In the case of Idea Cellular Limited vs. ADIT: ITA No. 1619/Mum/2011, order dated June 10, 2012 (Mum), the assessee had entered into a term loan agreement with the lender, Finnish Export Credit Limited. The Hong Kong Banking Corporation Limited, Hong Kong (HSBC) had arranged for the loan and the HSBC Bank PLC had acted as facility agent. The role of the arranger (HSBC) was to liaise with the lender and to procure the loan for the borrower as well as to negotiate the terms and conditions of the facility with the lender on behalf of the borrower. For the said service, HSBC was paid arranger fee by the assessee. The issue arose with respect to the nature of the said arranger fee, viz., whether such payment would be regarded as “interest” within the meaning of section 2(28A) of the Act or “fees for technical services for service” within the meaning of section 9(1) (vii) of the Act and would accordingly be subject to tax withholding or not. The Tribunal, after examining the facts of the case, position of law and judicial precedents, held that the assessee was not liable to deduct tax on such arranger fee as the same neither fell within the ambit of the definition of “interest” nor “fee for technical services”, specifically considering the following–
- The arranger was not the lender of money and in absence of any debt being incurred by the assessee in favour of the arranger vis-a-vis the money borrowed, any fee paid to the arranger cannot be said to be in respect of the money borrowed.
- The arranger was merely a facilitator bringing the lender and borrower together for facilitating the loan/credit facility, therefore, the said fee would not fall under the second limb of the definition of “interest” provided under section 2(28) of the Act, whereby interest encompasses service fee or other charge and such fee in respect of the money borrowed or any debt incurred or, for utilisation of credit facility. Such service fee or other charge does not bring within its ambit any payment made to third party or intermediary who has not given any money/ loan or credit facility but merely acted as a middleman.
- The element of relationship between the borrower and lender, which is a key factor to bring the payment within the ambit of definition of “interest” under section 2(28A) was absent between the borrower and arranger, notwithstanding that the arranger fee was inextricably linked with the loan utilisation or loan facility.
- The arranging of loan cannot be equated with lending of “managerial service”, since the arranger was not involved in providing control, guidance or administration of the credit facility nor was involved in day-to-day functioning of the assessee in overseeing the utilisation or administration of the credit facility.
- The arranger did not provide any advisory or counselling services, and accordingly, the transaction of arranging of loan cannot be regarded as rendering of “consultancy services”.