w w w . L a w y e r S e r v i c e s . i n



In Re : Societe De Promotion Et De Participation Pour La Co-Operation Economique

    AAR No. 1105 of 2011

    Decided On, 21 May 2018

    At, Authority For Advance Rulings Income Tax New Delhi

    By, THE HONOURABLE MR. R.S. SHUKLA
    By, (CHAIRMAN) (IN-CHARGE) & THE HONOURABLE MR. ASHUTOSH CHANDRA
    By, (REVENUE MEMBER)

    For the Appearing Parties: Vishal Kalra, Amit Babuani, Sumisha Murgai, Shruti Goyal, Kavita Pandey, Kamlesh Varshney, Advocates.



Judgment Text

Ashutosh Chandra, Member

1. Societe De Promotion Et De Participation Pour La Cooperation Economique (Proparco or the applicant), has filed an application under section 245Q(1) of the IT Act, 1961, on 15th July, 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 subsidiary of Agence Francaise de Development which is a Government owned financial institution. It is engaged in private sector financing in different countries, including in India.

2.1 The applicant has entered into agreements with clients, engaged in the business of developing infrastructure projects in India, for grant of loan facility. Pursuant to the aforesaid agreements, the applicant will earn the following fees, in addition to interest on such loans :

Front end fee (in two parts)

Commitment fee

Cancellation fee

Monitoring fee

Amendment fee

Reimbursement of out of pocket expenses.

3. On the above facts, as submitted by the applicant, the questions on which advance ruling is sought, have been framed as under :

"Question 1A : Whether on the stated facts and under the law', the 'front end fee' payable by a customer in India, for appraisal of loan application carried out outside India, under the financing arrangement with the applicant is taxable as income from 'interest' under Article 12 of the Convention between the Government of the Republic of India and the Government of the French Republic for the avoidance of double taxation ('India-France tax treaty')

Question 1B : If the answer to the above question is negative, whether the fee is taxable as fee for technical services (FTS) under Article 13 of India-France tax treaty ?

Question 1C : In case the aforesaid fees is not in the nature of interest or FTS, whether the fee would be regarded as business income and would not be liable to tax in the absence of PE of Proparco in India ?

Question 2A : Whether on the stated facts and under the law, the 'front end fee' other than appraisal fee payable by a customer in India, under the financing arrangement with the applicant would be taxable as income from 'interest' under Article 12 of the Indo-France tax treaty ?

Question 2B : If the answer to the above question is negative, whether the fee is taxable as fee for technical services (FTS) under Article 13 of India-France tax treaty ?

Question 2C : In case the aforesaid fees is not in the nature of interest or FTS, whether the fee would be regarded as business income and would not be liable to tax in the absence of PE of Proparco in India ?

Question 3A : Whether on the stated facts and under the law, the following fee payable by a customer in India under the financing arrangement 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 items 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 submitted that these fees are neither taxable as interest, nor as FTS. Further since there is no PE, it is also not taxable as

Please Login To View The Full Judgment!

business income. The applicant's contentions are as under :

4.1 Since it is tax resident of France, it is entitled to the benefits of India-France DTAA which provides restrictive definition of the term 'interest' in comparison to the domestic law. Under the DTAA, to constitute interest income it has to be an income from a 'debt claim'. Placing reliance on the Commentary by Klaus Vogel (para 83, p. 923, 4th Edition) it is stated that this definition refers to income generated by a debt claim as such and not to income realized as a consequence of the (re) payment of the principal amount. Income derived from services related to the debt claim does not come within the meaning of the term either. It has further relied on para 84, pp. 923-924 of the same commentary to state that debt claim should have a legal basis and must be valid and enforceable. Where payments are not derived from a debt claim, they do not fall within the definition of interest, even if the payment is linked in some way, other than through debt claim.

4.2 The applicant has also relied on AAR ruling in the case of ABC International Inc., In re, [reported at (2011) 241 CTR (AAR) 289 : (2011) 55 DTR (AAR) 393-Ed.] to plead that a debt has to exist for interest to be generated. The applicant believes that various fees in question in this application do not have direct nexus with the actual debt claim and therefore cannot be classified as interest. The applicant has cited various case laws in support of what is debt claim. With regard to the different fees charged by it, it is argued as under.

