December 2010
Fees received for assistance/services provided to Indian companies to whom loans, etc. are provided by the financial organisation from UK is business income — In absence of PE, is not chargeable to tax in India.
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Part C : Tribunal & AAR International Tax Decisions
JDIT v. M/s. Commonwealth Development Corporation
(2010) TII 102 ITAT-Mum.-Intl.
Article 7, 12(5) & 13 of India-UK DTAA
S. 2(28A) of Income-tax Act
Dated : 25-2-2010
11. Fees received for assistance/services provided
to Indian companies to whom loans, etc. are provided by the financial
organisation from UK is business income — In absence of PE, is not chargeable to
tax in India.
Upfront appraisal fee received by the UK financial
organisation constitutes ‘interest’ in terms of S. 2(28A) of the Income-tax Act
— However, such appraisal fee is not ‘interest’ in terms of India-UK DTAA.
Front-end fee recovered from the investee to whom
debt support is provided, is, ‘interest’, under the Income-tax Act as also DTAA.
Capital gain from transfer of shares in Indian
company is chargeable to tax in India.
Facts :
The assessee, a statutory corporation established
in the UK (CDC) was engaged in the business of providing loans to, and making
investment in shares of, Indian companies. The issue pertained to taxation of
the following four receipts :
(i) Director’s fees received from the Indian
companies for assistance/services rendered by CDC to Indian companies.
(ii) Appraisal fees received by CDC for
determining future profitability and worthiness for projects of Indian company
before CDC disbursed loans by way of convertible bonds, shares or debts to the
Indian Investees.
(iii) Front-end fee claimed to have been charged
for recovering cost of post-appraisal, other than cost of legal documents
which was the obligation of the investee.
(iv) CDC had sold certain shares of an Indian
company which were admittedly held as capital asset. It was the claim of CDC
that shares were held outside India and were sold outside India and hence not
taxable in India.
Held :
The ITAT held that :
-
Having regard to
the earlier decision of the ITAT in appellant’s own case, assistance provided
to the investee companies was not in the nature of fees for included services.
In terms of DTAA, such income would not be taxable in India.
-
Upfront appraisal
fee was ‘interest’ within the scope of S. 2(28A) of the Income-tax Act. In
view of ITAT :
-
Upfront appraisal fee
was charged before advancing loan or making investment of any kind.
-
S. 2(28A) covered
service fee or other charges for debt incurred. Additionally, it also included
service fee or other charges in respect of any credit facility which has not
been utilised.
-
The first limb of
S. 2(28A) which covered service fee/charge for debt incurred was not attracted
in the present case as the appraisal fee was recovered even before any debt
was incurred. However, being service fee for credit facility not utilised,
such fee was ‘interest’.
-
Though such amount
was ‘interest’ in term of the Income-tax Act, it was not ‘interest’ under DTAA
as definition of interest under DTAA is restrictive and covered only income
from debt claim.
-
Taxpayer’s
contention that front-end fee is not related to debt investment is not
acceptable. Front-end fee was charged by the taxpayer only if the investment
was made in the form of debt and not for investment in the form of equity. No
information was provided about the services for which front-end fee was
charged. In the circumstances, the income was regarded as having direct nexus
with the debt claim. Hence, it was ‘interest’ both in terms of the Income-tax
Act as also DTAA.
-
Capital gain earned
by CDC on transfer of shares of an Indian company was chargeable to tax in
India. The ITAT rejected contention of the taxpayer that such income can be
regarded as income arising from sale of asset outside India.
-
Share of a company
represents bundle of rights. Though the shares are freely transferable, a
contract between transferer and transferee regarding sale of shares is not
complete till it is approved by the company and change of name in the register
of a shareholder. The share in a company gives right to the shareholders to
participate in profits as also in liquidation proceeds. Transfer of shares of
an Indian company results in transfer of right to property/capital assets
situated in India, irrespective of where the transfer is effected. In lieu
thereof, charge to capital gain is attracted in terms of S. 9(1)(i) of
Income-tax Act, which is not relieved by DTAA.
