JT. DIT (OSD)-(IT) - Rg. 1, MUMBAI v. M/s. COMMON WEALTH DEVELOPMENT CORPORATION, MUMBAI

ITA 1987/MUM/2006 | 1998-1999
Pronouncement Date: 25-02-2010 | Result: Dismissed

Appeal Details

RSA Number 198719914 RSA 2006
Bench Mumbai
Appeal Number ITA 1987/MUM/2006
Duration Of Justice 3 year(s) 10 month(s) 28 day(s)
Appellant JT. DIT (OSD)-(IT) - Rg. 1, MUMBAI
Respondent M/s. COMMON WEALTH DEVELOPMENT CORPORATION, MUMBAI
Appeal Type Income Tax Appeal
Pronouncement Date 25-02-2010
Appeal Filed By Department
Order Result Dismissed
Bench Allotted L
Tribunal Order Date 25-02-2010
Assessment Year 1998-1999
Appeal Filed On 28-03-2006
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH L MUMBAI BEFORE SHRI R.S.SYAL AM & SMT. P.MADHAVI DEVI JM I.T.A.NOS.1987 & 1988/MUM/2006 A.YRS. 1998-99 & 1999-2000 JT. D.I.T. (OSD)-(IT) RANGE 1 MUMBAI VS. M/S COMMONWEALTH DEVELOPMENT CORPORATION C/O. BHARAT S. RAUT & CO. KAMALA MILLS COMPOUND 448 SENAPATI BAPAT MARG LOWER PAREL MUMBAI 400 013 GIR NO.34-097-PY-9798 (APPELLANT) (RESPONDENT) AND C.O.NOS.297 & 298/MUM/2006 (ARISING OUT OF I.T.A.NOS.1987 & 1988/MUM/2006 A.YRS. 1998-99 & 1999-2000 M/S COMMONWEALTH DEVELOPMENT CORPORATION MUMBAI JT. D.I.T. (OSD)-(IT) RANGE 1 MUMBAI (CROSS OBJECTOR) (RESPONDENT) REVENUE BY : SHRI NARENDRA SINGH. ASSESSEE BY : SHRI F.V.IRANI. O R D E R PER P.MADHAVI DEVI JM: THE APPEALS BY THE REVENUE AND THE CROSS OBJECTION S OF THE ASSESSEE ARE HEARD TOGETHER AND THEY ARE DISPOSED O F BY THIS COMMON ORDER. 2. I.T.A.NO.1987/M/06 A.Y 98-99 : IN THIS APPEAL THE REVENUE IS AGGRIEVED BY THE ORDER OF THE CIT[A] IN- 1. DELETING THE ADDITION MADE BY THE AO AMOUNTING T O RS.77 14 828/-; AND 2 2. DIRECTING THE AO TO DELETE THE ADDITION ON ACCOU NT OF DIRECTORS FEE AMOUNTING TO RS.1 34 150/-. 3. AS REGARDS GROUND NO.{2} BRIEF FACTS OF THE CAS E ARE THAT THE ASSESSEE IS A NON-RESIDENT STATUTORY CORPORATION ES TABLISHED IN U.K. UNDER THE OVERSEAS RESOURCES DEVELOPMENT ACT 1948. THE ASSESSEES INCOME IN INDIA IS FROM INVESTMENT IN SHARES AND DI SBURSEMENT OF LOANS TO INDIAN COMPANIES. THE ASSESSEE COMPANY IS ALSO R ECOGNISED AS AN OVERSEAS FINANCIAL ORGANISATION FOR THE PURPOSE OF SEC.115JB OF THE INCOME TAX ACT. FOR THE RELEVANT ASSESSMENT YEAR TH E ASSESSEE COMPANY FILED ITS RETURN OF INCOME DECLARING AN INC OME OF RS.13 78 82 890/-. DURING THE ASSESSMENT PROCEEDING S U/S.143[3] OF THE ACT AO OBSERVED THAT THE DIRECTORS FEES OF RS. 1 34 150/- IS RECEIVED FROM THE INDIAN COMPANIES ON ACCOUNT OF FI NANCIAL ASSISTANCE/SERVICES RENDERED TO THESE INDIAN COMPAN IES AND THE ASSESSEE CLAIMED THAT THE SAID FEES WOULD CONSTITUT E ITS BUSINESS INCOME AND THE SAME IS EXEMPT AS THE ASSESSEE COMPA NY DOES NOT HAVE P.E. IN INDIA. THE AO RELIED UPON THE ORDER OF HIS PREDECESSOR FOR THE A.Y 1997-98 AND HELD THAT THE SAID FEES ARE TAX ABLE UNDER ARTICLE 13(4) OF DTAA BETWEEN INDIA AND UK AS FEES FOR TECH NICAL SERVICES @ 15%. 4. AGGRIEVED ASSESSEE FILED AN APPEAL BEFORE THE C IT[A] WHO ALLOWED THE SAME BY FOLLOWING THE ORDER OF THE TRIB UNAL IN THE ASSESSEES OWN CASE FOR THE A.Y 1997-98 IN I.T.A.NO .581/M/02 DATED 28/6/2005 WHEREIN IT WAS HELD AS UNDER: WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PERUS ED THE MATERIAL ON RECORD AND WE ARE INCLINED TO AGREE WITH THE CON TENTIONS OF THE 3 LEARNED AR OF THE ASSESSEE BECAUSE CLAUSES (A) AND (B) OF ARTICLE 13(4) HAVE NO RELATION WITH THE IMPUGNED RECEIPT IN THE PRESENT CASE AND PARA (C) OF ARTICLE 13(4) REQUIRES MAKING AVAIL ABLE TO TECHNICAL KNOWLEDGE EXPERIENCE SKILL KNOW-HOW OR PROCESS A ND SINCE IN THE PRESENT CASE THE IMPUGNED RECEIPT IS ON ACCOUNT OF FEES FOR ATTENDING THE