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Idea Cellular Limited Versus Asst. Director of Income Tax (International Taxation) 3 (1) , Mumbai

2015 (6) TMI 419 - ITAT MUMBAI

TDS liability u/s 195 - Payment towards "Arranger's fee" payable to HSBC, Hongkong - whether such a fees paid to the arranger can be termed as "interest" within the meaning of section 2(28A) or "fees for technical services for service" within the meaning of section 9(1)(vii)? - Held that:- In this case arranging of a loan cannot be equated with lending of managerial services at all. It is also not in the nature of 'consultancy services' because, Arranger did not provide any advisory or counselli .....

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1)(vii) also and therefore, no TDS was deductible on such payment. Thus, the finding of the ld. CIT(A) that the payment of "Arranger fees" entails deduction of tax at source u/s 195 is reversed and we hold that assessee was not liable to deduct TDS on payment of Arranger fee to HSBC, Hongkong. - Decided in favour of assessee. - I .T.A. No. 1619/Mum/20116 - Dated:- 10-6-2015 - SHRI D. KARUNAKARA RAO AND SHRI AMIT SHUKLA, JJ. For the Appellant : Shri Yogesh A. Thar & Shri Deepak Jain For the R .....

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owing grounds:- "1. On the facts and circumstances of the case and in law, the learned CIT(A) erred in holding that the arranger's fee paid to the Hongkong and Shanghai Banking Corporation Ltd., Hongkong for arranging loan facility is taxable as interest income within the meaning of section 2(28A) of the Act and withholding of tax is required on the same. 2. The Appellant prays that it be held that the arranger's fee is not interest income within the meaning of section 2(28A) of the .....

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ot; dated 10th September, 2009, as borrower, with Finnish Export Credit Ltd., who is the lender. The HSBC, Hongkong had arranged for the loan as "Arranger" and UK based Company, HSBC Bank, PLC acted as a facility agent. The draw-down amount of the facility for the relevant previous year was as under:- Date of drawdown Drawdown Amount (USD) 1-February 2010 24,749,935 2-March 2010 21,661,799 2-March 2010 10,072,293 30-March 2010 3,005,851 TOTAL 59,489,878 3.1 Pursuant to the said agreeme .....

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tax at the applicable rate of 21.12%. Thereafter, the assessee filed appeal before the ld. CIT(A) u/s 248 denying its liability to deduct tax at source on such "Arranger's fee", as the said amount does not come within the definition "interest" u/s 2(28A) of the Act and therefore, such a remittance does not require tax deduction at source. The ld. CIT(A) called for the remand report from ADIT (International Taxation) -I, Mumbai, on written submission filed by the assessee .....

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or "consultancy services". He referred to the provisions of section 9(1)(vii) and also the Explanation below sub-section 2 of section 9, which was brought in the statute with retrospective effect from 1-6-1976. Thus, according to the A.O., such payment of Arranger fee is taxable as fees for technical services u/s 9(1)(vii) of the Act. 4. The first limb of the assessee's argument before the ld. CIT(A) was that, the payment of Arranger fee does not fall within the ambit and scope of .....

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. Further, arrangement fee is not paid to the lender but to the Arranger for the purpose of arranging the finance required by the assessee from the lenders. It is not a compensation for use of money and therefore cannot be regarded as interest. The second limb of the assessee's argument was that the income of non-residents would be chargeable to tax in India if it is either received in India or accrued or deemed to accrue in India. Here in this case, the fees were remitted outside India by t .....

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led submissions were made. 5. The ld. CIT(A) held that the payment of 'arranger fee' is not only in the nature of 'interest' but also it is in the nature of 'for technical services' within the meaning of section 9(1)(vii). The sum and substance of his reasoning are as under:- (i) Arranger fee have been paid for arranging the loan which has been called as "structuring fee" as per in clause 11.2 of the Term Loan Facility Agreement dated 10-09-2009 which reads as u .....

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ucturing fee letter dated 11-09-2009. The fee has been charged on account of utilisation of loan and funds by the Idea Cellular. It is nothing but part of debt or loan taken by the Indian Company and utilised thereof. (ii) After analysing the definition of interest as given in section 2(28A), he held that interest does not only mean interest payable on any money borrowed or debt incurred but also include any service fee or other charges in respect of money borrowed or debt incurred or in respect .....

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nexus between the payment of arranger fee and loan advanced to the borrower as it is charged as per the terms of agreement after the first utilisation date and the same is linked with the amount of loan disbursed by percentage of 0.40% of 23 crores USD. Thus, the arranger has a direct nexus with the Indian borrower and, therefore, it is in the nature of interest income arising in India within the meaning of section 9(1)(v) and section 115A of the Act. (iv) In support of his observation and conc .....

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interest under the Act. (v) Regarding such a payment falling within the meaning of fees for technical services u/s 9(1)(vii) as contended by the A.O., he held that the arranger fee is in the nature of service fee for managing and arranging the finance for the assessee borrower from the various lenders. The arranger had rendered services by way of arranging the loan which is nothing but in the nature of fees for technical services as any fees which has been paid for rendering any managerial or co .....

