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TMI Blog2018 (6) TMI 107X X X X Extracts X X X X X X X X Extracts X X X X ..... licant has only given a certificate that there is no PE and thus it needs to be examined by the AO - proper facts about reimbursement of expenses are also not provided - allowed for statistical purpose. Front end fee in the nature of appraisal fee (in the absence of any PE in India) would not be subjected to withholding tax under section 195 of the Act. - A.A.R. No 1105 of 2011 - - - Dated:- 21-5-2018 - Mr. R.S. Shukla, In-charge Chairman And Mr. Ashutosh Chandra, Member (Revenue) For the Applicant : Mr. Vishal Kalra, Advocate, Mr. Amit Babuani, CA Ms. Sumisha Murgai, CA Ms. Shruti Goyal, CA For the Department : Ms. Kavita Pandey, CIT (DR) Mr. Kamlesh Varshney, CIT(IT)-2 New Delhi RULING (By Ashutosh Chandra) Societe De Promotion Et De Participation Pour La Cooperation Economique (Proparco or the Applicant), has filed an application under section 245Q(1) of the Income tax Act, 1961, on 15.07.2011, seeking an advance ruling on taxability of fees received by it from Indian clients. 2. As per the details accompanying the application and subsequent submissions, the Applicant is a limited liability company incorporated under the laws of France. It is a su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment with the Applicant would be taxable as interest under the provisions of the India-France tax treaty? a. Commitment fee b. Cancellation fee c. Monitoring fee d. Amendment fee Question 3B: If the answer to the above question is negative, whether the following fee is taxable as FTS under Article 13 of India France tax treaty? a. Commitment fee b. Cancellation fee c. Monitoring fee d. Amendment fee Question 3C: : In case the below mentioned fees are not in the nature of interest or FTS, whether it would be regarded as business income and would not be liable to tax in the absence of PE of Proparco in India? a. Commitment fee b. Cancellation fee c. Monitoring fee d. Amendment fee Question 4: Whether on the stated facts and under the law, reimbursement of expenses on account of legal and advisory fee and out of pocket expenses actually incurred by Proparco and reimbursed by customers is taxable as business income? Question 5: If any of the above mentioned item is held not taxable in India, whether it would still be subject to tax withholding under section 195 of the Act? 4. The Applicant has submitt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n respect of un-availed portion/balance portion of the credit facility. It has been pleaded that since the borrower is not obligated to repay the balance (un-availed) credit facility, the same cannot be termed as debt claim. 4.2.4 Cancellation fee relates to percentage of the available credit facility which is cancelled. Applicant contends that since this relates to the portion of credit facility which the customer was never obligated to repay, the same cannot be termed as debt claim. 4.2.5 Monitoring fee relates to the time involved in undertaking periodic financial analysis, time to time review of the credit arrangement etc. The Applicant contends that this is not an income from debt claim. 4.2.6 Amendment fee is payable for amending the terms of the agreement. This fee is payable in order to compensate the Applicant form any amendment made to the loan agreement and does not relate to the debt claim of the Applicant. However, during the course of the hearing in this case, the Applicant conceded that amendment fee can be said to be related to debt claim in case the amendment is in relation to change in interest rate. 4.3 The Applicant has therefore contended that none ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... know-how or processes or consist of the development and transfer of a technical plan or technical design which enables the person acquiring the services to apply the technology contained therein. 4.5 Thus it is claimed by the Applicant that the definition of FTS in the India Portuguese treaty is more restrictive than the definition of FTS in India France DTAA and hence should be automatically read into the India France Treaty. The Applicant has relied upon the Delhi HC judgment in the case of Steria (India) Private Limited (W.P.(C) 4793/2014 CM APPL. 9551/2014), which reversed the ruling of this Authority in AAR no 1055 of 2011 in the same case on this issue. The AAR had held that the protocol cannot be treated as the same with the provisions contained in the DTAA itself. The Hon ble Delhi High Court held that the benefit of the lower rate or restricted scope of fee for technical services under the Indo-French DTAA was not dependent on any further action by the respective governments. It was held that the more restricted scope of fee for technical services as provided for in a DTAA entered into by India with another OECD member country shall also apply under the Indo-French ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evenue submitted that make available clause of India Portuguese DTAA cannot be automatically imported into India France DTAA without a notification. The Revenue submitted detailed argument in support of its contention, providing a legal basis, conduct of the parties and the practical aspect to argue that without a follow up notification one cannot import MFN clause automatically. 6.1 From the legal point of view it was stated that the DTAA prevails over domestic laws due to operation of Section 90/90A of the Income Tax Act, 1961. Section 90 of the Income Tax Act clearly requires that these agreements have to be notified in the official Gazette in order to implement them. It was contended that in India France DTAA, this legal requirement of notification has not been complied with as the two contracting states did not intend to extend the definition of FTS of India Portuguese treaty into the India France treaty. 6.2 The Revenue also cited the Hon ble SC decision in the case of Union of India And Anr vs Azadi Bachao Andolan And Anr, reported at 263 ITR 706 (SC) to support their contention that notification is a legal requirement to implement any provision of DTAA. The Revenue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under, even if the provisions of the DTAC are inconsistent with the provisions of Income-tax Act, 1961. 