2024 (5) TMI 1415 - HC - Income Tax

Income accrued in India or not? - receipt of guarantee charges by the appellant from its Indian subsidiaries in terms of an Intra Group Parental Guarantee and Counter Indemnity Services Agreement - Determination of source of income and the nature of services which are concerned with the extension of guarantees - Tribunal dismissing the additional ground raised by the assessee contending that since the source of guarantee for its Associated Enterprises to foreign banks is outside India, the parental corporate guarantee charges received from the Indian Subsidiaries cannot be held taxable in India? HELD THAT - Tribunal has correctly found that the appellant 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. It was the aforesaid undisputed facts which weighed upon the Tribunal to hold that the payments received by the appellant would not fall under Article 12 of the DTAA. No reason to differ from the view as expressed by the Tribunal bearing in mind the aforenoted undisputed facts. As was observed hereinbefore, the guarantee charges that the appellant received was a remuneration for the assurance that it had offered to lending entities and who may have extended credit facilities to its Indian subsidiaries. The debt that it owed was to those financial institutions. It would be those institutions which could have a claim against the appellant. The Intra Group Agreement also did not envisage any claims that the appellant could have laid against its own subsidiaries in the eventuality that they were to default. The Indian subsidiaries owed no debt to the appellant and which would have enabled us to recognise the guarantee charges as income derived from a debt or a claim and which constitutes the determinative factor for the purposes of examining the applicability of Article 12 of the DTAA. As is manifest from a reading of the Intra Group Agreement, the guarantee charges were levied for the service of providing parent company guarantees and counter-indemnification of the liabilities of the Indian subsidiaries. On an overall conspectus of the aforesaid we find ourselves unable to countenance the guarantee charges as being liable to be viewed as interest under Article 12 of the DTAA. The expression interest is defined to mean amounts payable in respect of any monies borrowed or debts incurred. Undisputedly the appellant had not borrowed any monies. The debt, if any, which could be said to have been incurred was clearly not one owed to the Indian subsidiaries. The income that it received from its Indian subsidiaries was solely in consideration of any liability that could possibly befall the appellant in case its Indian subsidiaries were to default in their repayment obligations. It thus becomes apparent that the guarantee fee would neither fall within the ambit of Article 12 of the DTAA nor Section 2 (28A) of the Act. The income in the form of guarantee charges had in fact accrued and arisen in India. The guarantee charges clearly answered to the description of income accruing and which was explained by the Supreme Court to constitute a periodical monetary return coming in with some sort of regularity, or expected regularity, from definite sources . As we view the Intra Group Agreement, it becomes evident and apparent that the foundational source of those payments was the appellant s agreement to provide the service of parent company guarantees and counter indemnification facilities. These were services offered to the Indian subsidiaries to avail for their own commercial benefit . The charge was envisaged to be levied on a quarterly basis and the annual rate at the time of execution of the Intra Group Agreement was prescribed to be 1.125%. The annual rate was to levied on the Recipient s the Indian subsidiaries outstanding balance of parent company guarantees and counter-indemnification obligations as at each Quarter Day . As evident that the guarantee charges became leviable every quarter at a rate already agreed upon by parties and on the outstanding balance. Thus, not only was the payment ordained to come from a specified source, it was also envisaged to become payable with sufficient regularity. The payment was to be invoiced every Quarter Day and liable to be paid as per the instructions of the appellant. The Intra Group Agreement also provisioned for consequences which would ensue in case the Indian subsidiary were to default in payment of those charges by stipulating that in such an event, it would be open to the appellant to suspend the provision of services. Thus, in case the Indian subsidiary were to fail to honor any invoice raised in respect of guarantee charges, it would have been open for the appellant to discontinue the service of extending guarantees. The guarantee charges were thus anchored to the Intra Group Agreement and were indelibly connected with the extension of services by the appellant in India for the benefit of its subsidiaries. The arrangement between the parties was independent of any other legal obligation or liability which the appellants may have taken over or owed to a lending institution. The only parties to this agreement were the appellants and their corresponding Indian subsidiary. The obligation to pay was incurred in India, was in respect of services utilized in India and was agreed to arise with regularity as per the stipulations forming part of the Intra Group Agreement. The charge was in a sense recompense for the service provided by the appellant in extending a guarantee to overseas financiers who may have extended credit facilities to its Indian subsidiaries and the assurance of repayment proffered to them by the appellant. Regard must also be had to the fact that the appellant had not extended any credit or lent capital to its Indian subsidiaries. The guarantee charges were solely on account of the appellant having guaranteed repayment of debts owed to third parties by the Indian subsidiaries. The source and fountainhead of the receipt was thus indelibly connected and confined to the Intra Group Agreement and the obligations of the appellant in connection therewith. Taxability of income is concerned solely with income accruing or arising - It is clearly not concerned with the ultimate destination of that income or the use to which it may be put. That the guarantee charges may be utilized by the appellant to meet its liabilities to overseas financial institutions would be wholly irrelevant for the purposes of examining whether income had arisen or accrued in India. As was pithily observed by the Supreme Court in Tuticorin Alkali Chemicals Fertilizers Ltd 1997 (7) TMI 4 - SUPREME COURT the Act is not concerned with destination or utilisation. It is focused on the aspect of income having arisen or accrued. 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. Further, 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 We, consequently, answer the two questions which stand posited in the negative and against the appellant. The issue of whether guarantee charges would constitute business income and fall within the ken of Article 7 of the DTAA is kept open to be addressed in an appropriate case.