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way of structure fees falls under fees for technical services is deemed to accrue or arise in India u/s. 9(l)(vii) of the Act. The tax withholding liability of the appellant u/s.95 being in the nature of vicarious liability, therefore, did extend to the deduction of tax at source from the payments being made to HSBC Hongkong, the Arrnager. Therefore, remittances are to be made by the appellant after making TDS u/s.194 of the Act as per prescribed tax rate. 1.5.11 In view of the aforesaid discuss .....

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nt are treated as dismissed." 6. Before us, the ld. Counsel for the assessee, Shri Yogesh A. Thar after explaining the entire facts of the case, submitted that, the ld. CIT(A) has wrongly treated the payment of arranger fee as 'interest' and also completely misdirected himself by treating the same as 'fees for technical services' u/s 9(1)(vii). Regarding the treatment of interest, he submitted that the duty of the arranger has been contained in clause 25.3 of the agreement w .....

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ent that Arranger fee has been paid to the lender if, that is so, then it cannot be said that it falls within the ambit of 'interest' as defined in section 2(28A). The second limb of definition of interest as given in the Act, he submitted that service fees or other charge levied by the person from whom the money have been borrowed or the person in whose favour the debt has been credited/incurred is also not applicable as Arranger is not lender. Merely because the Arranger fee have been .....

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Taxation) reported in [2013] 35 taxmann.com 583 (Mumbai - Trib) held that Arranger's fee for arranging the funds does not amount to fees for managerial or consultancy services within the ambit of 'fees for technical services' as defined in Explanation to section 9(1)(vii). This proposition has been reiterated and followed in the case of DDIT (IT) v. Abu Dhabi Commercial Bank Ltd. Reported in [2013] 37 taxmann.com 15 (Mumbai-Trib). Thus, the issue that Arranger fee cannot be held as f .....

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t of fees for technical services, he again reiterated the finding and conclusion given by the ld. CIT(A) and submitted that the Arranger fee had been paid for rending the services for obtaining the loan and host of other services for getting the credit facility, which are nothing but in the nature of managerial and technical services. Thus, he submitted that the order of the ld. CIT(A) should be upheld. 9. We have heard the rival contentions, perused the impugned order and the material placed on .....

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of the facility with the lender on behalf of the borrower. The Arranger is a third party who has acted as the middleman between the borrower and the lender to achieve/negotiate the terms and conditions agreeable to both the parties. The Arranger qua the borrower and the lender cannot create any binding obligation of any kind on them. This is evident from Clause 25.3 of the agreement as stated above. Here in this case, the Arranger had facilitated the transaction credit facility between the lende .....

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e, the Arranger fee has been paid by the assessee to the Arranger, HSBC. Thus, the Arranger had acted some kind of the broker or a middleman for arranging the loan for the assessee. 10. Now, the issue before us is, whether such a fees paid to the arranger can be termed as "interest" within the meaning of section 2(28A) or "fees for technical services for service" within the meaning of section 9(1)(vii). 11. The definition of "interest" u/s 2(28A) reads as under:- &q .....

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orrowed or debt incurred and, secondly, such interest payable includes any service fee or other charge in respect of the money borrowed or debt incurred or in respect of any credit facility which has not been utilised. In the main limb of the definition, it is amply clear that interest should be in respect of the money borrowed or debt incurred. In other words, the interest is payable by the borrower who had borrowed the money from the lender or the debt has been incurred by him in favour of the .....

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er charge and such fee is in respect of the money borrowed or any debt incurred or, for unutilised credit facility. Here also, such fee or charge is in respect of money borrowed only 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 which has been termed as "interest" in the section is that, these p .....

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be upheld because, it is not a part of debt or loan payable to the lender but it has been paid for facilitating the loan for the borrower from the lender. The element of relationship between the borrower and lender is a key factor to bring the payment within the ambit of definition of interest u/s 2(28A). 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, because the rel .....

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fee cannot be termed as "interest" under both the limbs of the definition; given in section 2(28A). Therefore, the assessee was not liable to deduct tax for such payment, as it does not fall within the ambit of interest. 12. Now, coming to the decision of M/s Commonwealth Development (supra) as relied upon by the ld. CIT(A), we find that in this case, the issue was, whether the upfront appraisal fee collected by the assessee company is in the nature of interest. Appraisal fee collected .....

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perhaps is based on misunderstanding of the ratio laid down by the Tribunal. This decision had travelled up to the Hon'ble High Court, wherein the Hon'ble High Court decided the issue in favour of the assessee under the DTAA. 13. Regarding the treatment of Arranger fees as fees for technical services, we find that the ld. CIT(A) had treated it to be in the nature of service fee for managing and arranging the finance and, hence, it is the consideration for rendering managerial and consul .....

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