4.2.1 The front end fee for appraisal of loan application is in the nature of a non-refundable fee payable to the applicant in connection with undertaking the due diligence, and is payable even prior to the grant of loan, i.e., before a debt claim comes into existence. Thus, it has no nexus with an actual debt claim.

4.2.2 The front end fee other than appraisal fee is payable at the time of signing of the agreement. According to the applicant, this fee is payable prior to existence of a debt claim since the act of committing a loan facility to a customer does not give rise to a debt claim.

4.2.3 Commitment fee is payable by the customer for securing the available credit facility. The applicant charges this fee for committing the loan. It is payable in respect of unavailed portion/balance portion of the credit facility. It has been pleaded that since the borrower is not obligated to repay the balance (unavailed) 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 from 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 of the above fees are in the nature of interest as they do not arise from a debt (except amendment fees). Further, none are taxable as FTS, since in order to be taxed as FTS under the India-France DTAA, the applicant should make available technical knowledge, experience, skill, know-how or processes or information to the person availing credit facility. Since this requirement is not satisfied, the fee cannot be taxed as FTS. The applicant has sought to invoke this "make available" clause from India-Portuguese DTAA, relying on clause 7 of the India-France Protocol (commonly referred to as MFN clause) which reads as under :

"7. In respect of Articles 11 (Dividends), 12 (Interest) and 13 (Royalties, fees for technical services and payments for the use of equipment), if under any convention, agreement or protocol signed after 1st Sept., 1989, between India and a third State which is a member of the OECD, India limits 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, the same rate or scope as provided for in that convention, agreement or protocol on the said items income shall also apply under this convention, with effect from the date on which the present convention or the relevant Indian convention, agreement or protocol enters into force, whichever enters into force later."

4.4 The applicant has contended that since India-Portuguese DTAA was signed on 11th Sept., 1998, i.e., after 1st Sept., 1989, and Portugal is a member of OECD, the scope of FTS which is more restrictive in India-Portuguese DTAA should apply.

Article 12(4) of India-Portuguese DTAA defining "fees for included services" reads as under :

"4. For the purposes of this article, 'fees for included services' means payments of any kind, other than those mentioned in Articles 14 and 15 of this convention, to any person in consideration of the rendering of any technical or consultancy services (including through the provisions of services of technical or other personnel) if such services :

(a) are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in para 3 is received, or

(b) make available technical knowledge, experience, skill, 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 High Court judgment in the case of Steria (India) Ltd. v. Commissioner of Income Tax & Anr., [Writ Petn. (Civil) No. 4793 of 2014 and Civil Misc. Appln. No. 9551 of 2014, [reported at (2016) 288 CTR (Del) 694 : (2016) 140 DTR (Del) 64-Ed.], which reversed the ruling of this Authority in AAR No. 1055 of 2011, [reported as Steria (India) Ltd., In re, (2014) 268 CTR (AAR) 399 : (2014) 103 DTR (AAR) 230- Ed.] 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 DTAA with effect from the date on which the Indo-French DTAA or such other DTAA enters into force.

4.6 The applicant has further contended that since it does not have a PE in India, the above fees are not taxable in India.

5. The Revenue has submitted detailed reports in the context of the submissions made with the application, as also in response to its subsequent contentions during the course of these proceedings. The same are as under.

5.1 The Revenue had initially stated that the front end fee for appraisal of loan application is related to a debt claim as it related to total loan facility proposed to be availed by the Indian customer and is calculated as a percentage of total loan requested. However, during the course of hearing, Shri K.C. Varshney, CIT, appearing for the Revenue accepted that the front end appraisal fee may not qualify as interest if it is paid before drawing up of loan agreement and is not contingent on actual loan being sanctioned or rejected. However, it was contended that "front end fee other than appraisal fee" is related to debt claim as it is calculated taking into account the amount of credit facility approved and is invoiced and payable upon signing of the transaction document, after approval of credit facility. Hence, debt claim has come into existence since credit facility has been approved, has been invoiced and transaction documents signed. The lender is now bound to advance the loan in accordance with the loan agreement. Further, it is charged as a certain percentage of credit approved. Thus, it is directly related to debt claim.