MEETINGS BY NOMINEE DIRECTORS IT CANNOT BE SAI D THAT ANY TECHNICAL KNOWLEDGE ETC. WERE MADE AVAILABLE BY T HE ASSESSEE COMPANY TO THESE INDIAN COMPANIES FROM WHOM THIS A MOUNT OF RS.2.62 LAKHS WAS RECEIVED AND UNDER THESE FACTS AN D CIRCUMSTANCES WE FIND NO INFIRMITY IN THE ORDER OF THE CIT[A] AND DECLINE TO INTERFERE WITH THE SAME. AGGRIEVED BY THE RELIEF GIVEN BY THE CIT[A] THE R EVENUE IS IN APPEAL BEFORE US. 5. AFTER HEARING BOTH THE PARTIES WE FIND THAT THE CIT[A] HAS ONLY FOLLOWED THE ORDER OF THE TRIBUNAL IN THE ASSESSEE S OWN CASE FOR THE A.Y 1997-98 AND THEREFORE WE DO NOT SEE ANY REASO N TO INTERFERE WITH THE SAME. THIS GROUND OF APPEAL IS ACCORDINGLY REJE CTED. 6. AS REGARDS GROUND NO.(1) BRIEF FACTS OF THE CASE ARE THAT IN THE RETURN OF INCOME THE ASSESSEE COMPANY HAD CLAIMED UPFRONT APPRAISAL FEES OF RS.77 14 828/- RECEIVED FROM THE INDIAN PARTIES AS NOT TAXABLE UNDER ARTICLE 7 OF THE DTAA BETWEEN IND IA AND UK. THE DETAILS OF THESE EXPENSES ARE AS UNDER- I. DLF POWER RS.11 85 175/- II. GPPL RS. 9 74 250/- III. PUNJAB WIRELESS RS. 1 208 151/- IV. STI RS. 9 61 282/- V. STI RS. 9 67 144/- VI. KONDAPALLI POWER CORPORATION RS. 24 18 826/- ---------------------- RS. 77 14 82 8/- ============= VIDE LETTER DATED 9-10-2000 THE ASSESSEE COMPANY S UBMITTED THAT THE ABOVE FEES WERE RECEIVED ON ACCOUNT OF APPRAISALS C ARRIED OUT BY IT TO 4 DETERMINE THE FUTURE PROFITABILITY AND WORTHINESS O F THE PROJECTS. THE AO OBSERVED THAT THE ASSESSEE COMPANY WHICH IS ENGA GED IN THE BUSINESS OF INVESTMENT IN INDIAN COMPANIES AND DISB URSEMENT OF LOANS BY WAY OF CONVERTIBLE BONDS OR CONVERTIBLE SHARES A ND DEBTS HAS CLAIMED THE ABOVE PAYMENTS AS BUSINESS INCOME AND N OT TAXABLE UNDER ARTICLE 7 OF THE DTAA. HE HELD THAT THE UPFRONT APP RAISAL FEES ARE INTEREST INCOME AS A SINGLE AGREEMENT IS ENTERED BE TWEEN LENDER AND THE BORROWER AND THE UPFRONT APPRAISAL FEE IS CHARG ED FOR EXAMINING THE CREDITWORTHINESS OF THE INDIAN COMPANIES AND T HEIR PROFITS FOR WHICH THE LOANS OR FUNDS ARE REQUIRED. HE HELD THAT THE ENTIRE TRANSACTION BETWEEN THE ASSESSEE COMPANY AND THE IN DIAN COMPANIES RELATE TO LOAN TRANSACTION AND THEREFORE PAYMENTS UNDER VARIOUS HEADS SUCH AS UPFRONT APPRAISAL FEES INTEREST COM MITMENT FEES FRONT END FEES ETC. CANNOT BE VIEWED SEPARATELY AS A WAT ER-TIGHT COMPARTMENT NOR CAN THEY EXIST INDEPENDENTLY AND T HEREFORE THEY ARE INTEREST INCOME CHARGEABLE TO TAX UNDER ARTICLE 12 OF THE TREATY BETWEEN INDIA AND UK. HE ACCORDINGLY BROUGHT TO T AX THE UPFRONT APPRAISAL FEES OF RS.L77 14 828/- AS INTEREST INCOM E IN THE HANDS OF THE ASSESSEE. WITHOUT PREJUDICE TO THIS STAND AO ALSO TREATED IT AS FEES FOR TECHNICAL SERVICES TAXABLE UNDER ARTICLE 13 OF THE TREATY. 7. AGGRIEVED ASSESSEE FILED AN APPEAL BEFORE THE CIT[A] STATING AS UNDER- THAT THE POTENTIAL INVESTEE APPROACHES CDC FOR INV ESTMENT WITH DETAILS OF THE PROJECT AND THE RESPONSIBLE PERSONNE L WITHIN THE ASSESSEE COMPANY HAVE TO OBTAIN INTERNAL APPROVALS AT VARIOU S LEVELS FOR THE 5 PROPOSED INVESTMENT. HE THEREFORE CONDUCTS AN APP RAISAL OF THE PROJECT TO SATISFY ITSELF OF THE FEASIBILITY AND PR OFITABILITY OF THE INVESTMENT AND THE FEES CHARGED FOR SUCH APPRAISAL IS CALLED UPFRONT APPRAISAL FEES AND THIS COVERS THE COSTS OF THE AP PRAISERS AND INCIDENTAL EXPENSES FOR CONDUCTING THE APPRAISAL SU CH AS TRAVELLING ACCOMMODATION ETC. THE APPRAISAL FEES ARE CHARGED I RRESPECTIVE OF WHETHER THE PROPOSAL FOR INVESTMENT IS ACCEPTED OR NOT AND THE FORM OF INVESTMENT MADE. THEREFORE THE APPRAISAL FEE HAS N OTHING TO DO WITH THE INTEREST INCOME ARISING ON THE INVESTMENT MADE SUBSEQUENTLY. 