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2017 (12) TMI 470

Corporate/bank guarantee recharge - nature of receipt - India U.K. DTAA - payment relate to the tendering of any technical or consultancy service - payment towards seconding an expatriate employee - fee for technical services (FTS) or not - concept of make available - Held that:- Having examined the issue of corporate/bank guarantee recharge with reference to Article 12(5) of the Indo U.K. Treaty and Section 2(28A) of the Act, we are of the considered opinion that the authorities below are perfectly 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. - Amount received from JMIPL on account of charges received for the services rendered by senior management employee seconded by the assessee to India - Held that:- Both the authorities below recorded a findin .....

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ment order dated 17 December 2015 passed under section 144C(13) read with section 143(3) of the Income-tax Act, 1961 ( the Act ), assessee preferred this appeal on the following grounds: 1. On the facts, in the circumstances of the case and in law, the Ld. AO erred in assessing the total income of the Appellant at ₹ 25,10,69,882 as against ₹ 24,59,90,022 declared by the Appellant in the return of income. 2. On the facts, in the circumstances of the case and in law, the Ld. AO as well as Dispute Resolution Panel (Ld. DRP') has erred in holding that guarantee fee of ₹ 1,49,15,090 is taxable as Other Income in terms of Article 23 of the India UK Double Taxation Avoidance Agreement ( Tax Treaty ). 3. On the facts, in the circumstances of the case and in law, the Ld. AO/ Ld. DRP failed to appreciate that the income arising to appellant providing guarantee for its Associated Enterprises ('AEs') is under the normal course of business and thus could not be held taxable as Other Income in terms of Article 23 of the India UK Double Taxation Avoidance Agreement ('India UK Tax Treaty'). 4. On the facts, in the circumstances of the case and in law, while co .....

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umstances of the case and in law, the Ld. AO erred in levying consequential interest under section 234B of the Act on the disallowance made in the assessment order. 9. On the facts, in the circumstances of the case and in law, the Ld. AO erred in initiating penalty proceedings under section 271(1)(C) of the Act. That the above grounds of appeal are mutually exclusive and without prejudice to each other. That the Appellant reserves its right to add, alter, amend or withdraw any ground of appeal either before or at the time of hearing of this appeal. Any consequential relief to which the Appellant may be entitled under law in pursuance of the aforesaid grounds of appeal, or otherwise may be granted. 2. Relevant facts are that the assessee i.e., JM Plc is the ultimate parent company of both Johnson Matthey India Private Limited (JMIPL) and Johnson Matthey Chemicals India Private Limited (JMCIPL). JM Plc provides various types of guarantees in relation to the business of its subsidiaries companies. In the relevant previous year JM Plc provided guarantees to support credit facilities extended to JMIPL and JMCIPL by banks in India. Guarantees provided to HSBC and Citibank on a global bas .....

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eived for providing guarantee for its Associated Enterprises (AEs) to foreign banks, is outside India and cannot be held taxable in India. 4. Firstly, insofar as the additional ground i.e., Ground No 10 is concerned, it is the argument of the Ld. AR that in terms of Art. 265 of the Constitution of India, no tax shall be levied or collected except by authority of law and the Hon ble Supreme Court of India also held that the purpose of assessment proceedings is to assess correctly the tax and consequently, the tribunal has the power to grant relief if it is found that a non-taxable item is taxed or a permissible deduction is denied and thus an assessed income can be lesser than the returned income. He placed reliance on the decision of the Apex Court in NTPC Vs. CIT, 229 ITR 383 wherein it was held that since the purpose of the assessment proceedings before the taxing authorities is to assess correctly the tax liability of an assessee in accordance with law, the assessee should not be prevented from raising that question before the Tribunal for the first time, so long as the relevant facts are on record in respect of that item. He also placed reliance on the decisions reported in the .....

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Corporation [2003] 261 ITR 113 (Gujarat). It is, therefore. Clear that there is no dispute as to the facts involved in this matter insofar as Ground Nos.2 to 4 are concerned but only question is in respect of the taxability of such a receipt in India, and if so, under what category whether interest or other source, such a receipt falls. We, therefore, find that no new facts are necessary to deal with this issue as such while respectfully following the ratio laid down in the case of NTPC (supra), we admit the additional ground, and proceed to decide the same. 7. In support of the contention that the guarantee commission received by the foreign parent pursuant to the availment of the loan by the Indian subsidiary basing on the global guarantee agreement entered into by the foreign holding company with a banker outside India, is not taxable in India, Ld.AR placed reliance on the decision of the Mumbai Tribunal in Capgemini SA Vs. DCIT (International Taxation) for Assessment Year 2009-10 vide ITA No. 7198/Mum/2012 dated 28.3.2016, which needs to be extracted hereunder:- 3. Rival contentions have been heard and record perused. Facts in brief are that the assessee is a resident of Franc .....

