2023 (12) TMI 585 - AT - Income Tax

Debt/Corporate guarantee fees taxed in India - DTAA between India and Japan - income chargeable to tax according income tax act, as per distributive rule whether as per Article-7 Business Profits of DTAA between India and Japan, in the absence of PE in India, debt/corporate guarantee fees charged to Indian AE are taxable only in Japan.? - whether the income of the assessee is classified as interest under article 11 or under article 22 of the double taxation avoidance agreement - HELD THAT - On careful consideration of the decision of learned AO, learned dispute resolution panel and the coordinate bench, we do not find that it gives an answer that whether the income chargeable to tax in the hands of the assessee under which head of income. Whether it is an interest or other income according to the double taxation avoidance agreement, for computation of taxation as per the provisions of the income tax act, it has to fall basically within one of the heads of the income as per section 14 of the act. It may be the case that income may either be chargeable to tax under article 11 or under article 22, according to section 14 of The Income Tax Act such income is chargeable to tax under the head income from other sources . Purpose of Double Taxation Avoidance Agreement is to distribute the tax between the source country and the country of residence whereas the purpose of the domestic tax law is to compute the income under the various heads as prescribed under section 14 of the act. The distributive rule of the Double Taxation Avoidance Agreement only classifies income into various types. This is not relevant for determining the head of income according to section 14 of the act in spite of similarity in terminology. The purpose of both is quite different. However, as for assessment year 2014 15 the issue has been set-aside to the file of the learned assessing officer to first determine whether the income of the assessee is classified as interest under article 11 or under article 22 of the double taxation avoidance agreement. The issue is still not decided. Therefore in the interest of justice, we also set-aside issue back to the file of the learned assessing officer to 1st decide how the income is chargeable to tax according income tax act, as per distributive rule what is the classification of income on what is the tax rate as per the double taxation avoidance agreement, and then compute tax according to income tax act. Ground allowed for statistical purposes. TP Adjustment in respect of interest on external commercial borrowings - arm s-length price of interest charged on external commercial borrowing lent to associated enterprises in India - assessee has advanced a loan to Nipro tube glass India private limited in Indian rupees wherein the assessee has received total interest wherein the assessee receives such interested the rate of 10.50% of the loan amount - HELD THAT - For determination of the arm s-length price of an international transaction the reserve bank of India guidelines does not have any role to play. However, when the external commercial borrowing is provided by the assessee to its Indian associated enterprises in Japanese yen, adoption of SBI PLR is not relevant. The Transaction is to be benchmarked by taking in to consideration whether any third party would give loan to Indian entity at those interest rates and on those conditions for that tenure. Therefore, taking Foreign AE as tested party is irrelevant. Even otherwise it is not a profit based method applied. It is the borrower whose condition and financial health needs to be ascertained first. That is Indian entity. Further, for determination of Arm s length price of interest received it is necessary to determine the credit rating of borrower. Thereafter the External comparables for benchmarking can be searched on publicly available financial databases, by applying appropriate filters to find comparable loan transactions with the same characteristics such as 1 Currency type, 2 Tenure, 3 Purpose of loan General/Working Capital/Capital Expansion/Re-financing, etc. 4 Tranche Type such as Term Loan/Revolving Credit, 5 Covenants , and 6 Credit Rating. Such Interest rate is further required to be adjusted to meet the economic conditions of the tested loan transaction to Interest Swap Adjustment, Tenor Adjustment and Country Risk Adjustment to factor in the geographical difference. The Assessee or the TPO / ld DRP has not looked in to these basic aspects. Therefore, we remit this issue back to the file of the ld AO with direction to assessee to benchmark interest on loan transaction taking all these issues in consideration. Appeal of the assessee is partly allowed as indicated above for statistical purposes.

Summary

Issues Involved:
1. Taxation of Debt/Corporate Guarantee Fees
2. Transfer Pricing Adjustment in Interest on External Commercial Borrowings (ECB)
3. Double Addition of Interest on ECB

Summary:

Issue 1: Taxation of Debt/Corporate Guarantee Fees
The assessee contested the taxation of Rs. 2,70,84,735/- as arm's length Debt/Corporate guarantee fees under "Article 22: Other Income" of the DTAA between India and Japan. The Dispute Resolution Panel (DRP) held that the guarantee fee should be taxed as interest under Article 11 of the DTAA, not as "other income" under Article 22(3). The DRP also reduced the arm's length price from 1% to 0.5% of the guarantee amount. The Assessing Officer (AO) failed to follow the DRP's direction and taxed the fee at 40% under "income from other sources." The Tribunal remitted the issue back to the AO to determine the correct classification and tax rate under the DTAA and the Income Tax Act.

Issue 2: Transfer Pricing Adjustment in Interest on ECB
The assessee challenged the arm's length rate of interest on ECB loans, arguing that the rates should be compared with those prevalent in Japan, not India. The DRP upheld the AO's benchmarking of the rupee loan interest rate at 14.05% but reduced the ECB loan interest adjustment following a previous decision in the assessee's case. The Tribunal directed the AO to re-examine the benchmarking, considering factors like currency type, tenure, and credit rating, and decide the issue afresh.

Issue 3: Double Addition of Interest on ECB
The assessee did not press the ground of double addition of interest on ECB amounting to Rs. 28,64,302/-.

Conclusion:
The Tribunal remitted the issues related to the taxation of guarantee fees and the arm's length rate of interest on ECB loans back to the AO for fresh adjudication, emphasizing the need to follow the DRP's directions and properly benchmark the interest rates. The appeal was partly allowed for statistical purposes.