Management Fee Received on Loan Advanced to Be Treated As Interest | Eligible for Tax Exemption Under Indo-Germany DTAA

Case Details: Aka Ausfuhrrkreditgesellschaft MBH v. ACIT - [2024] 158 taxmann.com 627 (Delhi-Trib.)

Judiciary and Counsel Details

• • Saktijit Dey, Vice President & Dr. B.R.R. Kumar, Accountant Member
  • Danesh Bafna & Hardik Nirmal for the Appellant.
  • P. Praveen Siddharth for the Respondent.

Facts of the Case

Assessee was a non-resident banking company incorporated in the Federal Republic of Germany and a tax resident of Germany during its banking business. The assessee had advanced External Commercial Borrowing (ECB) Loan to certain Indian entities, including M/s Filatex India Ltd. granted by HarmesDeckung Germany. As against the loan granted to M/s Filatex India Ltd., the assessee had received interest along with connected fees, such as management/processing fee, documentation fee and commitment fee.

The issue before the Delhi Tribunal was:

“Whether the management fee/processing fee received by the assessee is in the nature of Fees for Technical Services (FTS) under provisions of section 9(1)(vii) as well under Article 12 of the India Germany Double Tax Avoidance Agreement (DTAA)?”

ITAT Held

The Delhi Tribunal held that on reading Article 11(3)(b) of the India-Germany tax treaty, it is observed that interest paid to a resident of the Federal Republic of Germany in consideration of loan granted by Hermes-Deckung shall be exempted from Indian Tax.

In terms of the loan agreement, the borrower shall pay the commitment Fee @ 0.55%, non-refundable management fee @ 1.25%, and non-refundable documentation fee, EUR 20,000/- flat. The Assessing Officer (AO) was in agreement with the assessee that interest along with commitment fee and documentation fee are exempt under Article 11(3)(b) of the India-Germany Tax Treaty. However, he held that the said provision did not cover the management fee.

As per Article 11(4) of the treaty, interest has been defined to mean income from debts claim of every kind, whether or not secured by the mortgage and whether or not carrying a right to participate in the debtor’s profit, and in particular, income from Government securities and income from bonds or debentures, including premiums and prizes attached to such securities, bonds or debentures, except, penalty charges for late payment shall not be regarded as interest.

Further, the term interest has been defined under section 2(28A) of the Act as follows:

“(28A) “interest” means interest payable in any manner in respect of any moneys borrowed or debt incurred (including a deposit, claim or other similar right or obligation) and 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;”

The provision clearly states that “interest” encompasses service fees, charges related to borrowed money or debt, and unused credit facilities. This broad definition in domestic law includes all payments associated with a loan.

After carefully examining the facts on record, the tribunal held that even the management fee is similar to the commitment fee and documentation fee, as it is closely linked to the loan granted and hence cannot be distinguished from the documentation fee and commitment fee.

Thus, the management fee partakes the character of interest under section 2(28A) and would be exempt from taxation in India in terms of Article 11(3)(b) of the treaty.