9911796707
TMI Blog2024 (5) TMI 1415X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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. - HON'BLE MR. JUSTICE YASHWANT VARMA HON'BLE MR. JUSTICE PURUSHAINDRA KUMAR KAURAV For the Petitioner Through: Mr. Percy J. Pardiwalla, Sr. Adv. with Mr. Prakash Kumar, Adv. For the Respondent Through: Mr. Abhishek Maratha, SSC with Mr. Parth Semwal, JSC Ms. Nupur Sharma, Adv. JUDGMENT YASHWANT VARMA, J. 1. The appellant/assessee impugns the order of the Income Tax Appellate Tribunal [Tribunal] dated 06 December 2017. The appeal was originally admitted in terms of an order dated 06 March 2019 and the following question of law came to be accepted for consideration: Whether, on the facts and in the circumstances of the case in law, the Income Tax Appellate Tribunal erred in 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 of Rs. 1,49,15,090/- received from the Indian Subsidiaries cannot be held taxable in Ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us the issue of guarantee charges answering to the description of business income was elaborately addressed by learned counsels appearing for respective sides. Mr. Pardiwalla, learned senior counsel, had while seeking to explain the ambit and scope of business income had placed for our consideration the decisions rendered by the Supreme Court in S.A. Builders Ltd. vs Commissioner of Income-tax (Appeals), Chandigarh (2007) 158 taxman 74 (SC), G. Venkataswami Naidu Co. vs Commissioner of Income Tax (1959) 35 ITR 594, Dalmia Cement Ltd. vs Commissioner of Income Tax, New Delhi (1976) 4 SCC 614, as well as a judgment rendered by the Bombay High Court in Vassanji Sons Co. (P.) Ltd. vs Commissioner of Income Tax (1980) 125 ITR 462 (Bombay to contend that the guarantee charges received would be liable to be treated as business income. 6. It was in the same context that Mr. Maratha, learned counsel appearing for the respondent, had relied upon the judgment rendered by the Bench of the Tribunal at Ahmedabad in Micro Link Limited vs Addl. Commissioner of Income Tax I.T.A. No. 2873/Ahd/10 as well as a decision rendered by the Calcutta Bench of the Tribunal in Metso Outotec OYJ vs DCIT ITA No ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntract. Art 12 (5) of the DTAA and Section 2 (28A) of the Act extend the scope of such payments. However, payment or re-payment pursuant to any loan to be qualified as interest , necessarily have to be within the context of loan and shall relate to the parties to the privity of contract. In this context only, the expressions claims of any kind , service fee or other charge have to be understood. So also the expression whether or not there is the relationship of creditor-debtor or lender-borrower exists . It is only in the context and privity of contract, the payments covered by Article 12 (5) of the India U.K. treaty or 2 (28A) of the Act would be qualified to be treated as interest, even if there is no semblance of relationship between the parties like that of creditor-debtor exists. However, it does not take into its fold any payments made to stranger to the privity of loan transactions, though such payments have to be made incidentally in relation to such loan. Undoubtedly, assessee is a stranger to the privity of loan transactions inasmuch as the contract of loan is a different from the contract of guarantee, as such in our considered opinion, the expression of debt claims of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he entering of the global corporate agreement outside India that occasions the assessee to charge the guarantee commission, but it is the act of the subsidiary in availing the loan that accrues the guarantee commission to the assessee. So long as there is no denial that the loan transaction took place in India, it is not open for the assessee to contend that no income accrued to them in India. We are fortified in our this opinion, by the decision of the Hon ble Apex Court in Kanchanganga Sea Foods Pvt. Lgd. Vs. CIT (2010) 325 ITR 540 (SC) where the Hon ble Court held that in cases of the receipts created by legal fiction under section 5 (2) of the Act, there is no escape from the conclusion that the income earned by the non-resident company had received the same in India. 10. In these circumstances, in view of the legal fiction followed by the Hon ble Supreme Court in the above decision while considering section 5 (2) of the Act, we are of the considered opinion that the parental/bank guarantee commission was accrued to and received by the assessee in India as such the assessee cannot succeed in their plea that such a receipt is not taxable in India. 11. Proceeding further to deal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be chargeable to tax in terms of Explanation 1(a) of Section 9 (1) (i) of the Act. Mr. Pardiwalla, in this behalf placed reliance on the decision rendered in Capgemini S.A. vs. ADIT(International Taxation) ITA No. 7198/Mum/2012 by the Mumbai Bench of the Tribunal where while dealing with a similar question it had opined as under: 5. We have considered rival contentions and found that the AO taxed the guarantee commission on the plea that guarantee has been provided for the purpose of raising finance by an India company. As per the AO finance was raised in India. The AO further observed that finance requirement is met by a Indian branch of the bank, the benefits of guarantee are shared by the Indian entity with the assessee by making a compensatory payment. Accordingly the AO held that fees for guarantee arise in India. From the record we found that guarantee commission received by France company did not accrue in India nor it can be deemed to be accrued in India, therefore, not taxable in India under Income Tax Act. Furthermore, as per Article 23.3, income can be taxed