7.1 THE ASSESSEE ALSO FILED A CHART SHOWING THE DE TAILS OF THE APPRAISAL FEES RECEIVED DURING THE YEAR TO DEMONST RATE THAT THE APPRAISAL FEE IS RECEIVED EVEN IF THE PROPOSAL FOR INVESTMENT FAILS. THE SAID CHART IS REPRODUCED AT PAGE-4 OF THE CIT[A] S ORDER. THE CIT[A] AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE A BOUT THE DEFINITION OF TERM INTEREST U/S.2(28A) OF THE I.T.ACT AND AL SO ARTICLE 12(5) OF INDO UK DTAA CAME TO THE CONCLUSION THAT THE APPRAI SAL FEE IS BEING PAID FOR THE PRELIMINARY CONSIDERATION OF THE BORRO WERS PROPOSAL SO AS TO ASSESS THE FEASIBILITY OF THE FINANCE AND THE DE FINITION OF INTEREST U/S.2[28A] OF THE I.T.ACT DOES NOT COVER THE APPRAI SAL FEE SINCE SUCH FEE IS NOT BEING LEVIED IN RESPECT OF MONEYS BORROW ED OR INCURRED AND IT IS ALSO NOT COVERED BY ARTICLE 12[5] OF THE DTAA . 8. AS REGARDS THE AOS FINDING THAT THE SAID INCOME HAS TO BE TREATED AS FEES FOR TECHNICAL SERVICES THE CIT[A] HELD THAT THE ASSESSEE DOES NOT RENDER ANY SERVICES OR CONSULTANC Y SERVICES TO THE BORROWER AND THEREFORE IT CANNOT BE TERMED AS FEE S FOR TECHNICAL 6 SERVICES. AGGRIEVED BY THE RELIEF GIVEN BY THE CIT[ A] THE REVENUE IS IN APPEAL BEFORE US. 9. THE LD. DR PLACED RELIANCE UPON THE ORDER OF THE AO AND SUBMITTED THAT THE ASSESSEE COMPANY BEING BASICALLY IN THE BUSINESS OF GIVING LOANS TO INDIAN COMPANIES THE APPRAISAL FEE S COLLECTED BY IT IS IN CONNECTION WITH THE GRANTING OF THE LOANS AND THER EFORE IT FALL WITHIN THE SCOPE OF INTEREST U/S.2[28A] OF THE I.T.ACT AND ALSO ARTICLE 12[5] OF THE TREATY. HE DREW OUR ATTENTION TO THE DEFINITION OF INCOME U/S.2[28A] OF THE ACT AND SUBMITTED THAT INTEREST MEANS NOT ONLY INTEREST PAYABLE ON ANY MONIES BORROWED OR DEBT INCURRED BUT INCLUDE ANY SERVICE FEE OR OTHER CHARGE IN RESPECT OF THE MONIES BORROWED O R DEBT INCURRED OR IN RESPECT OF ANY CREDIT FACILITY WHICH HAS NOT BEE N UTILIZED. HE SUBMITTED THAT EVEN UNDER ARTICLE 12[5] OF THE INDO UK DTAA THE TERM INTEREST MEANT INCOME FROM DEBT CLAIMS OF EVERY K IND WHETHER OR NOT SECURED BY MORTGAGE AND WHETHER OR NOT CARRYING A R IGHT TO PARTICIPATE IN THE DEBTORS PROFIT. THUS ACCORDING TO HIM APPR AISAL FEE IS NOTHING BUT INTEREST INCOME AS HAS RIGHTLY BEEN HELD BY THE AO. 10. THE LD. COUNSEL FOR THE ASSESSEE ON THE OTHER HAND SUPPORTED THE ORDER OF THE CIT[A] AND DREW OUR PARTICULAR AT TENTION TO THE SUBMISSIONS MADE BY THE ASSESSEE BEFORE THE CIT[A] . HE TOOK US THROUGH THE INVESTMENT PROCESS FOLLOWED BY THE ASSE SSEE TO DEMONSTRATE THAT THE APPRAISAL IS DONE FOR COMING T O THE PRELIMINARY CONCLUSION ABOUT THE FINANCIAL VIABILITY OF THE PRO JECT AND THE APPRAISAL FEE IS COLLECTED TO MEET THE EXPENDITURE OF THE APP RAISAL AND IS NOT FOR LENDING OF THE MONEY AND IT IS NOT REFUNDED EVEN IF THE INVESTMENT IS 7 NOT MADE SUBSEQUENTLY. ACCORDING TO HIM THE INCOME DOES NOT FIT WITHIN THE DEFINITION OF INTEREST U/S.2[28A] OF THE I.T.ACT OR UNDER ARTICLE 12[5] OF THE INDO UK TREATY AS AT THE TIME OF RECEIPT OF THE APPRAISAL FEE THERE IS NO DEBT CREATED BETWEEN THE ASSESSEE AND THE INDIAN COMPANY. 11. AS REGARDS THE AOS FINDING ABOUT THE INCOME BE ING FEE FOR TECHNICAL SERVICES HE SUBMITTED THAT THE APPRAISAL FEES ARE REIMBURSEMENT OF COSTS INCURRED BY THE ASSESSEE COM PANY FOR APPRAISING THE PROSPECTIVE BORROWER AND THERE IS NO ELEMENT OF SERVICE IN IT MUCH LESS TECHNICAL OR CONSULTANCY SERVICES 12. HAVING HEARD BOTH THE PARTIES AND HAVING CONSID ERED THEIR RIVAL SUBMISSIONS WE FIND THAT THE BASIC QUESTION BEFORE US IS WHETHER THE UPFRONT APPRAISAL FEES COLLECTED BY THE ASSESSEE CO MPANY IS IN THE NATURE OF INTEREST INCOME UNDER THE INCOME TAX ACT OR UNDER ARTICLE 12[5} OF DTAA BETWEEN