5.2 With respect to commitment fee, cancellation fee, amendment fee and monitoring fee, it was submitted by the Revenue that they are paid after the disbursement of loan. Thus, without doubt, a debt claim has come into existence when these fees are paid, being relate d to the debt claim. The fact that these fees are calculated on undrawn amount would not change the basic fact that they are related to debt claim. The Revenue also contended that commitment fee, cancellation fee, amendment fee and monitoring fee are camouflage for interest. The Revenue relied on the judgment of Mumbai Tribunal and Bombay High Court in the cases of Commonwealth Development Corporation, being Tribunal judgment in ITA Nos. 1987 & 1988/Mum/2006 and Bombay High Court judgment in IT Appeal No. 1058 of 2011, [reported as Director of IT (International Taxation) v. Commonwealth Development, (2012) 253 CTR (Bom) 208 : (2012) 76 DTR (Bom) 233-Ed.].

6. With respect to FTS, the Revenue 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 IT Act, 1961. Section 90 of the IT 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 Supreme Court decision in the case of Union of India & Anr. v. Azadi Bachao Andolan & Anr., (2003) 184 CTR (SC) 450 : (2003) 263 ITR 706 (SC) to support their contention that notification is a legal requirement to implement any provision of DTAA. The Revenue quoted the following relevant extract (emphasis supplied by the Revenue) from Supreme Court order :

"A survey of the aforesaid cases makes it clear that the judicial consensus in India has been that section 90 is specifically intended to enable and empower the Central Government to issue a notification for implementation of the terms of a DTAA. When that happens, the provisions of such an agreement, with respect to cases to which where they apply, would operate even if inconsistent with the provisions of the IT Act. We approve of the reasoning in the decisions which we have noticed. If it was not the intention of the legislature to make a departure from the general principle of chargeability to tax under section 4 and the general principle of ascertainment of total income under section 5 of the Act, then there was no purpose in making those sections 'subject to the provisions of the Act'. The very object of grafting the said two sections with the said clause is to enable the Central Government to issue a notification under section 90 towards implementation of the terms of the DTAAs which would automatically override the provisions of the IT Act in the matter of ascertainment of chargeability to income-tax and ascertainment of total income, to the extent of inconsistency with the terms of the DTAC.

This Court is not concerned with the manner, in which tax treaties are negotiated or enunciated nor is it concerned with the wisdom of any particular treaty. Whether the Indo-Mauritius DTAC ought to have been enunciated in the present form, or in any other particular form, is none of our concern. Whether section 90 ought to have been placed on the statute book, is also not our concern. Section 90, which delegates powers to the Central Government, has not been challenged before us, and, therefore, we must proceed on the footing that the section is constitutionally valid. The challenge being only to the exercise of the power emanating from the section, we are of the view that section 90 enables the Central Government to enter into a DTAC with the foreign Government. When the requisite notification has been issued thereunder, the provisions of sub-section (2) of section 90 spring into operation and an assessee who is covered by the provisions of the DTAC is entitled to seek benefits thereunder, even if the provisions of the DTAC are inconsistent with the provisions of IT Act, 1961."

6.3 With regard to conduct of the parties, the Revenue submitted that India-France DTAA was signed on 29th Sept., 1992. It was notified on 7th Sept., 1994 and as per the notification it came into effect from 1st Aug., 1994. This DTAA was subsequently revised vide notification dt. 10th July, 2000. The said notification in its Preamble specifically stated that :

"And whereas para 7 of the protocol dt. 29th Sept., 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 Cooperation 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 force, whichever enters into force later, the same rate or scope as provided for in that convention, agreement or protocol on the said items income shall also apply under this Convention:

And whereas in the convention between India and Germany which entered into force on the 26th Oct., 1996, and the Convention between India and the United States of America which entered into force on the 18th Dec., 1990 which States are members of the Organization for Economic Co-operation and Development, the Government of India has limited the taxation at source on dividends, interest, royalties, fees for technical services and payment for the use of equipment to a rate lower or scope more restricted than that provided in the convention between India and France on the said items of income:

Now, therefore, in exercise of the powers conferred under section 90 of the IT Act, 1961 (43 of 1961), the Central Government hereby directs that the following modifications shall be made in the convention between India and France, namely:"

6.4 The Revenue further submitted that the notification shows that only lower rate has been notified and there is no change with regard to lower scope. It was stated that when the notification clearly identifies that DTAA between India and Germany as well as between India and USA has lower rate as well as restricted scope, still it went on to notify only lower rate, and did not change the scope. This indicates that there was intention to change the scope. Since make available clause is also there in DTAA between India and USA, the preamble also recognized this aspect when it clearly said that DTAAs between India and Germany and Indian and USA have lower rate or restricted scope, still the above notification did not import that "make available" clause into India-France DTAA, though it did import the lower rate of tax. This was not done even in the amendment of 2009.