6.3 With regard to conduct of the parties, the Revenue submitted that India France DTAA was signed on 29.09.1992. It was notified on 7th Sept 1994 and as per the notification it came into effect from 1st August 1994. This DTAA was subsequently revised vide notification dated 10th July 2000. The said notification in its preamble specifically stated that: And whereas paragraph 7 of the Protocol dated 29th September 1992, to the aforesaid convention provides that is after the 1st day of September 1989, under any Convention, Agreement or Protocol concluded between India and a third State which is a member of the Organisation for Economic Co-operation and Development, India should limit its taxation at source on dividends, interest, royalties, fees for technical services or payments for the use of equipment to a rate lower or a scope more restricted than the rate of scope provided for in this Convention on the said items of income, then, as from the date on which the Convention between India and France or the relevant India Convention, Agreement or Protocol enters into forc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... apes or any other means of reproduction for use in connection with radio or television broadcasting. The Revenue has dealt with the issue in detail to show one cannot say which definition is restricted in scope and which one is wider in scope. It is for this reason it is important that if the definition of royalty/FTS is to be imported from other treaty it is to be done through a notification. Hence, one cannot decide automatically which definition is more restricted in scope. 6.6 The Revenue also referred to the specific MFN clause in Indian treaty with Philippines and Switzerland which require specific enabling action in the form of notification from the Government. While India may not insist on such specific enabling clause in the treaty due to existence of such clause in Section 90 of its domestic legislation, such requests can be there from the other treaty countries either as per their law, or by way of abundant precaution. 6.7 With respect to Delhi High Court Judgment in the case of Steria (India) Private Limited, the Revenue submitted that the arguments advanced above were never advanced before Hon ble High Court and were therefore not considered. Revenue submitted th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the fee that is being charged is related to that debt claim. The Revenue has relied heavily on the judgment of Mumbai ITAT and Bombay HC in the cases of Commonwealth Development Corporation (CDC). In this case the issue was whether under India UK DTAA (where definition of interest income is identical to India France DTAA) front end fee for appraisal and front end fee other than appraisal fee are interest. It was held by the Mumbai ITAT that front end fee for appraisal is not interest while front end fee other than appraisal fee is interest. The Applicant accepted the judgment. Thus the issue of front end fee other than appraisal fee was accepted to be interest by both the parties. Revenue appealed to Bombay High Court with respect to front end fee for appraisal and pleaded that this is also interest. The Hon ble High Court confirmed the finding of ITAT that front end fee for appraisal is not interest. This is a direct case on this subject to understand when debt claim comes into existence. 8.4 While holding that front end appraisal fee is not interest, Mumbai ITAT observed at para 15, as under: ..From this definition it is clear that it is income from debt claim of ev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 recognizes the fact that the respondent examined the creditworthiness of the Indian companies and its projects for which the loans were required. 8.7 From the above it can be seen that the front end appraisal fee was not held as interest as there was no debt claim in existence when this fee was payable. The non-resident was not bound to sanction the credit facilities, and was entitled to appraise the project and decide whether or not to sanction the credit facilities, the payment of the said fee was fixed and mandatory and neither dependent upon nor connected with the loans advanced. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... facility has been approved, agreement between debtor and creditor has been drawn, credit facility has been invoiced and transaction documentation have been signed. Hence, debt claim has come into existence as credit facility has already been granted. It is now connected with the loan which the lender is bound to advance in accordance with the agreement. 8.10 The Applicant during hearing, however, submitted that the facts of the CDC case are different in the case of front end fee other than appraisal fee. The counsel of the Applicant quoted from the order of the ITAT to substantiate his point, as under: 18 .The CIT(A) after considering the definition of the interest under the IT 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 advance given in addition to the interest leviable as per Article 7.6 of the agreement. He also observed that as per para 9. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fee it is clear that they are directly related to debt claim as the fee are charged after disbursement of loan. We may clarify that we are not saying that it would relate to debt claim only after the loan is disbursed. However, once the loan is disbursed there should not be any doubt that debt claim has come into existence. The learned counsel of the Applicant has argued that commitment fee is percentage of loan not drawn, and thus it is not related to the loan disbursed. In our view, once debt claim is in existence, the fee charged is in relation to debt claim as there is certain commitment to debt claim. Then it does not matter whether it is calculated as percentage of loan left to be drawn or any other method. The fact is that it is directly related to and is on account of loan advanced and hence, it is in the nature interest. Similarly the cancellation fee is for un-availed credit facility cancelled. Here too it is after disbursal of loan and relates to credit facility sanctioned and then cancelled. The fact that it is calculated on un-availed portion of loan (which has been cancelled) would not change the nature of its being related to the debt claim. The Applicant s counsel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any notification, as we discussed earlier. If there is no make available clause, then relying on Supreme Court decision in the case of GVK Industries Limited another, 228 ITR 564, it would be a case of FTS. However, if make available clause is to apply then it is clear that the Applicant is not making available technical knowledge, experience, skill, know-how or processes to the borrower. In that case it cannot be held that these fees are FTS. 9.1 The Revenue has put forward forceful argument in support of their contention that make available clause cannot be automatically read into India France DTAA without any notification, as we saw in the earlier part of this order. Howsoever compelling argument this may be, we are bound by judicial discipline. We have before us a judgment of the Hon ble Delhi High Court in the case of Steria (India) Limited(supra) where the ruling of AAR was overruled, and it was held that the benefit of the lower rate or restricted scope of fee for technical services under the Indo-French DTAA was not dependent on any further action by the respective governments. It was held that the more restricted scope of fee for technical services as provided f ..... X X X X Extracts X X X X X X X X Extracts X X X X
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