on record and we are inclined to agree with the contentions of the learned AR of the assessee because clauses (a) a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e interest income as a single agreement is entered between lender and the borrower and the upfront appraisal fee is charged for examining the creditworthiness of the Indian companies and their profits for which the loans or funds are required. He held that the entire transaction between the assessee company and the Indian companies relate to loan transaction and, therefore, payments under various heads such as upfront appraisal fees, interest, commitment fees, front end fees etc., cannot be viewed separately as a water-tight compartment nor can they exist independently and, therefore, they are interest income chargeable to tax under Article 12 of the treaty between India and UK. He, accordingly, brought to tax the upfront appraisal fees of ₹ 77,14,828/- as interest income in the hands of the assessee. Without prejudice to this stand, AO also treated it as fees for technical services taxable under Article 13 of the treaty. 7. Aggrieved, assessee filed an appeal before the CIT[A] stating as under- That the potential investee approaches CDC for investment with details of the project and the responsible personnel within the assessee company have to obtain internal approval ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ge in respect of the monies borrowed or debt incurred or in respect of any credit facility which has not been utilized. He submitted that even under Article 12[5] of the Indo UK DTAA the term interest meant income from debt claims of every kind, whether or not secured by mortgage and whether or not carrying a right to participate in the debtors profit. Thus, according to him, appraisal fee is nothing but interest income as has rightly been held by the AO. 10. The ld. counsel for the assessee, on the other hand, supported the order of the CIT[A] and drew our particular attention to the submissions made by the assessee before the CIT[A] . He took us through the investment process followed by the assessee to demonstrate that the appraisal is done for coming to the preliminary conclusion about the financial viability of the project and the appraisal fee is collected to meet the expenditure of the appraisal and is not for lending of the money and it is not refunded even if the investment is not made subsequently. According to him, the income does not fit within the definition of interest u/s.2[28A] of the I.T.Act or under Article 12[5] of the Indo UK treaty as at the time of receip ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... other charge but whether it is for the instances stated in the definition is to be seen. In the first instance, we find that here also, the emphasis is on the money borrowed or debt incurred. As seen from the chart at page-4 of the CIT[A] s order, the appraisal fee is charged even from those parties where there is no investment made. Therefore, it cannot be said that the appraisal fee is in the nature of service fee or other charge in respect of the monies borrowed or debt incurred. 14. Coming to the third limb of the definition i.e. service fee or other charge in respect of any credit facility which has not been utilized , we find that this limb would apply to the appraisal fees collected by the assessee, as it is collected only for the purpose of verifying the debt claim of the assessee even if it is not utilized. 15. Coming to the meaning of the term interest under Article 12[5] of the DTAA, the definition is as follows- The term interest as used in this article means income from debt claim of every kind, whether or not secured by mortgage and whether or not carrying a right to participate in debtor s profit and in particular income on government securities and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee under Article 12 of the treaty between Indo UK. Aggrieved, assessee filed an appeal before the CIT[A] stating that the frond-end fees are charged to cover costs of post appraisals other than costs of legal documentations which are generally borne by the investee. It was submitted that these fees are generally charged only in respect of debt investments as a percentage of the proposed investment and they are agreed upon before the agreements are finalized and are generally received prior to the disbursement of loans and as in the case of appraisal fees, the fees are not returned even when the case of investment is aborted. It was thus admitted that in the absence of debt claim, the same cannot be treated as interest income. The CIT[A] after considering the definition of the term interest under the I.T.Act, and also under Article 12[5] of DTAA between India and UK and also agreements with STI Limited and Easter Industries, held that front-end fees charged has a direct nexus with the loans advanced. He observed that though the fees are being collected in installments and not being charged as a percentage at certain rate, the front-end fee is being charged as interest on the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment at a certain percentage of the proposed investment. Thus, it can be seen that it has a direct nexus with the debt claim though the documentation is subsequent to the charging of front-end fees. In the case of STI Ltd. and Easter Industries Ltd., the deals were successful and it is only then the front-end fees were charged. In view of the same, we are satisfied that it is covered by the definition of the term interest under the Act as well as the treaty and the CIT[A] has rightly confirmed the addition made by the AO. Accordingly, we uphold the order of the CIT[A] and reject this ground of cross objection raised by the assessee. 22. As regards ground No.2, brief facts are that the assessee had raised an additional ground of appeal No.10 before the CIT[A] that the Jt. CIT, Special Range 12, Mumbai, ought to have held that the capital gains on the sale of shares located outside India do not constitute taxable income under the Income Tax Act, 1961 in the hands of the appellant. 22.1 The CIT[A] called for the comments of the AO and pursuant thereto received the remand report dated 11-11-2005. Before the CIT[A] , assessee submitted that it had sold 10,43,486 shares of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e relaxed in the companies act to enable transfer of the shares by one person to another. However, a share certificate by itself is not a tangible property like an aircraft. In the case of shares, the transferor may agree to sell to the transferee. Transaction may be complete between them by the exchange of shares and the consideration. However, when it comes to exercising the rights as shareholders in the company, it is necessary to get the transfer registered in the company and to get the change in the name recorded in the register. This activity can only happen in the Share Register of a company. The company is not bound to accept the sale of shares to a person and it can object to it. If approved in the Annual General Meeting or Extraordinary General Meeting, it can refuse to register change in name in the register of shareholders. In other words, a contract between the transferor and transferee regarding the sale of shares does not complete the transaction as it is further subject to the approval by the company and the procedure of changing the name in the Register is shareholders. The share in a company gives rights to shareholder to participate in the profits of the co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , assessee s ground of cross objection is dismissed. 26. I.T.A.No.1988/m/06 A.Y 1999-2000: The only ground of appeal raised by the revenue is as under- On the facts and in the circumstances of the case and in law, the ld. CIT[A] has erred in deleting the addition made by the AO amounting to ₹ 97,76,700. 27. This ground of appeal is similar to ground of appeal No.(1) raised by the revenue for the A.Y 1998-99 and for the reasons given therein, this ground of appeal is also rejected. 28. In the result, revenue s appeal is dismissed. 29. C.O.NO.298/Mum/06 A.Y 1999-2000: The assessee has raised the following grounds of cross objections- 1.1 On the facts and circumstances of the case, the Learned Commissioner of Income Tax [Appeals]-XXXI, Mumbai [ CIT[A] ] has erred in holding that the front-end fees were taxable under section 2[28A] of Income Tax Act, 1961 [ Act ] in the hands of the Respondent. 1.2 On the facts and circumstances of the case, the learned CIT[A] erred in holding that the front-end fees were taxable as interest income in the hands of the respondent under Article 12 of Agreement for Avoidance of Double Taxation between India ..... X X X X Extracts X X X X X X X X Extracts X X X X
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