2018 (6) TMI 107 - AAR - Income Tax

Front-end appraisal fees not taxable as interest or technical services; classified as business income pending PE determination.

The front-end fee for appraisal of loan applications was held not taxable as interest or fees for technical services, classified as business income, ... Taxability of fees received from Indian clients - withholding of tax - income from interest - whether fee payable by a customer in India under the financing arrangement would be taxable as ‘interest’ or FTS under Indo-France Tax Treaty - or whether it shall be taxable as business income - Held that:- Front end fee other than appraisal fee is 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 following the view of JOINT DIRECTOR OF INCOME TAX (OSD) - (IT) RANGE 1, MUMBAI VERSUS M/S COMMONWEALTH DEVELOPMENT CORPORATION, [2010 (2) TMI 1150 - ITAT MUMBAI]. Commitment fee, cancellation fee, amendment fee and monitoring fee are directly related to debt claim as the fee are charged after disbursement of loan - and thus are treated as interest income under India France DTAA. Determination of PE - Held that:- Determination of PE is dependent of facts of each year - in the present case Applicant 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. Issues Involved:1. Taxability of various fees (front-end fee, commitment fee, cancellation fee, monitoring fee, amendment fee, and reimbursement of expenses) under the India-France tax treaty.2. Classification of fees as 'interest' or 'fees for technical services' (FTS).3. Determination of Permanent Establishment (PE) status.4. Applicability of tax withholding under section 195 of the Income Tax Act, 1961.Detailed Analysis:Issue 1: Taxability of Front-End Fee for Appraisal of Loan ApplicationThe Applicant contended that the front-end fee for appraisal of loan applications is not taxable as 'interest' under Article 12 of the India-France tax treaty because it is paid before a debt claim comes into existence. The Revenue initially argued that this fee is related to a debt claim but later conceded during the hearing that it might not qualify as interest if paid before the loan agreement is drawn up and is not contingent on the loan being sanctioned.The Authority held that since the fee is paid before the existence of a debt claim and is mandatory regardless of whether the loan is sanctioned, it is not taxable as interest. Additionally, it does not qualify as FTS under Article 13 of the treaty because the Applicant is not making available technical knowledge, experience, skill, know-how, or processes to the borrower.Issue 2: Taxability of Front-End Fee Other Than Appraisal FeeThe Applicant argued that the front-end fee other than the appraisal fee is also not related to a debt claim as it is payable upon signing the agreement, before the loan disbursement. The Revenue countered that this fee is related to a debt claim since it is calculated based on the approved credit facility and invoiced upon signing the transaction documents.The Authority held that this fee is taxable as interest under Article 12 of the India-France tax treaty because it is directly related to a debt claim that comes into existence upon the approval and signing of the loan agreement.Issue 3: Taxability of Commitment Fee, Cancellation Fee, Monitoring Fee, and Amendment FeeThe Applicant contended that these fees are not related to a debt claim and thus should not be classified as interest. The Revenue argued that these fees are paid after the loan disbursement and are directly related to the debt claim.The Authority held that these fees are taxable as interest under Article 12 of the India-France tax treaty because they are directly related to the debt claim. The commitment fee, cancellation fee, monitoring fee, and amendment fee are all connected to the loan agreement and its terms.Issue 4: Reimbursement of ExpensesThe Applicant did not provide clear facts about the nature of the reimbursement of expenses. The Revenue argued that it could not be determined whether these reimbursements are actual expenses or a camouflage for interest.The Authority did not give a ruling on this issue due to the lack of clear facts.Issue 5: Applicability of Tax Withholding Under Section 195The Authority held that the front-end fee for appraisal (in the absence of any PE in India) would not be subject to withholding tax under section 195 of the Income Tax Act, 1961.Determination of Permanent Establishment (PE)The Authority agreed with the Revenue that the determination of PE is dependent on the facts of each year, which are not before the Authority. The Applicant has not provided sufficient facts for the determination of PE, and this needs to be examined by the assessing officer in the relevant assessment year.Ruling Summary:1. The front-end fee for appraisal is not taxable as interest or FTS and is classified as business income, subject to PE determination by the assessing officer.2. The front-end fee other than appraisal fee is taxable as interest.3. Commitment fee, cancellation fee, monitoring fee, and amendment fee are taxable as interest.4. No ruling on the reimbursement of expenses due to unclear facts.5. The front-end fee for appraisal is not subject to withholding tax under section 195 in the absence of a PE in India.