in India, only if it arises in India. In the instant case, the income clearly arises in France because the guaran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y, the Tax Court's factual findings are not clearly erroneous, nor is its ultimate characterization incorrect. It is clear that the source of payments for services is where the services are performed not where the benefit is inured. See Comm'r v. Piedras Negras Broadcasting Co., 127 F.2d 260, 261 (5th Cir. 1942). The Tax Court held that Vitro's promise to pay in the event of default produced the guaranty fees. Vitro's guaranty was the service. Thus, the services were performed in Mexico, and International did not have to withhold thirty percent of the guaranty fees paid. Container Corp., 134 T.C. at 140. Under these factual circumstances, the guaranty fees are more analogous to payments for services, and the income was properly sourced outside the United States. As we find no reversible error of fact or law, the judgment of the Tax Court is AFFIRMED. 14. It may be noted that the decision in Container Corporation was principally concerned with the issue of identifying the jurisdiction within which income could be said to have arisen or accrued. The Court of Appeals ultimately found that since the secondary obligation was to be performed outside the United States, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itutions who may have extended credit facilities to its subsidiaries in India. During Financial Year 2010-11, the appellant asserts having extended guarantees to various overseas branches of foreign banks on a global basis in relation to credit facilities extended by those financial institutions to its Indian subsidiaries, namely, Johnson Matthey India Private Limited and Johnson Matthey Chemicals India Private Limited. It is stated to have received guarantee charges aggregating INR 1,49,15,090/- from those subsidiaries. In connection therewith, the appellant and its various Indian subsidiaries executed the Intra Group Parental Guarantee and Indemnity Services Agreement on 29 March 2010. For the purposes of appreciating the issues which arise we deem it apposite to extract the following clauses from that Intra Group Agreement: This AGREEMENT is made on the 29 March 2010 between JOHNSON MATTHEY PLC, a company registered and operating under the laws of England and Wales with its registered office at 40-42 Hatton Garden, London, ECIN 8EE England (the PROVIDER ) AND JOHNSON MATTHEY INDIA-PRIVATE LIMITED a company registered and operating under the laws of INDIA with its registered offi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the provision of the Services, this Agreement shall be terminable by either party giving to the other one month s notice in writing of its intention to terminate the Agreement. However, in respect of outstanding parent company guarantees and counter-indemnified obligations, this Agreement shall continue until there are no longer any such obligations outstanding between the Provider and the Recipient. 8) The Provider shall be entitled to terminate this Agreement forthwith by notice in writing to the Recipient if the Recipient shall: a) pass a resolution for winding up (otherwise than for the purpose of a bona fide scheme of solvent amalgamation or reconstruction) or a court of competent jurisdiction shall make an order to that effect; b) make any voluntary arrangement with its creditors or become subject to an administration order; c) have a receiver or administrative receiver appointed of it or over any part of its undertaking or assets; or d) any equivalent even occurs under any jurisdiction in which either of the parties are established. 9) If any sum payable by the Recipient under this Agreement is not paid by the due date the Provider shall be entitled to suspend provision of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l and all the counterparts together shall constitute one and the same instrument. 17) This Agreement shall be governed by the laws of England and Wales and the parties shall submit to the non-exclusive jurisdiction of the courts of England and Wales. 19. The appellant in its Return of Income, as originally submitted, had characterized the amount of guarantee fee as interest and thus taxable under Article 12 of the DTAA. However, and as was noticed hereinbefore, the AO as well as the DRP held that the sum would be liable to be taxed under Article 23 (3) of the DTAA being in the nature of other income . In order to appreciate the contentions that were advanced on this score, Articles 12 and 23 of the DTAA are extracted hereinbelow: ARTICLE 12 - Interest - 1. Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. 2. However, such interest may also be taxed in the Contracting State in which it arises and accordingly to the law of that State, provided that where the resident of the other Contracting State is the beneficial owner of the interest the tax so charged shall not exceed 15 per cent of the gross amount of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in respect of which the interest is paid is effectively connected with such permanent establishment or fixed base. In such case the provisions of Article 7 (Business profits) or Article 15 (Independent personal services) of this Convention, as the case may be shall apply. 7. Interest shall be deemed to arise in a Contracting State when the payer is that State itself, a political sub-division, a local authority or a resident of that State. Where, however, the person paying the interest, whether he is a resident of a Contracting State or not, has in a Contracting State a permanent establishment or a fixed base in connection with which the indebtedness on which the interest is paid was incurred, and such interest is borne by that permanent establishment or fixed base, then such interest shall be deemed to arise in the Contracting State in which the permanent establishment or fixed base is situated. 