AI Drafter 
TaxTMI 
TaxTMI 
2018 (6) TMI 107
X X X X Extracts X X X X
X X X X Extracts X X X X
....ed 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: Ques 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") Ques 1B: If the answer to the above question i....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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 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, pg 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 paragraph 84, pages 923-24 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 Applic....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e 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 1-9-1989, 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, th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 app....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nt any provision of DTAA. The Revenue quoted the following relevant extract (emphasis supplied by the Revenue) from SC 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 double taxation avoidance agreement. 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 Income-tax 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 DTAs which would automatically ov....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ndia 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 October, 1996, and the Convention between India and the United States of America which entered into force on the 18th December, 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 Income- tax 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 h....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Court and were therefore not considered. Revenue submitted that in the case of Rameshwar Lal Sanwarmal v. CIT 122 ITR 1, Hon'ble SC 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 assessing officer 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 questions 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 And 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 DTA....
X X X X Extracts X X X X
X X X X Extracts X X X X
.......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 ITAT 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 CDC 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 pages 15 to 18 of the paper book, it is stated that fr....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ixed 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....o 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 direct nexus with the loans advanced and accordingly is interest income arising from the debt claim within the meaning of Article 12(5) of DTAA.".... (Para 18, page 10 and 11 of the order). 8.11 The Applicant pointed out that in the case of CDC, fee is collected in installments 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 ITAT in para 19 of the order at page 11: " The ld. 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 pages 4&5 of the paper book, ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ancelled) 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 alternate 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 de....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ve 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 of 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 assessing officer 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 ....