2020 (6) TMI 406 - AT - Income Tax

TDS u/s 195 - non-deduction of tax at source on guarantee commission paid to lease plan Corporation NV Netherland - addition u/s 40 (a)(i) - Fees For Technical Services as well as Interest as per the article 11 and 12 of The Double Taxation Avoidance Agreement DTAA between India and Netherland - HELD THAT - In the present case apparently, AE has not provided any capital to the appellant on which income is earned. It is a corporate guarantee , being a surety to the lender bank of the appellant that, if in a case, in future, the appellant fails to pay the due amount owed to those lenders, the Netherland Company will pay to those lenders. Thus, there was promise to reimburse the amount to those lenders on happening of an event i.e. failure of payments by the appellant of the dues owed to the lenders and lenders invoking the guarantee issued by the Netherlands company in favour of those lenders. Therefore it needs to examine whether there is any provision of capital by the Netherland Company to Indian Company appellant, answer is in negative. There should be a debt claim and form such claim income should arise to qualify as interest . Thus the word debt claim predicate the existence of debtor creditor relationship lender borrower . That relationship can arise only when there is a provision of capital. In view of this, we hold that guarantee fee paid by the assessee to Netherlands company, in the above facts, cannot be covered in the definition of interest as per Article 11 of The DTAA.. Whether such guarantee fee can be Fees for technical services within compass of Article 12 (5) of the DTAA ? - The ld CIT (A) has held it to be a Consultancy services . In fact we are of the view that Provision of Guarantee is a service provided by the Netherlands Company to the assessee. US Court decision relied up on by the ld AR also says that provision of Guarantee is a service . But is it a consultancy service or not needs to be examined. Looking to the nature of Service provided by the Netherlands company in providing guarantee, it is a financial service and can by no stretch of imagination is called a Consultancy services. Even otherwise, it does not cross the threshold of make available in 12 (5) (b) of the DTAA. Therefore we also hold that, provision of Guarantee fees service is not fees for Technical services under article 12 of The DTAA. AR has also said that guarantee Fees is not chargeable to tax under Article 7 in absence of any permanent establishment of the Netherlands company. We fully agree with that as the revenue has not at all invoked article 7 in this case.In view of this, we hold that assessee is not require, Orders of lower authorities are reversed and ld AO is directed to delete the disallowance for both the years. - Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance under section 40(a)(i) for non-deduction of tax at source on guarantee commission.
2. Situs of services and income accrual in India under section 9 of the Income Tax Act.
3. Classification of guarantee commission as 'interest' under Article 11 of the DTAA.
4. Classification of guarantee commission as 'fees for technical services' under Article 12 of the DTAA.
5. Taxability of guarantee commission under the Act or DTAA.
6. Charging of interest under section 234D and withdrawal of interest under section 244A.

Issue-wise Detailed Analysis:

1. Disallowance under section 40(a)(i):
The Commissioner of Income-tax (Appeals) confirmed the disallowance of the guarantee commission paid to Lease Plan Corporation NV, Netherlands, due to non-deduction of tax at source, invoking provisions of section 40(a)(i) of the Income-tax Act, 1961.

2. Situs of Services and Income Accrual in India:
The CIT(A) held that the situs of services rendered by Lease Plan Corporation NV was in India. Therefore, the guarantee commission was considered income of the non-resident under section 9 of the Act.

3. Classification as 'Interest' under Article 11 of the DTAA:
The CIT(A) held that the guarantee commission was income from a debt claim and thus classified it as 'interest' under Article 11 of the DTAA between India and Netherlands. However, the Tribunal disagreed, stating that there was no provision of capital or debt claim, and thus the guarantee fee could not be considered 'interest' under Article 11.

4. Classification as 'Fees for Technical Services' under Article 12 of the DTAA:
The CIT(A) alternatively held that the guarantee commission represented payment for ancillary and subsidiary services to the application or enjoyment of a right, thus qualifying as 'fees for technical services' under Article 12 of the DTAA. The Tribunal refuted this, stating that the provision of a guarantee is a financial service, not a consultancy service, and does not meet the 'make available' criteria of Article 12(5)(b).

5. Taxability under the Act or DTAA:
The Tribunal concluded that the guarantee commission paid to the Netherlands company was not chargeable to tax in India under the DTAA. Consequently, the assessee was not required to deduct tax at source under section 195, and the disallowance under section 40(a)(i) was reversed.

6. Charging of Interest under section 234D and Withdrawal of Interest under section 244A:
The other grounds related to the charging of interest under section 234D and the withdrawal of interest under section 244A were considered consequential and did not require separate adjudication.

Conclusion:
The Tribunal allowed the appeals, reversing the orders of the lower authorities and directing the deletion of the disallowance for both assessment years. The Tribunal also noted that the order was passed beyond 90 days after the hearing, following the precedent set by a coordinate bench.