Management Fee On ECB Partakes Character Of 'Interest' U/s 2(28A), Hence Exempt Under Art.11 Of Indo Germany DTAA: Delhi ITAT

The Delhi ITAT ruled that management fee received by the non-resident taxpayer bank for extending ECB to an Indian entity is not taxable as fee for technical services (FTS) since it partakes the character of interest under Section 2(28A).

Thus, the ITAT held that such management fee would be exempt under Article 11(3)(b) of India-Germany DTAA.

The Division Bench comprising Saktijit Dey (Vice President) and Dr. B.R.R. Kumar (Accountant Member) observed that “even the management fee is of similar nature as commitment fee and documentation fee, as it is closely linked to the loan granted, hence cannot be distinguished from the documentation fee and commitment fee. Thus, in our view, management fee partakes the character of interest under section 2(28A) of the Act. Hence, would be exempt from taxation in India in terms of Article 11(3)(b) of the treaty”. (Para 13)

As per the brief facts of the case, the assessee, a German banking company, advanced External Commercial Borrowing (ECB) to certain Indian entities against which the Assessee received interest along with connected fees, such as, management/ processing fee, documentation fee and commitment fee. However, did not file any return in India. From the Form 15CA uploaded by the Indian entities, Revenue found that foreign remittance of Rs.87 Lacs was made towards management/processing fee, on which no tax had been deducted at source, accordingly, the Assessee was subject to reassessment. Assessee argued that interest along with various fees received in connection with loan granted are not taxable in India as they are exempt under Article 11(3)(b) of India-Germany DTAA. The Revenue accepted contention for the interest not being taxable under Article 11 but held that management/processing fee is taxable as FTS.

Relying on the decision of DCIT vs Sisecam Flat Glass India Ltd. in ITA No.2475/Kol/2019, the Bench observed that the definition of interest in the domestic law which includes all kinds of payment attached to the loan.

The Bench noted that the Assessee entered into loan agreement with Indian entity as per which the borrower paid commitment Fee at 0.55%, non-refundable management fee at 1.25% and non-refundable documentation fee.

The Bench observed that the Revenue Department admitted that interest and documentation fee are exempt under Article 11(3)(b) of the Indo German Treaty.

From a reading of Article 11(4) of the India-Germany treaty and Section 2(28A) of the Income tax Act, which defines 'interest', the Bench opined that the term “interest” includes any service fee or other charge in respect of the moneys borrowed or debt incurred or in respect of any credit facility which has not been utilised.

Thus, the ITAT allowed the assessee's appeal and concluded that management fee is not taxable as FTS but exempt as interest under Article 11 of India-Germany DTAA.

Counsel for Appellant/ Taxpayer: Danesh Bafna & Hardik Nirmal

Counsel for Respondent/ Department: P. Praveen Siddharth

Case Title: Aka Ausfuhrrkreditgesellschaft Mbh Verses The Assistant Commissioner of Income-tax

Case Number: ITA No.783/DEL/2023

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