6.5 To illustrate its stand, Revenue has cited the definition of royalty in the various DTAAs to say that the India-France DTAA talks about including cinematograph films, or films or tapes used for radio or television broadcasting, India-UK and US DTAA talk about cinematograph films, or work on films, tape or other means of reproduction for use in connection with radio or television broadcasting, and India-Portuguese DTAA talks about cinematograph films, or tapes 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 treaties 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) Ltd. (supra), the Revenue submitted that the arguments advanced above were never advanced before Hon'ble High Court and were therefore not considered. Revenue submitted that in the case of Rameshwarlal Sanwarmal v. Commissioner of Income Tax, (1980) 14 CTR (SC) 372 : (1980) 122 ITR 1 (SC), Hon'ble Supreme Court had held that it is open to reconsidering its earlier decision, if new arguments or facts are brought before it.

7. With respect to existence of a PE, the Revenue submitted that merely because the applicant submits that there is no PE, it should not be accepted. Revenue pleaded that determination of PE should be left to the AO in each year as it would depend on facts of that year which are not before AAR. The applicant has not produced facts for determination of PE and has not raised a question's as to whether there is PE or not. Hence, Revenue pleaded that no ruling should be given on this.

8. We have considered the questions raised before us seeking a ruling, the interpretation and contentions of the applicant, and the arguments of the Revenue.

8.1 It has been held by the Hon'ble Supreme Court in Azadi Bachao Andolan & Anr. (supra) that the applicant is entitled to more beneficial provisions between domestic laws and tax treaty. In this case the applicant is a resident of France and is entitled to benefit of India-France DTAA. Since the definition of "interest" in India-France DTAA is more restricted, the applicant is entitled to that definition. Article 12(4) of the DTAA defines interest as :

"The term 'interest' as used in this article means income from debt-claims of every kind, whether or not secured by mortgage and whether or not carrying a right to participate in debtor's profits, and in particular, income from Government securities and income from bonds or debentures, including premiums and prizes attaching to such securities, bonds or debentures. Penalty charges for late payment shall not be regarded as interest for the purpose of this article."

8.2 Thus, in order to constitute interest under the India-France DTAA. the income must be from debt claims. The applicant grants loan to various clients in India. There is no doubt that these loan agreements create debt claims. We are in agreement with the applicant that a debt claim should be legal, valid and enforceable. Where payments are not derived from a debt claim, they do not fall within the definition of interest, even if the payment is linked in some way, other than through debt claim.

8.3 But the important question then is to find the stage when one can say that debt claim comes into existence and the fee that is being charged is related to that debt claim. The Revenue has relied heavily on the judgment of Mumbai Tribunal and Bombay High Court in the cases of Commonwealth Development Corporation (supra). 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 Tribunal 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 Tribunal 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 Tribunal observed at para 15, as under :

"......From this definition it is clear that it is income from debt claim of every kind. In this case before us, at the time of receipt of the appraisal fees, there is no debt claim in existence and therefore, under Article 12(5) of the treaty the said income cannot be termed as interest income.

8.5 While holding that front end fee other than appraisal fee is interest, Mumbai Tribunal observed at para 21 :

"21. Having heard both the parties and having considered their rival contentions, we find that as seen from the investment process chart, after the final approval obtained from investment board of Commonwealth Development Corporation and the form of investment is also decided, then the assessee charges front end fee if the investment is in the form of a debt and no front end free is charged if the investment is in the form of equity. Though the assessee submits that there is no debt claim as on the date of charging of the front end fees and that it is only charged to cover the expenses, post appraisal, it is not clear as to what are the services of the costs which are covered by these front end fees. Further in his submissions before the CIT(A) placed at pp. 15 to 18 of the paper book, it is stated that front end fees are charged only in respect of debt investment 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."

8.6 The Hon'ble Bombay High Court while holding that the front end appraisal fee is not interest, observed at paras 12 and 13, as under :

"12. We will assume that a single agreement was entered into. It is however, not disputed that the respondent was not thereby bound to sanction the credit facilities. Admittedly, 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 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. It had to be paid even if the loan transaction was not entered into. As held by the Hon'ble Bombay High Court, if these conditions are satisfied, the front end fee is not interest. Since, in this case, these conditions are satisfied we hold that front end fee for appraisal is not interest under India-France DTAA.