INDIA AND UK. THE DEFINITION OF TERM INTEREST U/S.2[28A] IS AS FOLLOWS- INTEREST MEANS INTEREST PAYABLE IN ANY MANNER IN RESPECT OF ANY MONEYS BORROWED OR DEBT INCURRED (INCLUDING A DEPOS IT CLAIM OR OTHER SIMILAR RIGHT OR OBLIGATION) AND INCLUDES ANY SERVICE FEE OR OTHER CHARGE IN RESPECT OF THE MONEYS BORROWED OR D EBT INCURRED OR IN RESPECT OF ANY CREDIT FACILITY WHICH HAS NOT BEE N UTILIZED FROM THE ABOVE DEFINITION IT CAN BE SEEN THAT THE M EANING OF INTEREST HAS 3 LIMBS TO IT. INTEREST IS PAYABLE IN ANY MANNE R [1] IN RESPECT OF ANY MONEYS BORROWED OR DEBT INCUR RED [INCLUDING A DEPOSIT CLAIM OR OTHER SIMILAR RIGHT OR OBLIGATIONS]; AND INCLUDES- 8 (2) ANY SERVICE FEE OR OTHER CHARGE [A] IN RESPECT OF THE MONEYS CHARGED OR DEBT INCUR RED; OR [B] IN RESPECT OF ANY CREDIT FACILITY WHICH HAS NOT BEEN UTILIZED. THE PLAIN MEANING OF THE TERM INTEREST MEANS INTE REST PAYABLE IN ANY MANNER IN RESPECT OF ANY MONEYS BORROWED OR DEBT IN CURRED . IN THE CASE IN HAND AS THE APPRAISAL FEE IS PAID EVEN BEF ORE THE ADVANCEMENT OF LOAN OR INVESTMENT OF ANY KIND IT CANNOT BE SA ID THAT IT IS INTEREST PAYABLE IN RESPECT OF ANY MONIES BORROWED OR DEBT I NCURRED. SO IT IS OUT OF THE PLAIN MEANING OF THE TERM. 13. COMING TO THE SECOND LIMB OF THE DEFINITION I.E . INCLUSIVE DEFINITION WE FIND THAT IT IS INCLUSIVE OF SER VICE FEE OR OTHER CHARGE AND SUCH SERVICE FEE OR OTHER CHARGE SHOULD BE IN R ESPECT OF MONIES BORROWED OR DEBIT INCURRED OR IN RESPECT OF ANY CRE DIT FACILITY WHICH HAS NOT BEEN UTILISED. THUS SERVICE OR OTHER CHARGE IS IN THE NATURE OF INTEREST INCOME PROVIDED IT IS FOR THE PURPOSES ENU MERATED ABOVE. THE APPRAISAL FEE CAN BE SAID TO BE THE SERVICE FEE OR OTHER CHARGE BUT WHETHER IT IS FOR THE INSTANCES STATED IN THE DEFIN ITION IS TO BE SEEN. IN THE FIRST INSTANCE WE FIND THAT HERE ALSO THE EMP HASIS IS ON THE MONEY BORROWED OR DEBT INCURRED. AS SEEN FROM THE C HART AT PAGE-4 OF THE CIT[A] S ORDER THE APPRAISAL FEE IS CHARGED E VEN FROM THOSE PARTIES WHERE THERE IS NO INVESTMENT MADE. THEREFOR E IT CANNOT BE SAID THAT THE APPRAISAL FEE IS IN THE NATURE OF SER VICE FEE OR OTHER CHARGE IN RESPECT OF THE MONIES BORROWED OR DEBT IN CURRED. 14. COMING TO THE THIRD LIMB OF THE DEFINITION I.E. SERVICE FEE OR OTHER CHARGE IN RESPECT OF ANY CREDIT FACILITY WHIC H HAS NOT BEEN 9 UTILIZED WE FIND THAT THIS LIMB WOULD APPLY TO TH E APPRAISAL FEES COLLECTED BY THE ASSESSEE AS IT IS COLLECTED ONLY FOR THE PURPOSE OF VERIFYING THE DEBT CLAIM OF THE ASSESSEE EVEN IF IT IS NOT UTILIZED. 15. COMING TO THE MEANING OF THE TERM INTEREST UN DER ARTICLE 12[5] OF THE DTAA THE DEFINITION IS AS FOLLOWS- THE TERM INTEREST AS USED IN THIS ARTICLE MEANS INCOME FROM DEBT CLAIM OF EVERY KIND WHETHER OR NOT SECURED BY MORT GAGE AND WHETHER OR NOT CARRYING A RIGHT TO PARTICIPATE IN DEBTORS PROFIT AND IN PARTICULAR INCOME ON GOVERNMENT SECURITIES AND INCOME FROM BON DS OR DEBTS INCLUDING PREMIUM AND APPRAISAL ATTACHES SUCH SECUR ITIES BONDS OR DEBENTURES SUBJECT TO THE PROVISIONS OF PARA-9 OF T HIS ARTICLE SHALL NOT INCLUDE ANY ITEM WHICH IS TREATED AS A DISTRIBUTION IN THE PROVISIONS OF ARTICLE 11 (DIVIDEND) OF THIS CAVATINA. FROM THIS DEFINITION IT IS CLEAR THAT IT IS INCOME FROM DEBT CLAIM OF EVERY KIND. IN THE CASE BEFORE US AT THE TIME OF RECEIPT OF THE APPRAISAL FEES THERE IS NO DEBT CLAIM IN EXISTENCE AND THEREFORE U NDER ARTICLE 12[5] OF THE TREATY THE SAID INCOME CANNOT BE TERMED AS INTE REST INCOME. 