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TMI Blog2020 (6) TMI 406X X X X Extracts X X X X X X X X Extracts X X X X ..... aim 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Agreement entered into between India and Netherlands. 4. That the Commissioner of Income-tax (Appeals) erred on facts and in law in alternatively holding that guarantee commission paid to Lease Plan Corporation NV represents payment made in consideration for rendering a service that is ancillary and subsidiary to the application or enjoyment of a right and therefore is in the nature of fees for technical services as per paragraph 5 of Article 12 of the Double Taxation Avoidance Agreement between India and Netherlands. 4.1. That on the facts and circumstances of the case, the CIT(A) erred in law in holding that guarantee commission is paid by the appellant to Lease Plan Corporation NV for providing consultancy services arid the same are taxable as fees for technical services . 5. That the Commissioner of Income-tax (Appeals) erred on facts and in law in failing to appreciate that the aforesaid guarantee commission was not chargeable to tax in India under the Act or the Double Taxation Avoidance Agreement between India and Netherlands and therefore, the appellant was not required to deduct tax at source there from. 6. That the CIT(A) erred on facts and in law ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owever, on merits, assessee submitted that appellant for the purpose of its business has obtained a corporate guarantee from an overseas company based in Netherland. The said corporate guarantee was pursuant to an agreement dated 21 March 2004 entered into with LEASE PLAN CORPORATION, which provided guarantee at the fee at the rate of 1/8 percentage per annum. During the year the appellant has made payment of ₹ 11988958/- towards fees for guarantee to the above company and such guarantee charges are not chargeable to tax in India and therefore tax was not deducted at source there from. Assessee submitted that it is not at all in the nature of fees for technical services as it does not involve any element of technical, consultancy or advisory services. 10. The learned CIT A dealt with the issue for assessment year 2009 10 and 2010 11 by a common order dated 4/9/2015 wherein, first in paragraph number 4.1, he noted that similar issue has been decided by his predecessor for assessment year 2006 07 to 2008 09 wherein the above payment have been held to be a fees for technical services . Subsequently the learned and CIT A for the impugned year noted the facts of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as to how the actual corporate guarantee charges are computed in the note for, it is apparent that the same comprises a certain percentage of the amount of credit facility that is extended by the bank or alternatively, it is dependent on the maximum limit that is payable to the bank under the guarantee in case the credit defaults on the payment. 4.3 Territorial nexus for the purpose of determining the tax liability is an internationally accepted principle. An endeavor should, thus, be made to construe the taxability of a non-resident in respect of income derived by it. Having regard to the internationally accepted principle and the DTAA, no extended meaning can be given to the words income deemed to accrue or arise in India as expressed in section 9 of the act. Section 9 incorporates various heads of income on which taxes are to be levied by the Republic of India. Whatever is payable by a resident to non-resident by way of a fees for services, thus, would not always come within the purview of section 9 (1) (vii) of the act. It must have sufficient territorial nexus with the India so as to furnish a basis for imposition of tax. Whereas a resident would come within the purview ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ehicles under operating lease. The appellant had availed of unsecured loans totaling to ₹ 611.94 crores as on 31/3/2009, which stands reduced to ₹ 490.86 crores as on 31/3/2010. In terms of the loan repayment schedule (Schedule 7 of notes to accounts), the principal repayment during the financial year 2009 10 in respect of short-term loan is ₹ 132.50 crores and in respect of long-term loans, the repayment is to the tune of ₹ 144.10 crores. The interest burden on fixed loan seems to be very heavy at ₹ 68.42 crores and ₹ 59.13 crores respectively for assessment year 2009 10 and 2010 11 respectively. The entire business model of appellant is built around heavy capital investment in vehicles financed through the bank loans and in such a scenario; the role of the guarantor is of the utmost importance. Since LP Corporation which is itself a recognized bank under Dutch law, its role as a guarantor is of immense value to the appellant company and the services provided by LP Corporation are able to enjoy hassle free loans, which are unsecured. 12. Thereafter, the learned CIT A referred to the decision of the Honourable Karnataka High Court i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Thus he confirmed the disallowance made by the learned assessing officer. 13. There is no difference in the facts and circumstances of the case for assessment year 2009-10 and assessment year 2010 11 except the amount of corporate guarantee fees. 14. Assessee being aggrieved with the order of the learned that CIT Appeal has preferred these appeals. The learned authorised representative, Shri Ajay Vora, Sr. Advocate, first took us to the page number 63 64 of paper book where the copy of guarantee fee agreement between the assessee and Lease plan Corporation NV is entered into. He thereafter referred to the copy of loan agreement between the assessee and Standard Chartered bank placed at page number 65 71 of the paper book. He also referred to the copy of guarantee agreement in respect of credit facility granted by Standard Chartered bank to the assessee placed at page number 7 to 74 of his paper book. He thereafter referred to the Double Taxation Avoidance Agreement between India and Netherland. He referred to article 11 of the agreement and took us to clause 6 where the term interest has been defined. He submitted that the guarantee commission