8. Where, owing to a special relationship between the payer and the beneficial owner or between both of them and some other person, the amount of the interest paid exceeds for whatever reason the amount which would have been paid in the absence of such relationship, the provisions of this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... services from a fixed base situated the therein, and the right or property in respect of which the income is paid is effectively connected with such permanent establishment or fixed base. In such case, the provisions of Article 7 or Article 15 of this Convention, as the case may be, shall apply. 3. Notwithstanding the provisions of paragraphs 1 and 2 of this Article, items of income of a resident of a Contracting State not dealt with in the foregoing articles of this Convention, and arising in the other Contracting State may be taxed in that other State. 20. Insofar as the issue of guarantee charges being viewed as interest under Article 12 of the DTAA is concerned, we note that the expression interest is defined by Article 12 (5) to mean income from debt-claims of every kind irrespective of whether they be secured by a mortgage or carry a right to participate in the debtor s profit. It becomes pertinent to note that the guarantee charges were not received by the appellant in respect of any debt owed to it by its Indian subsidiary. It also cannot possibly be acknowledged to be income derived from claims that the appellant may have had against its Indian subsidiaries. As per its own ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t would also not sustain even when tested on the anvil of Section 2 (28A) of the Act and which reads as under: interest means interest payable in any manner in respect of any moneys borrowed or debt incurred (including a deposit, claim or other similar right or obligation) and includes any service fee or other charge in respect of the moneys borrowed or debt incurred or in respect of any credit facility which has not been utilized 24. As is manifest from the above, 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. 25. That then takes us to the submission of the said income not being liable to be v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or investments (considered in reference to its amount and commonly expressed in terms of money); annual or periodical receipts accruing to a person or corporation (Oxford Dictionary). The word clearly implies the idea of receipt, actual or constructive. The policy of the Act is to make the amount taxable when it is paid or received either actually or constructively. Accrues , arises and is received are three distinct terms. So far as receiving of income is concerned, there can be no difficulty; it conveys a clear and definite meaning, and I can think of no expression which makes its meaning plainer than the word receiving itself. The words accrue and arise also are not defined in the Act. The ordinary dictionary meanings of these words have got to be taken as the meanings attaching to them. Accruing is synonymous with arising in the sense of springing as a natural growth or result. The three expressions accrues , arises and is received having been used in the section. Strictly speaking accrues should not be taken as synonymous with arises but in the distinct sense of growing or growing up by way of addition or increase or as an accession or advantage; while the word arises means co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are the observations of Satyanarayana Rao, J. in CIT v. Anamallais Timber Trust Ltd. [CIT v. Anamallais Timber Trust Ltd., 1949 SCC OnLine Mad 336 : (1950) 18 ITR 333 at p. 342 (Mad)] at ITR p. 342 and Mukherjea, J. in CIT v. Ahmedbhai Umarbhai Co. [CIT v. Ahmedbhai Umarbhai Co., 1950 SCC 94 at p. 104 : (1950) 18 ITR 472 : 1950 SCR 335 at p. 389] at SCR p. 389 where this passage from the judgment of Mukerji, J. in Rogers Pyatt case [Rogers Pyatt Shellac Co. v. Secy. of State for India, 1924 SCC OnLine Cal 67 : ILR (1925) 52 Cal 1 : (1924) 1 ITC 363 at p. 372] at ITC p. 372 is approved and adopted. It is clear therefore that income may accrue to an assessee without the actual receipt of the same. If the assessee acquires a right to receive the income, the income can be said to have accrued to him though it may be received later on its being ascertained. The basic conception is that he must have acquired a right to receive the income. There must be a debt owed to him by somebody. There must be as is otherwise expressed debitum in praesenti, solvendum in futuro; see W .S. Try Ltd. v. Johnson (Inspector of Taxes) [W.S. Try Ltd. v. Johnson (Inspector of Taxes), (1946) 1 All ER 532 at p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ording to the Oxford English Dictionary the meaning of the word accrue is to fall as a natural growth or increment; to come as an accession or advantage . The word arise is defined as to spring up, to come into existence . The word receive is not used in the same sense as accrue and arise in para 4(1)(iii) of Part B States (Taxation Concession) Order. The words accrue and arise do not mean actual receipt of the profits or gains. Both these words are used in contradistinction to the word receive and indicate a right to receive. In Colquhoun v. Brooks [(1888) 21 QBD 52 at 59] Lord Justice Fry had to construe the expression profits or gains, arising or accruing in 16 and 17 Victoria Chapter 34, Section 2, Schedule D and observed in that connection as follows: In the first place, I would observe that the tax is in respect of profits or gains arising or accruing . I cannot read those words as meaning received by . If the enactment were limited to profits