15.1 WHEREVER THE PROVISIONS OF DTAA ARE BENEFICIA L TO THE ASSESSEE IN COMPARISON TO THE PROVISIONS OF THE INCOME TAX A CT THE PROVISIONS OF DTAA ARE TO BE APPLIED. THEREFORE WE HOLD THAT THE UPFRONT APPRAISAL FEES COLLECTED BY THE ASSESSEE DOES NOT F ALL WITHIN THE MEANING OF THE TERM INTEREST UNDER ARTICLE 12[5] OF THE INDO UK DTAA AND THEREFORE WE SEE NO REASON TO INTERFERE WITH THE FINDINGS OF THE CIT[A] AND THIS GROUND OF APPEAL RAISED BY THE REV ENUE IS REJECTED. 16. IN THE RESULT REVENUES APPEAL IN I.T.A.NO.198 7/M/06 IS DISMISSED. 17. C.O.NO.297/M/06 A.Y 1998-99 : THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS OF CROSS OBJECTIONS: 1.1 ON THE FACTS AND CIRCUMSTANCES OF THE CASE TH E LEARNED COMMISSIONER OF INCOME TAX [APPEALS]-XXXI MUMBAI [ CIT[A] 10 ] HAS ERRED IN HOLDING THAT THE FRONT-END FEES WER E TAXABLE UNDER SECTION 2[28A] OF INCOME TAX ACT 1961 [ACT ] IN THE HANDS OF THE RESPONDENT. 1.2 ON THE FACTS AND CIRCUMSTANCES OF THE CASE THE LEARNED CIT[A] ERRED IN HOLDING THAT THE FRONT-END FEES WERE TAXAB LE AS INTEREST INCOME IN THE HANDS OF THE RESPONDENT UNDER ARTICLE 12 OF AGREEMENT FOR AVOIDANCE OF DOUBLE TAXATION BETWEEN INDIA AND THE UNITED KINGDOM [DTAA]. 2. ON THE FACTS AND CIRCUMSTANCES OF THE CASE THE LEARNED CIT[A] ERRED IN HOLDING THAT THE SALE OF SHARES IN RANGE T RW STEERING SYSTEMS LTD. LOCATED OUTSIDE INDIA RESULTED IN INCO ME DEEMED TO ACCRUE OR ARISE IN INDIA UNDER SECTION 9(1)(I) O F THE ACT IN THE HANDS OF THE RESPONDENT. 18. AS REGARDS GROUND NO.1 BRIEF FACTS ARE THAT FR OM THE RETURN OF INCOME AO OBSERVED THAT THE ASSESSEE HAD ALSO RECEI VED FRONT-END FEES UNDER THE CONTRACT WITH STI INDIA LTD. FOR THE REASONS DISCUSSED IN RESPECT OF UPFRONT APPRAISAL FEES AO TREATED TH E FRONT-END FEES ALSO AS INTEREST INCOME IN THE HANDS OF THE ASSESSEE UND ER ARTICLE 12 OF THE TREATY BETWEEN INDO UK. AGGRIEVED ASSESSEE FILED A N APPEAL BEFORE THE CIT[A] STATING THAT THE FROND-END FEES ARE CHA RGED TO COVER COSTS OF POST APPRAISALS OTHER THAN COSTS OF LEGAL DOCUME NTATIONS WHICH ARE GENERALLY BORNE BY THE INVESTEE. IT WAS SUBMITTED T HAT THESE FEES ARE GENERALLY CHARGED ONLY IN RESPECT OF DEBT INVESTMEN TS AS A PERCENTAGE OF THE PROPOSED INVESTMENT AND THEY ARE AGREED UPON BEFORE THE AGREEMENTS ARE FINALIZED AND ARE GENERALLY RECEIVED PRIOR TO THE DISBURSEMENT OF LOANS AND AS IN THE CASE OF APPRAIS AL FEES THE FEES ARE NOT RETURNED EVEN WHEN THE CASE OF INVESTMENT IS AB ORTED. IT WAS THUS ADMITTED THAT IN THE ABSENCE OF DEBT CLAIM THE SAM E CANNOT BE TREATED AS INTEREST INCOME. THE CIT[A] AFTER CONSIDERING T HE DEFINITION OF THE TERM INTEREST UNDER THE I.T.ACT AND ALSO UNDER A RTICLE 12[5] OF DTAA BETWEEN INDIA AND UK AND ALSO AGREEMENTS WITH STI L IMITED AND 11 EASTER INDUSTRIES HELD THAT FRONT-END FEES CHARGED HAS A DIRECT NEXUS WITH THE LOANS ADVANCED. HE OBSERVED THAT THOUGH TH E FEES ARE BEING COLLECTED IN INSTALLMENTS AND NOT BEING CHARGED AS A PERCENTAGE AT CERTAIN RATE THE FRONT-END FEE IS BEING CHARGED AS INTEREST ON THE ADVANCE GIVEN IN ADDITION TO THE INTEREST LEVIABLE AS PER ARTICLE 7.6 OF THE AGREEMENT. HE ALSO OBSERVED THAT AS PER PARA 9. 1.1 OF THE AGREEMENT THE FRONT-END FEE IS CHARGED AFTER THE F IRST ADVANCE IS PAID AND SUBSEQUENTLY REMAINING INSTALLMENTS ARE COLLECT ED. HE THEREFORE HELD THAT THE FRONT-END FEES CHARGED HAS A DIRECT N EXUS WITH THE LOANS ADVANCED AND ACCORDINGLY IS INTEREST INCOME ARISING FROM THE DEBT CLAIM WITHIN THE MEANING OF ARTICLE 12[5] OF DTAA. AGGRIEVED BY THIS FINDING OF THE CIT[A] ASSESSEE IS IN APPEAL BEFOR E US. 19. THE LD. COUNSEL FOR THE ASSESSEE WHILE REITERAT ING THE SUBMISSIONS MADE BEFORE THE AUTHORITIES BELOW DREW OUR ATTENTION TO THE INVESTMENT PROCESS CHART FILED BY THE ASSESSEE AT PAGES 4 & 5 OF THE PAPER BOOK TO DEMONSTRATE THAT FRONT-END FEES ARE CHARGED POST APPRAISAL AND POST APPROVAL BUT PRIOR TO THE ACTUA L DISBURSEMENT OF THE LOAN. HE ALSO DREW OUR ATTENTION TO PAGES 16 TO 1L8 OF THE PAPER BOOK WHEREIN THE NATURE OF FRONT-END FEE HAS BEEN EXPLAI NED. THUS ACCORDING TO HIM AS THERE IS NO DEBT CLAIM AS ON T HE DATE OF COLLECTING THE FRONT-END FEES THE SAME CANNOT BE CONSIDERED A S INTEREST INCOME BOTH UNDER THE INCOME TAX ACT AS WELL AS THE INDO U K TREATY. 