In the present case, Johnson Matthey Public Limited Company1 (the Assessee), is a tax resident of UK. During the AY 2011-12, it received guarantee charges aggregating to Rs. 1.49 Cr. from Indian companies for providing guarantee in respect of credit facilities extended by banks, in terms of the “Intra Group Parental Guarantee and Counter Indemnity Services Agreement” entered into with them.
Assessee characterised the receipts as interest, considered them sourced from India, and paid tax as per the provisions of Article 12 (interest) of the tax treaty between India and the U.K. The tax authorities disagreed with the characterisation as an interest and taxed the same as other income under Article 23 (2).
Aggrieved with the tax authority’s decision, the assessee filed an appeal to the Income Tax Appellate Tribunal (“ITAT”). The ITAT held that the guarantee fee does not fit into the definition of interest as available in the Income Tax Act and tax treaty. The ITAT disagreed with the assessee that the fee did not accrue or arise in India. It also did not concur with its position that the fee taxation would be covered under the Business Profit Article.
Agrieved by the order of ITAT, assessee filed further appeal to the Hon’ble Delhi High Court. Delhi High Court distinguishes Mumbai ITAT ruling in Capgemini on the grounds that
- Ruling proceeded on a mere ipse dixit that “from the record” the guarantee commission did not accrue or arise in India,
- ITAT took the position that since the guarantee was given by a French Assessee to a bank situate in that country, income could not be said to have arisen or accrued in India,
- in the present case, the guarantee charges were not founded on any contract that the Assessee may have had with a foreign bank but sourced and indelibly tied to the Intra Group Agreement;
Delhi HC observes that guarantee charges were received by the Assessee neither in respect of any debt owed to it by the Indian companies nor is it income derived from claims that the Assessee may have had against such its Indian companies.
Delhi HC upholds the ITAT finding that the Assessee was neither a party to the loan agreements that may have been executed nor was there any privity of contract that could be said to exist and hence, the guarantee charges that the Assessee received was a remuneration for the assurance that it had offered and that the debt that it owed was to those lenders who extended credit facilities to Indian companies which could have a claim against the Assessee. Hence, it holds that guarantee charges are not income derived from a debt or a claim and do not qualify as “interest‟ under Article 12(5) of the DTAA and also, under Section 2(28A) of the Act. Delhi HC takes note of the coordinate bench ruling in Lease Plan2 wherein it was held that “in absence of provision of capital and any debt claim between the parties the impugned guarantee fees paid by the Assessee to the Netherlands based company cannot be held to be “interest” in terms of Article 11 of the DTAA.”.
It distinguishes United States Court of Appeals judgment in Container Corporation’s3 case whereby it was noted that ‘the guarantee are more analogous to services, like services, are produced by the obligee. Holding the guarantee fee as interest has too many shortcomings, as it does not approximate the interest on a loan. Guarantee is merely a promise to possibly perform a future act and there was no obligation to pay immediately’.
Thus, Delhi HC dismissed Assessee’s appeals, without commenting on the possible tax treatment of guarantee charges as business income as per Article 7 of the DTAA and keeps the said question open to be addressed in an appropriate case.
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1 ITA No. 727 / 2018 [Delhi High Court]
2 Lease Plan India Pvt. Ltd. Vs. Deputy Commissioner of Income Tax [ITA No. 6461 & 6462/Del/2015]
3 Container Corporation v. Commissioner of Internal Revenue of United States Tax Court Report, [134 T.C. 122 (U.S.T.C. 2010) 134 T.C. 5 Decided Feb 17, 2010]
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