Case Law Details

Case Name : Idea Cellular Limited. Mumbai Vs Asst. Director of Income Tax Mumbai (International Taxation) (ITAT Mumbai)
Appeal Number : 1619/Mum/2011
Date of Judgement/Order : 10/06/2015
Related Assessment Year : 2010-11
Courts : All ITAT (7345) ITAT Mumbai (2112)

Brief Facts:

The assessee (Idea Cellular Limited) had entered into “Term Loan Facility Agreement” 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.

Pursuant to the said agreement dated 10-9-2009, the assessee was liable to pay Arranger’s fees to HSBC, Hongkong (“Arranger”) amounting to Rs. 2,64,75,645/-. The assessee, out of abundant caution remitted the said amount payable as Arranger’s fees after deducting tax @21.12% amounting to Rs. 55,91,645/- u/s 195 of the Act and deposited the same in the Treasury of Govt. of India on 5-2-2010. At the time of deduction of tax, the assessee considered the amount as “interest” and deducted the 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 giving detail reasoning as to why such “Arranger fee” cannot be termed as “interest”. In the remand report, the ld. ADIT admitted that the amount payable as “Arranger fee” is not interest and to that extent he accepted the contention of the assessee.

However, he was of the opinion that the payment to the Arranger for arranging finance is taxable in India as “fees for technical services” u/s 9(1)(vii) as the same is in the nature of “managerial” 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.

Assessee Contention :

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 “interest” as defined u/s 2(28A). The Arranger fee is a kind of fees payable to a third party which can be said to be akin to brokerage or commission and, hence, it cannot be regarded as interest. In support, the assessee relied upon the CBDT Circular No. F.164/18/770IT (A-I) dtd. 13-7-1978 with specifically held that brokerage or manager’s remuneration payable to a broker or a middleman who help in securing the deposits is not includible in the meaning of word “interest”. 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 the assessee, therefore, cannot be held to be taxable in India. The assessee also made detailed submission of non-applicability of Clause (i) of section 9(1) which has been dealt with by the ld. CIT(A) in his appellate order. Lastly, it was submitted that such a payment cannot be termed as ‘fees for technical services’ within the meaning of section 9(1)(vii), because the services of the arranger do not constitute managerial or consultancy services.

Revenue Contention :

Revenue held that the Arranger fee amount is taxable as interest income within the meaning of section 2(28A) r.w.s. 9( 1)(v) of the Act as per section 115A of the Act and as well as fees for technical services being managerial and consultancy in nature u/s.9(1)(vii) and 9(1)(1) of the Act. Accordingly, the withholding of tax is required on the same. Therefore, the appellant is directed to make payment after withholding of tax thereon u/s.195 of the Act.

Court Order

The Arranger is not the lender as the person who has provided the money and any fee paid to him is not in respect of the borrowing, because no debt has been incurred by the assessee in favour of the Arranger vis-a-vis the money borrowed. He is merely a facilitator who brings lender and borrower together for facilitating the loan/credit facility.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 relationship of a borrower or a lender is missing.

Thus, Arranger is only a intermediary/third party and accordingly, any fee paid as Arranger 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.

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 consultancy services. This precise issue had come up for consideration before the Tribunal in the case of Credit Lyonnais (supra) wherein SBI was appointed as Arranger for mobilising the deposits from the eligible depositor under “India Millennium Deposit Scheme” and collecting bank for receiving and handling application forms. The A.O. had held that payment made by the assessee toSBI is for services covered u/s 9(1)(vii). The Tribunal after considering the various kind of services rendered by the SBI and scope of work, held that it is not in the nature of managerial or consultancy services and therefore, the same cannot be brought within the ambit of fees for technical services as per section 9(1)(vii) of the Act. This ratio was again reiterated in the case of Arranger fee paid for mobilising the deposits in the case of Abu Dhabi Commercial Bank Ltd. (supra), wherein it was held that Arranger fee cannot be treated as fees for technical services u/s 9(1)(vii). Otherwise also, the term ‘managerial’ essentially imply control, administration and guidance for business, day to day functioning. It includes the act of managing by direction or regulation or superintendence. Here, 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 counselling services. The Arranger was not involved in providing control, guidance or administration of the credit facility nor it was involved in day-today functioning of the assessee in overseeing the utilisation or administration of the credit facility. It was not in charge of entire or part of the transaction of arranging services, hence, it cannot be termed as managerial or consultancy services within the meaning of section 9(1)(vii). Accordingly, the Arranger fee cannot be held to be taxable u/s 9(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. The grounds raised by the assessee are thus allowed. In the result, appeal filed by the assessee is allowed.

Compiled by Our Team member CA Amit Handa

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