20. THE LD. DR ON THE OTHER HAND SUPPORTED THE OR DERS OF THE AUTHORITIES BELOW AND SUBMITTED THAT THE ASSESSEE H AS NOT GIVEN ANY BASIS FOR CHARGING OF THE FRONT-END FEES AND AS SEE N FROM THE 12 AGREEMENT THE FRONT-END FEE IS RECEIVED AFTER THE DISBURSEMENT OF THE FIRST INSTALLMENT AND THEREFORE IT HAS RIGHTLY BE EN TAXED AS INTEREST INCOME. 21. HAVING HEARD BOTH THE PARTIES AND HAVING CONSID ERED THEIR RIVAL CONTENTIONS WE FIND THAT AS SEEN FROM THE INVESTME NT PROCESS CHART AFTER THE FINAL APPROVAL OBTAINED FROM INVESTMENT B OARD OF CDC AND THE FORM OF INVESTMENT IS ALSO DECIDED THEN THE AS SESSEE CHARGES FRONT-END FEE IF THE INVESTMENT IS IN THE FORM OF A DEBT AND NO FRONT- END FEE IS CHARGED IF THE INVESTMENT IS IN THE FORM OF EQUITY. THOUGH THE ASSESSEE SUBMITS THAT THERE IS NO DEBT CLAIM AS ON THE DATE OF CHARGING OF THE FRONT-END FEES AND THAT IT IS ONLY CHARGED TO COVER THE EXPENSES POST APPRAISAL IT IS NOT CLEAR AS TO WHA T ARE THE SERVICES OF THE COSTS WHICH ARE COVERED BY THESE FRONT-END FEES . FURTHER IN HIS SUBMISSIONS BEFORE THE CIT[A] PLACED AT PAGES 15 T O 18 OF THE PAPER BOOK IT IS STATED THAT FRONT-END FEES ARE CHARGED ONLY IN RESPECT OF DEBT INVESTMENT AT A CERTAIN PERCENTAGE OF THE PROP OSED INVESTMENT. THUS IT CAN BE SEEN THAT IT HAS A DIRECT NEXUS WIT H THE DEBT CLAIM THOUGH THE DOCUMENTATION IS SUBSEQUENT TO THE CHARG ING OF FRONT-END FEES. IN THE CASE OF STI LTD. AND EASTER INDUSTRIES LTD. THE DEALS WERE SUCCESSFUL AND IT IS ONLY THEN THE FRONT-END FEES W ERE CHARGED. IN VIEW OF THE SAME WE ARE SATISFIED THAT IT IS COVERED BY THE DEFINITION OF THE TERM INTEREST UNDER THE ACT AS WELL AS THE TREAT Y AND THE CIT[A] HAS RIGHTLY CONFIRMED THE ADDITION MADE BY THE AO. ACCO RDINGLY WE UPHOLD THE ORDER OF THE CIT[A] AND REJECT THIS GROUND OF CROSS OBJECTION RAISED BY THE ASSESSEE. 13 22. AS REGARDS GROUND NO.2 BRIEF FACTS ARE THAT TH E ASSESSEE HAD RAISED AN ADDITIONAL GROUND OF APPEAL NO.10 BEFORE THE CIT[A] THAT THE JT. CIT SPECIAL RANGE 12 MUMBAI OUGHT TO HA VE HELD THAT THE CAPITAL GAINS ON THE SALE OF SHARES LOCATED OUTSIDE INDIA DO NOT CONSTITUTE TAXABLE INCOME UNDER THE INCOME TAX ACT 1961 IN THE HANDS OF THE APPELLANT. 22.1 THE CIT[A] CALLED FOR THE COMMENTS OF THE AO AND PURSUANT THERETO RECEIVED THE REMAND REPORT DATED 11-11-2005 . BEFORE THE CIT[A] ASSESSEE SUBMITTED THAT IT HAD SOLD 10 43 486 SHARES OF RANE TRW STEERING SYSTEMS LTD. TO TRW INC. USA ON 25-11- 1997 FOR A CONSIDERATION OF POUNDS 22 82 500/- AND AS THESE SH ARES WERE HELD ABROAD AND SOLD ABROAD CAPITAL GAINS ARISING OUT O F SUCH TRANSACTION IS NOT TAXABLE IN INDIA. IN SUPPORT OF ITS CONTENTION THE ASSESSEE RELIED UPON THE FOLLOWING DECISIONS- A) CIT VS. QUANTAS AIRWAYS LTD. 256 ITR 84 (DEL) B) DECISION OF ADVANCE RULING AUTHORITY IN THE CASE OF PFIZER CORPORATION 271 ITR 101 (AR) AFTER CONSIDERING THE REMAND REPORT OF THE AO AS WE LL AS ASSESSEES SUBMISSIONS THE CIT[A] AT PARAS 11.1 AND 11.2 HAS DECIDED AS UNDER- 11.1 THE SECTION 9(1) OF THE I.T. ACT READS AS UND ER: 9. INCOME DEEMED TO ACCRUE OR ARISE IN INDIA. (1) THE FOLLOWING INCOMES SHALL BE DEEMED TO ACCRUE OR ARISE IN INDIA: - (I) ALL INCOME ACCRUING OR ARISING WHETHER DIRECTL Y OR INDIRECTLY THROUGH OR FROM ANY BUSINESS CONNECTION IN INDIA OR THROUGH OR FROM ANY PROPERTY IN INDIA OR THROUGH OR FROM ANY ASSET OR SOURCE OF INCOME IN INDIA OR THROUGH THE TRANSFER OF A CAPITAL ASSET SITUATE IN INDIA. 