8.8 However, in the case of front end fee other than appraisal fee, the facts are different. During hearing, the counsel of the applicant had relied on several case laws to substantiate his point that debt claim is not in existence when front end fee other than appraisal fee is payable. However, these cases are only with respect to what is a debt claim. In the case of Basumal Jagat Narain, the issue was whether trade advance is debt. In the case of Ramkumari Kumbhat, the issue was whether both gift and interest accrued were to be deemed as property from the deceased, for estate duty purpose. In the case of Sahib Chits the issue was whether chit fund agreement is a money lending agreement. In the case of Cargil Global trading the issue was whether the discount in sales of goods transaction was interest. In the case of GE Strategic Investments the issue was whether debenture is loan. We are unable to get much support from these cases so as to hold anything different from the fact that in our case the loan advanced is a debt claim.

8.9 The main issue now before us is as to when we can say that a debt claim has come into existence and the fee is related to the debt claim. On this issue the case of Commonwealth Development Corporation (supra), cited by the Revenue is of direct relevance. It was held by Mumbai Tribunal that the front end fees other than appraisal fees are charged only in respect of a successful loan approval at a certain percentage of the proposed investment, and thus has a direct nexus with the debt claim, though the documentation may be subsequent to the charging of front end fees. In the model agreement in our case, total front end fee payable is 1.25 per cent of approved credit facility. The first instalment is invoiced and payable to the applicant before the due diligence mission for an amount of 0.25 per cent of the aggregate amount requested. However, the balance fee (1 per cent) is calculated taking into account the amount of credit facility approved and invoiced, and payable upon signing of the transaction documentation. In this case, this part of front end fee is payable when the credit facility has been approved, agreement between debtor and creditor has been drawn, credit facility has been invoiced and transaction documentations 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 Commonwealth Development Corporation case (supra) are different in the case of front end fee other than appraisal fee. The counsel of the applicant quoted from the order of the Tribunal 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 Ltd. 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 instalments 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 9.1.1 of the agreement, the front end fee is charged after the first advance is paid and subsequently remaining instalments are collected. He. therefore, held that the front end fees charged have a direct nexus with the loans advanced and accordingly interest income is arising from the debt claim within the meaning of Article 12(5) of DTAA.".... (Para 18, pp. 10 and 11 of the order).

8.11 The applicant pointed out that in the case of CDC (supra), fee is collected in instalments and is charged after the first advance is paid. Hence once an advance is paid, debt claim has come into existence. It was stated by him that in our case this fact pattern is not there since the fee is paid on approval of credit facility and signing of transaction document and before disbursement of loan. The Revenue in its counter pointed to the observation of the Tribunal in para 19 of the order at p. 11 :

"The learned counsel for the assessee while reiterating the submissions made before the authorities below drew our attention to the investment process chart filed by the assessee at pp. 4 and 5 of the paper book, to demonstrate that front end fees are charged post appraisal and post approval, but prior to the actual disbursement of the loan. He also drew our attention to pp. 16 to 18 of paper book, wherein the nature of front end fee has been explained. Thus, according to him, as there is no debt claim as on the date of collecting the front end fees, the same cannot be considered as interest income both under the IT Act as well as the Indo-UK Treaty."

(emphasis, italicised in print, supplied)

8.12 We are unable to agree with the submission of the applicant on this issue. It is seen that even in the case of Commonwealth Development Corporation (supra), the front end fee is paid post-approval but prior to actual disbursement of the loan. Further, the counsel of assessee in the case of Commonwealth Development Corporation (supra) had also pleaded that there is no debt claim on the date of collecting the front end fee as no loan has been disbursed. The facts of Commonwealth Development Corporation (supra) and the case before us are similar. In this case also the front end fee other than appraisal fee (balance portion of front end fee) is also to be paid after the signing of the agreement. Hence, front end fee other than appraisal fee has to be treated to be in relation to a debt claim and is income from interest under the India-France DTAA.