and gains received by the person to be charged, that limitation would apply as much to all Her Majesty's subjects as to foreigners residing in this country. The result would be that no income tax would be payable upon profits which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al [A.I.R. 1930 Bom. 381.] the word was interpreted to indicate some origin or source of growth for the income in question , as opposed to actual receipt. In Rogers Pyatt Shellac Co. v. Secretary of State for India [[1924] 1 I.T.C. 363, 372.] Mukerji J . said as follows: accrues should not be taken as synonymous with arises but in the distinct sense of growing up by way of addition or increase or as an accession or advantage; while the word arises means comes into existence or notice or presents itself. The former connotes the idea of a growth or accumulation and the latter of the growth or accumulation with a tangible shape so as to be receivable both the words are used in contradistinction to the word receive and indicate a right to receive. They represent a stage anterior to the point of time when the income becomes receivable and connote a character of the income which is more or less inchoate . 5. These observations were adopted in V. Ramaswami Naidu v. Commissioner of Income-tax [[1959] 35 I.T.R. 33.] and E.D. Sassoon Co. Ltd. v. Commissioner of Income-tax [[1954] 26 I.T.R. 27; [1955] 1 S.C.R. 313.]. In the latter case Bhagwati J. said at page 51: If the assessee acquires a r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terson [(1924) 9 Tax Cas. 163.]; (5) income from property, though it was paid as maintenance allowance to dependants under a decree of court (without the maintanance being a charge upon the property yielding the income): Sitaldas Tirathdas [[1961] 41 I.T.R. 367; [1961] 3 S.C.R. 634.]; (6) income received by an assessee from property bequeathed to him by its previous owner with a direction to spend for obtaining probate of the will and on his shradh ceremony expenses: P.C. Mullick v. Commissioner of Income-tax [[1938] 6 I.T.R. 206 (P.C.).]; (7) royalty due from a lessee, though the lessee was to retain and apply it towards adjustment of the debt due to him from the assessee: Manager of Katras Encumbered Estate [[1934] 2 I.T.R. 100.] ; (8) profit arising out of a partnership assigned for a certain term to relations under a deed of settlement : K.A. Ramachar v. Commissioner of Income-tax [[1961] 42 I.T.R. 25; [1961] 3 S.C.R. 380.] ; and (9) dividend assigned by the holder of the shares to his wife for the future, while the shares remained in the assessee's name: Provat Kumar Mitter v. Commissioner of Income-tax [[1961] 41 I.T.R. 624; [1961] 3 S.C.R. 37.]. 22. And the following hav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of its being paid to it, was to be retained by the Corporation. So the commission accrued first to the assessee and then it was retained. It was not that the commission did not accrue at all to the assessee. The contract makes it clear that the whole commission at the rate of Rs. 1.75 per cent. was to accrue annually and that the amount to be retained was to come out of it. There is not a word in any of the contracts and the letters to suggest that the amount to be retained was not to accrue at all. If it did not accrue, there could be no question of its being retained or of its being adjusted. If it did not accrue, it remained the money of the Corporation. The commission was to be paid by the Corporation out of its own money; so what was not payable as commission remained its money. If it were said that the disputed amount did not accrue as commission, it would mean that it remained the. Corporation's money, but then it could not be used for discharge of the debt due to it. If it could be used in discharge of the debt due to it, it necessarily follows that it had accrued as commission and become payable to the assesses. It is of no consequence that the right to the commission ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng 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. 31. 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. 32. While it may be true that if the Indian subsidiaries were to default, the financial institutions may be compelled to adopt measures of recourse against the assets of the appellant situated overseas, however, that in our considered o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t source to pay the amount to the creditors of the company. It is well settled that tax is attracted at the point when the income is earned. Taxability of income is not dependent upon its destination or the manner of its utilisation. It has to be seen whether at the point of accrual, the amount is of revenue nature. If so, the amount will have to be taxed. ( Pondicherry Rly. Co. Ltd. v. CIT [AIR 1931 PC 165 : 1931 All LJ 481 : 58 IA 239] ) 34. As we examine the facts that obtain, we come to the firm conclusion that the guarantee charges were founded principally and solely upon the Intra Group Agreement and consequently the right to receive was also based on that agreement. The ultimate impact of any guarantee extended or any adverse consequence which the appellant may ultimately face or bear would not be determinative of the question of where the income had arisen or accrued. 35. Much emphasis was laid by the appellant on the judgment rendered by the Mumbai Bench of the Tribunal in Capgemini and where the Tribunal had while examining a similar transaction held that guarantee commission could not be said to have arisen or accrued in India. We find ourselves unable to endorse the vie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. Hon Bombay High court in Commonwealth Development Corporation. 20. Further, we have perused decision of the ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