paid by the assessee to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ey public limited company versus Deputy Commissioner Of Income Tax (International Taxation) New Delhi dated 6 December 2017 to submit that while interpreting the DTAA between India and United Kingdom, the coordinate bench has held that where assessee provided guarantee to various banks to extend credit facilities to its Indian subsidiaries, guarantee fees charged by it would not fall within the expression of interest and in view of clause 3 of article 23 of the India UK tax treaty, in absence of any specific provision dealing with corporate/bank guarantee recharge, same had to be taxed in the India as income from other sources . However, he submitted that in the present case same is also not chargeable under the head income from other sources, as there is no article of Other income in India Netherland DTAA and also the guarantor is a engaged in banking business in Netherlands, as well as not chargeable as interest. He relied upon this decision only for the proposition that guarantee fees; commission paid by the assessee is not Interest. 15. With respect to the fate of the order of the learned Commissioner of income tax (Appeals) for AY 2006-07 to 2008-09, which were follow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e above mentioned years. 17. The learned departmental representative vehemently supported the orders of the lower authorities and submitted that the guarantee fees paid by the assessee to its associated concern based in Netherlands is chargeable to tax as per the Indian income tax act and as per the Double Taxation Avoidance Agreement as interest income and fees for technical services. He reiterated the same arguments which were given by the lower authorities. He therefore submitted that there is no infirmity in the order of the lower authorities in making the about disallowance. He also submitted that as the identical issues are pending before the learned CIT A, any decision by the coordinate bench now, will also effectively decide the issue before the learned CIT A for the earlier years. Therefore the matter should go back to CIT (A) for these years also. 18. We have carefully considered the rival contentions and perused the orders of the lower authorities. Admittedly in this case the assessee has obtained a corporate guarantee from its Netherland based associated enterprise for a fee. There is no dispute between the parties that the above sum is chargeable to tax as pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de the issue to the file of the learned assessing officer as well as to the learned CIT A for the purpose of consideration of additional evidences in the form of corporate guarantee agreement, loan agreement et cetera. In the impugned appeals these documents were available before the CIT A and he has considered the same. Thus we are sure that facts of these two years are similar but circumstances are not. Reason being that in these two years CIT (A) has considered all these documents and decided the issue. Further, on perusal of the reframed assessment orders passed by the learned assessing officer for assessment year 2007 08 and 2008 09, though they are not in appeal before us at present, it is on similar lines as decided by the CIT appeal in these impugned appeals before us. Thus we do not have option to set aside the issue back to the file of the ld CIT (A), as he has already considered the documents and evidences, which were not examined in earlier years and therefore coordinate bench set it aside. 19. Thus we examine the facts whether the Guarantee Fee paid by assessee to its AE in Netherlands can be considered as interest in terms of Article 11 of the DTAA. It de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ates Tax Court Report [134 T.C. 122 (U.S.T.C. 2010) 134 T.C. 5 Decided Feb 17, 2010]. On careful consideration of the decision of that court, the issue before the Court was whether the guarantee fee paid towards guaranteeing debt of a subsidiary company is interest or a service . The court came to conclusion that guarantee are more analogous to services, like services, are produced by the obligee. It further held that in holding the guarantee fee as interest has too many shortcomings, as it does not approximate the interest on a loan. It is merely a promise to possibly perform a future act and there was no obligation to pay immediately. Thus, the court held that guarantee fee cannot be considered as an interest. However it was held to be a service. In view of this we hold that in absence of provision of capital and any debt claim between the parties the impugned guarantee fees paid by the appellant to the Netherlands based company cannot be held to be interest in terms of Article 11 of the DTAA. 21. Now we proceed to examine 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 Consu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y justified in concluding that this payment does not fall within the expression of interest and in view of Clause 3 of Article 23 of the Treaty, in the absence of any specific provision dealing with corporate/bank guarantee recharge, the same has to be taxed in India as per the provisions of the Income tax Act, 1961. We do not find any illegality or irregularity in the reasoning given or conclusions reached by the authorities below. We, therefore, dismiss Ground Nos. 2 to 4 10. 26. We have carefully perused the above decision however, on reading it we did not find how the coordinate bench has dealt with the We are dealing with India Netherlands DTAA facts that whether income of Guarantee fess was dealt with in the forgoing articles of that convention or not. Whether the Guarantee fee income was not expressly mentioned in earlier articles or not. It is also not coming out of the order whether circular no 787 of 2000 was cited and considered. India Netherland Treaty do not have article for Other income. Therefore, in the impugned case the revenue authorities have also perhaps not tried to say that Guarantee Fees is Other income . The India-Netherlands tax treaty presentl ..... X X X X Extracts X X X X X X X X Extracts X X X X
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