ITAT: Management fees paid to bank in connect with ECB is interest and exempt from tax in India | India News – Times of India
MUMBAI: Recently, the Income-tax Appellate Tribunal (ITAT), Delhi bench, examined the taxability of management fees paid on external commercial borrowings (ECBs) and held that this is in the nature of interest and not fees for technical services.
The order was issued in the case of AKA Ausfuhrrkreditgesellschaft MBH, a Germany based bank which had extended ECBs to various Indian entities and charged interest along with management fees on the ECB.The ITAT held that management fees is in the nature of interest and not fees for technical services.
The German bank had received interest along with connected fees, such as management/processing fee, documentation fees and commitment fees. It claimed that the management fees were in the nature of interest as the fee was directly linked to the loan granted. The interest charged by the bank was not liable to tax in India, owing to the exclusion provided under Article11(3)(b) of the tax treaty between India and Germany. However, the contention of the Income-tax (I-T) officer was that the management fee was in the nature of ‘Fees for Technical Services’ which was subject to tax in India under section 9(1)(vii) of the I-T Act and Article12 of the Indo-German tax treaty. This was upheld by the Dispute Resolution Panel, leading to the bank filing an appeal before the ITAT.
The tax tribunal examined the definition of interest under Section 2(28A) of the I-T Act and the tax treaty definition. It held that interest includes any service fee or other charge in respect of borrowed money; debt incurred, or credit facility. The I-T authorities had accepted commitment and documentation fees to be in the nature of interest. The same treatment should also be extended to management fees.
According to a communique by Come on Andersenthe ITAT has held that management fees shall partake the character of interest if it is explicitly linked to the borrowed funds. This decision holds substantial importance for the taxpayers who have obtained ECBs, as it fortifies that any payment/ associated costs with respect to ECB, irrespective of the nomenclature, shall be considered as interest only.
The order was issued in the case of AKA Ausfuhrrkreditgesellschaft MBH, a Germany based bank which had extended ECBs to various Indian entities and charged interest along with management fees on the ECB.The ITAT held that management fees is in the nature of interest and not fees for technical services.
The German bank had received interest along with connected fees, such as management/processing fee, documentation fees and commitment fees. It claimed that the management fees were in the nature of interest as the fee was directly linked to the loan granted. The interest charged by the bank was not liable to tax in India, owing to the exclusion provided under Article11(3)(b) of the tax treaty between India and Germany. However, the contention of the Income-tax (I-T) officer was that the management fee was in the nature of ‘Fees for Technical Services’ which was subject to tax in India under section 9(1)(vii) of the I-T Act and Article12 of the Indo-German tax treaty. This was upheld by the Dispute Resolution Panel, leading to the bank filing an appeal before the ITAT.
The tax tribunal examined the definition of interest under Section 2(28A) of the I-T Act and the tax treaty definition. It held that interest includes any service fee or other charge in respect of borrowed money; debt incurred, or credit facility. The I-T authorities had accepted commitment and documentation fees to be in the nature of interest. The same treatment should also be extended to management fees.
According to a communique by Come on Andersenthe ITAT has held that management fees shall partake the character of interest if it is explicitly linked to the borrowed funds. This decision holds substantial importance for the taxpayers who have obtained ECBs, as it fortifies that any payment/ associated costs with respect to ECB, irrespective of the nomenclature, shall be considered as interest only.