14 THUS ANY INCOME ARISING THROUGH THE TRANSFER OF CAP ITAL ASSET SITUATE IN INDIA IS DEEMED TO ACCRUE OR ARISE IN IN DIA. THE ISSUE IS WHETHER THE SHARES CONSTITUTE A CAPITAL ASSETS SITU ATE IN INDIA. IN THE CASE OF QUANTAS AIRWAYS LTD. THE ISSUE INVOLVED WAS SALE OF AIRCRAFT. QUANTAS AIRWAYS LTD. HAD A BUSINESS OPERA TION IN INDIA AND WAS OPERATING AIRLINE WORLD-VIDE. THE SALE OF AIRCRAFT TOOK PLACE OUTSIDE INDIA AND I T WAS HELD THAT THE PROVISIONS OF SECTION 9(1)(I) WERE NOT ATTRACTE D. THE CHARACTER OF AIRCRAFT AS AN ASSET IS ENTIRELY DIFFERENT FROM CHARACTER OF SHARES OF A PUBLIC LIMITED COMPANY. ACCORDINGLY THIS DECI SION DOES NOT RENDER ANY HELP IN DECIDING THE ISSUE. SECOND DECIS ION IN THE CASE OF PFIZER CORPORATION REFERS TO TRANSFER OF A DOSSIER CONTAINING TECHNOLOGY INFORMATION. IN THAT CASE THE TRANSFER OF DOSSIER TOOK PLACE OUTSIDE AND THE DOSSIER DID NOT LIE IN INDIA. IT WAS HELD THAT THE CAPITAL GAIN WAS NOT TAXABLE IN I NDIA. CHARACTER OF ASSETS IN THAT CASE IS ENTIRELY DIFFERENT FROM T HE SHARE OF A COMPANY. 11.2 THE SHARE OF A COMPANY IS AN ASSET WHICH GIVES A BUNDLE OF RIGHTS TO THE HOLDER NAMELY RIGHT TO PA RTICIPATE IN THE PROFITS OF THE COMPANY. SHAREHOLDER ALSO GETS RIGHT S TO HAVE A SHARE IN THE MANAGEMENT OF THE COMPANY. WITH A VIEW TO PROVIDE LIQUIDITY AND THE EASY TRANSFERABILITY RULES ARE R ELAXED IN THE COMPANIES ACT TO ENABLE TRANSFER OF THE SHARES BY O NE PERSON TO ANOTHER. HOWEVER A SHARE CERTIFICATE BY ITSELF IS NOT A TANGIBLE PROPERTY LIKE AN AIRCRAFT. IN THE CASE OF SHARES T HE TRANSFEROR MAY AGREE TO SELL TO THE TRANSFEREE. TRANSACTION MAY BE COMPLETE BETWEEN THEM BY THE EXCHANGE OF SHARES AND THE CONS IDERATION. HOWEVER WHEN IT COMES TO EXERCISING THE RIGHTS AS SHAREHOLDERS IN THE COMPANY IT IS NECESSARY TO GET THE TRANSFER REGISTERED IN THE COMPANY AND TO GET THE CHANGE IN THE NAME RECOR DED IN THE REGISTER. THIS ACTIVITY CAN ONLY HAPPEN IN THE SHAR E REGISTER OF A COMPANY. THE COMPANY IS NOT BOUND TO ACCEPT THE SAL E OF SHARES TO A PERSON AND IT CAN OBJECT TO IT. IF APPROVED IN THE ANNUAL GENERAL MEETING OR EXTRAORDINARY GENERAL MEETING I T CAN REFUSE TO REGISTER CHANGE IN NAME IN THE REGISTER OF SHARE HOLDERS. IN OTHER WORDS A CONTRACT BETWEEN THE TRANSFEROR AND TRANSFEREE 15 REGARDING THE SALE OF SHARES DOES NOT COMPLETE THE TRANSACTION AS IT IS FURTHER SUBJECT TO THE APPROVAL BY THE COMPAN Y AND THE PROCEDURE OF CHANGING THE NAME IN THE REGISTER IS S HAREHOLDERS. THE SHARE IN A COMPANY GIVES RIGHTS TO SHAREHOLDER TO PARTICIPATE IN THE PROFITS OF THE COMPANY AND ALSO HAVE A SHARE IN THE PROPERTIES OF THE COMPANY UPON ITS LIQUIDATION AND WINDING UP. IN OTHER WORDS THE SHARE CERTIFICATE IS NOT A TANGIBL E PROPERTY BUT A BUNDLE OF RIGHT GIVEN TO SHAREHOLDER WITH REGARD TO BUSINESS AND ASSETS OF THE COMPANY. THEREFORE IT CAN BE CONCLUD ED THAT WHEN A SHARE OF AN INDIAN COMPANY IS TRANSFERRED ANYWHER E IT IS A TRANSFER OF RIGHT TO PROPERTY OR CAPITAL ASSETS SIT UATED IN INDIA. I AM THEREFORE OF THE VIEW THAT DESPITE THE SALE OF SHAR ES HAVE BEEN TAKEN PLACE OUTSIDE INDIA SHARES BEING THOSE OF A INDIAN COMPANY CAPITAL GAIN ARISING FROM SALE OF SUCH SHA RES IS INCOME ARISING FROM THE CAPITAL ASSETS SITUATE IN INDIA. T HEREFORE PROVISIONS OF SECTION 9(1)(I) ARE ATTRACTED AND CAP ITAL GAIN IS CHARGEABLE TO TAX IN INDIA. ARTICLE 14 OF THE INDO- UK DTAA PROVIDES THAT EACH CONTRACTING STATE MAY TAX CAPITA L GAINS IN ACCORDANCE WITH THE