TaxTMI 
TaxTMI 
2010 (2) TMI 1150
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.... as an Overseas Financial 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 be....
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....re 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 approvals at various levels for the proposed investment. He, therefore, conducts an appraisal of the project to satisfy itself of the feasibility and profitability of the investment and the fees charged for such appraisal is called 'upfront appraisal fees' and this covers the ....
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....ortgage 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 receipt of the appraisal fee, there is no debt created between the assessee and the Indian company. 11. As regards the AO's finding about the income being fee for technical services, he submitted that the appraisal fees are reimbursement of costs incurred by the assessee company fo....
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.... 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 income from bonds or debts, including premium and appraisal attaches such securities, bonds or debentures subject to the provisions of para-9 of this article, shall not include any item which is treated as a distribution in the provisions of Article 11 (dividend) of this cavatina." From this defini....
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....ged 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 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 installments are collected. He, therefore, held that the front-end fees charged has a dir....
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....ged. 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 Rane TRW Steering Systems Ltd. to TRW Inc. USA on 25-11-1997 for a consideration of Pounds 22,82,500/- and as these shares were held abroad and sold abroad, capital gains arising out of such transaction is not taxable in India. In support of its contention, the assessee relied upon the following decisions a) CIT vs. Quantas Airwa....
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....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 company and also have a share in the properties of the company upon its liquidation and winding up. In other words, the share certificate is not a tangible property but a bundle of right given to shareholder with regard to business and assets of the company. Therefore, it can be concluded that when a share of an Indian Company is transferred anywhere, it is ....