Summary

Issues Involved:
1. Taxability of parental corporate guarantee charges in India.
2. Characterization of guarantee commission under Article 12 (5) of the Indo-UK DTAA.
3. Whether guarantee charges constitute business income under Article 7 of the DTAA.

Summary:

Issue 1: Taxability of Parental Corporate Guarantee Charges in India
The appellant/assessee challenged the Income Tax Appellate Tribunal's (Tribunal) order regarding the taxability of Rs. 1,49,15,090/- received as parental corporate guarantee charges from its Indian subsidiaries. The Tribunal and the Dispute Resolution Panel (DRP) held that the sum should be taxed under Article 23 (3) of the DTAA as 'other income.' The appellant argued that since the source of the guarantee was outside India, the charges should not be taxable in India.

Issue 2: Characterization of Guarantee Commission under Article 12 (5) of the Indo-UK DTAA
The Tribunal concluded that the guarantee commission did not fall within the ambit of 'interest' as defined in Article 12 (5) of the DTAA. The Tribunal noted that the guarantee charges were not received in respect of any debt owed by the Indian subsidiaries to the appellant. The Tribunal emphasized that the appellant was a stranger to the privity of loan transactions, and the payments made were not related to any debt claims or service fees for moneys borrowed. Consequently, the Tribunal held that the guarantee charges could not be categorized as 'interest' for taxation purposes.

Issue 3: Whether Guarantee Charges Constitute Business Income under Article 7 of the DTAA
The Tribunal also addressed whether the guarantee charges could be considered business income under Article 7 of the DTAA. It was determined that since the appellant was not engaged in the business of providing corporate or bank guarantees, the guarantee charges could not be classified as business income. The Tribunal noted that the global corporate guarantee was solely for securing loans to the appellant's subsidiaries and was incidental to its primary business activities.

Court's Observations:
- The Court observed that the appellant did not request the framing of an additional question pertaining to business income under Article 7 of the DTAA.
- The Tribunal's decision that the guarantee charges were not 'interest' under Article 12 (5) of the DTAA was upheld, as the charges were not related to any debt claims or service fees for borrowed money.
- The guarantee charges were found to have arisen or accrued in India, as the services provided by the appellant were for the benefit of its Indian subsidiaries, and the charges were levied based on the Intra Group Agreement.
- The Court noted that the ultimate destination or use of the guarantee charges was irrelevant for determining taxability under Section 5 (2) of the Act.

Conclusion:
The Court dismissed the appeals, affirming that the guarantee charges were taxable in India and did not fall under the definition of 'interest' in Article 12 (5) of the DTAA. The question of whether the charges constituted business income under Article 7 of the DTAA was left open for future consideration.