Section 9(1)(v), 9(1)(vii) – “Arranger Fee” paid to foreign bank to facilitate loan from, and negotiating terms and conditions with, NR lender, is not in the nature of interest or fees for technical services (FTS).
Facts:
Taxpayer, an Indian Company (I Co), entered into term loan agreement with an a non-resident (“NR”) lender. This term loan was arranged by a foreign bank (F Co) as an arranger. As per the arranger agreement, F Co was required to act as an intermediary between I Co and the lender, liaise with the NR lender and negotiate the terms and conditions of the facility with the lender on behalf of I Co. For such services, I Co paid “arranger fee” to F Co. I Co contended that the payment made to F Co was not in the nature of interest under the Act and hence, taxes were not required to be withheld on “arranger fee”. However, the Tax Authority contended that the “arranger fee” was in the nature of interest or alternatively qualified as FTS and hence liable to tax u/s.9(1)(v)/(vii) of the Act.
Held:
The issues in appeal were decided as under:
Whether arranger fee can be regarded as interest
FCo, as an arranger, facilitated the credit facility between the lender and I Co on terms which were agreeable to both the parties. Thus, F Co had acted as a sort of broker or middleman for arranging the loan for I Co.
Interest is defined under the Act and the definition has two limbs. The main limb of the definition clearly provides that interest should be in respect of the money borrowed or debt incurred. F Co was not the lender because no debt was incurred by I Co in favour of F Co vis-a-vis the money borrowed. FCo was merely a facilitator who brought parties together for facilitating the loan/credit facility.
The second limb of the definition of interest is an inclusive limb and includes service fee or other charge. However, such fee or charge should also be in respect of money borrowed i.e. given by the lender to the borrower. The service fee or other charge does not bring within its ambit any third party or intermediary who has not given any money.
The fundamental proposition permeating between various kinds of payments covered by “interest” under the Act is that, those payments are paid or payable to the lender either for giving loan or for giving the credit facility. Nowhere the definition suggests that interest includes fees paid to a third party who did not give any loan or extend any credit facility.
The element of borrower-lender relationship is a key factor to bring the payment within the ambit of definition of interest under the Act. The Arranger fee may be inextricably linked with the loan or utilisation or loan facility but it is not a part of interest payable in respect of money borrowed or debt incurred.
Whether arranger fee can be regarded as FTS
“Arranger fee” is also not in the nature of ‘consultancy services’ as F Co did not provide any advisory or counselling services. The payment is also not for managerial services.
The term ‘managerial’ essentially implies control, administration and guidance for business and day-to-day functioning. It includes the act of managing by direction or regulation or superintendence. F Co was not involved in: providing control, guidance or administration of credit facility; or in day-to-day functioning of I Co; or in overseeing the utilisation or administration of the credit facility. Thus, on facts, F Co cannot be said to have rendered managerial services. Consequently, “arranger fee” cannot be termed as FTS within the meaning of section 9(1)(vii) of the Act. The Tribunal also relied on decisions in Credit Lyonnais ([2013] 35 taxmann.com 583) and Abu Dhabi Commercial Bank Ltd ([2013] 37 taxmann.com 15)..