PROVISIONS OF ITS DOMESTIC LAW EXCEPT AS PROVIDED IN ARTICLE 8 AND ARTICLE 9 OF THE DTAA. I THEREFORE HOLD THAT THE AO HAS CORRECTLY TAXED THE CAPITAL GAINS A RISING ON THE SALE OF SHARES. ACCORDINGLY APPELLANTS ADDITIONAL GROUND OF APPEAL RAISED ON THIS ISSUE IS REJECTED. AGGRIEVED BY THE FINDING OF THE CIT[A] THE ASSESS EE IS IN APPEAL BEFORE US. 23. THE LD. COUNSEL FOR THE ASSESSEE REITERATED THE SUBMISSIONS MADE BEFORE THE AUTHORITIES BELOW AND SUBMITTED THA T FOR COMPUTING THE CAPITAL GAIN THE TEST IS NOT AS TO WHERE THE S HARES ARE TRANSFERRED BUT THE PHYSICAL HOLDING OF THE SHARES IS IMPORTANT . HE SUBMITTED THAT THE SHARE CERTIFICATE IS THE MANIFESTATION OF THE A SSET AND THEREFORE THE PROVISIONS OF SEC.9(1) OF THE I.T.ACT ARE NOT A PPLICABLE TO THE ASSESSEES CASE. 16 24. THE LD. DR ON THE OTHER HAND SUPPORTED THE OR DER OF THE CIT[A] AND SUBMITTED THAT THE SHARE GETS TRANSFERR ED ONLY WHEN THE SHARE GETS TRANSFERRED IN THE SHARE REGISTER IN IND IA AND SHARE CERTIFICATE IS NOT A MOVABLE ASSET LIKE OTHER MOVAB LE ASSETS BUT IS A BUNDLE OF RIGHTS EXERCISABLE IN INDIA. 25. HAVING HEARD BOTH THE PARTIES AND HAVING CONSID ERED THEIR RIVAL SUBMISSIONS WE AGREE WITH THE REASONING AND FINDIN GS OF THE CIT[A] THAT THE TRANSFER OF SHARES IS NOT A MERE TRANSFER OF SHARE CERTIFICATE BUT IS A TRANSFER OF RIGHTS EXERCISABLE IN THE AFFA IRS OF THE COMPANY SITUATED IN INDIA AND THEREFORE CAPITAL GAINS ARI SING FROM TRANSFER OF SHARES FROM INDIAN COMPANY ARE TAXABLE IN INDIA. IN THE RESULT ASSESSEES GROUND OF CROSS OBJECTION IS DISMISSED. 26. I.T.A.NO.1988/M/06 A.Y 1999-2000 : THE ONLY GROUND OF APPEAL RAISED BY THE REVENUE IS AS UNDER- ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW THE LD. CIT[A] HAS ERRED IN DELETING THE ADDITION MADE BY THE AO AMOUNTING TO RS.97 76 700. 27. THIS GROUND OF APPEAL IS SIMILAR TO GROUND OF A PPEAL NO.(1) RAISED BY THE REVENUE FOR THE A.Y 1998-99 AND FOR T HE REASONS GIVEN THEREIN THIS GROUND OF APPEAL IS ALSO REJECTED. 28. IN THE RESULT REVENUES APPEAL IS DISMISSED. 29. C.O.NO.298/MUM/06 A.Y 1999-2000 : THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS OF CROSS OBJECTIONS- 1.1 ON THE FACTS AND CIRCUMSTANCES OF THE CASE TH E LEARNED COMMISSIONER OF INCOME TAX [APPEALS]-XXXI MUMBAI [ CIT[A] ] HAS ERRED IN HOLDING THAT THE FRONT-END FEES WERE TAXABLE UNDER SECTION 2[28A] OF INCOME TAX ACT 1961 [ACT] IN THE HANDS OF THE RESPONDENT. 17 1.2 ON THE FACTS AND CIRCUMSTANCES OF THE CASE THE LEARNED CIT[A] ERRED IN HOLDING THAT THE FRONT-END FEES WERE TAXABLE AS INTEREST INCOME IN THE HANDS OF THE RESP ONDENT UNDER ARTICLE 12 OF AGREEMENT FOR AVOIDANCE OF DOUB LE TAXATION BETWEEN INDIA AND THE UNITED KINGDOM [DTA A]. 30. THESE GROUNDS ARE SIMILAR TO GROUNDS OF CROSS O BJECTIONS RAISED BY THE ASSESSEE FOR THE A.Y 1998-99 AND FOR THE REA SONS GIVEN THEREIN THESE GROUNDS OF CROSS OBJECTIONS ARE REJECTED. 31. IN THE RESULT ASSESSEES CROSS OBJECTION IS DI SMISSED. ORDER PRONOUNCED ON THIS 25 TH DAY OF FEBRUARY 2010. SD/- SD/- (R.S.SYAL) (P.MADHAVI DEVI) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI: 25 TH FEBRUARY 2010. P/-* COPY TO- 1) APPELLANT 2) RESPONDENT 3) CITA MUMBAI. 4) CIT CITY MUMBAI 5) DR BENCH MUMBAI TRUE COPY BY ORDER DY /ASST.REGISTRAR ITAT MUMBAI. 18 SR.NO. PARTICULARS DATE INITIALS 1 DRAFT DICTATED ON 24-2-10 P 2 DRAFT PLACED BEFORE AUTHOR 25-2-10 P 3 DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER 4 DRAFT DISCUSSED/APPROVED BY SECOND MEMBER 5 APPROVED DRAFT COMES TO SR.PS/PS 6 ORDER KEPT FOR PRONOUNCEMENT 7 FILE SENT TO BENCH CLERK 8 DATE ON WHICH FILE GOES TO THE HEAD CLERK 9 DATE OF DISPATCH OF ORDER