8.13 With regard to commitment fee, cancellation fee, amendment fee and monitoring fees it is clear that they are directly related to debt claim as the fees 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 of interest. Similarly the cancellation fee is for unavailed 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 unavailed portion of loan (which has been cancelled) would not change the nature of its being related to the debt claim. The applicant's counsel had admitted that if amendment to loan agreement relates to change of interest rate, the amendment fee would be correctly classified as interest under India-France DTAA. We are of the view that that irrespective of whether the amendment relates to interest rate or principal amount, the fee would be in relation to debt claim which is already in existence and hence would fall under the definition of interest under India-France DTAA. Monitoring fee is also in relation to debt claim as the debt is already in existence, since the applicant is monitoring the work through financial analysis and doing a time to time review of credit arrangement. Hence, commitment fee, cancellation fee, amendment fee and monitoring fee are also treated as interest income under India-France DTAA.

8.14 Revenue has also taken an alternative plea that all the fees are nothing but camouflage for interest since lender has to set aside money once he enters into agreement with the borrower. This money which is set aside earns considerably less interest as it has to be invested in fully liquid assets to meet the demand of borrower which can come at any point of time. If there is less drawal than what has been committed or if there is cancellation, there is loss of interest. Thus, this loss of interest is compensated through these fees. Hence, commitment fee and cancellation fee are a camouflage for interest. In the case of monitoring fee, the fee is charged by the lender for monitoring the borrower, and it is submitted that the report of monitoring is not shared with borrower. This means that the monitoring is only for the purpose of the lender and there is no need to charge it to the borrower. This simply shows that monitoring fee is also nothing but a camouflage for interest. We have already held that these fees are clearly covered under the definition of interest under India-France DTAA. That being so, we feel no compulsion to adjudicate on whether they are a camouflage for interest or not.

9. We have held that front end fee in the nature of appraisal fee is not interest and all other fees are in the nature of interest. Once front end fee in the nature of appraisal fee is not interest, we have to examine if it is FTS. The decision with regard to FTS would depend upon whether the "make available" clause of India-Portuguese DTAA could be automatically read into India-France DTAA without any notification, as we discussed earlier. If there is no "make available" clause, then relying on Supreme Court decision in the case of G.V.K. Industries Ltd. & Anr. v. Commissioner of Income Tax, (1997) 228 ITR 564 (AP), 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) Ltd. (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 for in a DTAA entered into by India with another OECD member country shall also apply under the Indo-French DTAA with effect from the date on which the Indo-French DTAA or such other DTAA comes into force. We respectfully follow the Hon'ble Delhi High Court decision mentioned above, and hold that the fees cannot be taxed as FTS as they do not pass the "make available" test for the above reason.

10. So far as existence of PE is concerned, we agree with the submission of the Revenue that determination of PE is dependent on facts of each year which are not before us. There is also no specific question asking us to give a ruling if there is PE on the given facts. The applicant has only given a certificate that there is no PE. This needs to be examined by the AO in the relevant assessment. During hearing, the counsel of the applicant agreed to this view. Thus, we do not give any ruling as to whether there is PE or not.

11. With regard to reimbursement of expenses as well, proper facts are not given about the nature of reimbursement. Hence, it is not possible to give a ruling as to whether they is actual reimbursement or camouflage for interest.

12. In view of the foregoing, the questions posed to us for a ruling are answered as under :

Question 1A : The 'front end fee' payable by a customer in India, for appraisal of loan application carried out outside India, under the financing arrangement with the applicant is not taxable as income from interest' under Article 12 of India-France tax treaty.

Question 1B : This fee is also not taxable as fee for technical services (FTS) under Article 13 of India-France tax treaty.

Question 1C : It is business income but whether there is PE or not would be determined by the AO based on the facts of each year.

Question 2A : The 'front end fee' other than appraisal fee payable by a customer in India, under the financing arrangement with the applicant is taxable as income from 'interest' under Article 12 of the Indo-France tax treaty.

Question 2B : This fee is not taxable as fee for technical services (FTS) under Article 13 of India-France tax treaty.

Question 2C : Not applicable as it is held as interest income.

Question 3A : Commitment fee, cancellation fee, monitoring fee and amendment fee payable by a customer in India under the financing arrangement with the applicant is taxable as 'interest' under the provisions of the India-France tax treaty.

Question 3B : These fees are not taxable as fees for technical services (FTS) under Article 13 of India-France tax treaty.

Question 3C : Not applicable as it is held as interest income.

Question 4 : Since facts are not clear, no answer is given.

Question 5 : 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
OR

Already A Member?

Also