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mmission is only the Indian entity availing loan, but not merely on the foreign parent company entering into the global corporate guarantee agreement, as such consideration of the matter in the light of the provisions under section 5(2) of the Act is necessary. 9. At the outset, it is needless to say that while according to Section 4 of the Act income-tax shall be charged in accordance with, and subject to the provisions (including provisions for the levy of additional income-tax) of the Act in respect of the total income of the previous year of every person, Section 5(2) of the Act says that, the total income of any previous year of a person who is a non-resident shall include all income from whatever source derived which is received or is deemed to be received in India in such year by or on behalf of such person; or accrues or arises or is deemed to accrue or arise to him in India during such year. It is, therefore, clear that in cases covered under section 5(2) of the Act, there are no escapes for the receipts from being included in the total income of the Non-resident Indian. In the case on hand, though it is contended by the assessee that they have entered into the global corp .....

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resident of the UK. He submits that the term Interest has been defined under Article 12(5) of India UK tax treaty to include debt-claims of every kind, which is exhaustive and covers all kinds of income regarded as interest in domestic law, whereas under the domestic law Section 2(28A) of the Income Tax Act, 1961 (the Act) defines interest to include any moneys borrowed or debt incurred including a deposit, claim or other similar right or obligation and also 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 utilised. 12. He also placed reliance on a decision of Gujarat High Court in the case of CIT vs Vijay Ship Breaking Corporation [2003] 261ITR 113 (Gujarat), and Madras High Court in the case of Viswapriya Financial Services and Securities Limited [2002] 258 ITR496 (Madras), in support of his argument that the statutory definition under section 2(28A) of the Act regards such amounts which may not otherwise be regarded as interest to be treated as interest for the purpose of the statute and that too even in cases where there is no relationship of debtor and creditor or borrower and lender, if .....

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f India UK reads as follows: 5. The term interest as used in this Article means income from debtclaims of every kind, whether or not secured by mortgage and whether or not carrying a right to participate in the debtor's profits, and in particular, income from Government securities and income from bonds or debentures, including premiums and prizes attaching to such securities, bonds or debentures but, subject to the provisions of paragraph 9 of this Article, shall not include any item which is treated as a distribution under the provisions of Article 11 (Dividends) of this Convention. Section 2(28A) of the Income- Tax Act, 1961 reads as follows: (28A) 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 utilised;] 16. According to the Ld. AR as is evident from the above, Article 12(5) of the India U.K. DTAA speaks of income from debt claims of every kind whereas Section 2(28A) says that the term interest includes a deposi .....

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elationship 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 any kind or the service fee or other charge in respect of moneys borrowed or debt incurred does not stand extended to the payment of guarantee commission received by the assessee in India. The payments relating to debt claims, service fee or other charge, could be categorized as interest provided they is privity of such contract. Lest we are afraid that the thin line that separates the payment of interest from other payments will be missing and the p .....

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guarantee recharge with reference to Article 12(5) of the Indo U.K. Treaty and Section 2(28A) of the Act, we are of the considered opinion that the authorities below are perfectly 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. 21. Now, turning to Ground Nos. 5 to 7, is an admitted fact that the assessee received a sum of ₹ 55,80,855/- from JMIPL on account of charges received for the services rendered by senior management employee seconded by the assessee to India. However, the assessee s case is that such an amount represents the expenditure incurred by them on the employee and was reimbursed by the Indian entity. Ld.AO did not accept the contention of the assessee and observed that considering the overall sphere of activities and overall avai .....

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e in employment of the foreign enterprise or not is wholly irrelevant for this purpose. What is relevant is that the income embedded in these payments in question is taxable in India under the head Salaries and if that be so, there are no tax withholding obligations under section 195. In view of the above decision, it is submitted that the sum received by the Appellant could not be brought to tax separately in the hands of Appellant under the deeming provisions of 9(1)(vii) i.e. FTS. Thus, the action of the Ld. AO / Ld. DRP taxing the same as FTS is erroneous and deserves to be quashed on this point alone. 23. Per contra, Ld. DR submitted that the assessee is manufacturing technologically advanced chemicals known as catalysts used in automobile and other industries, it manufactures a variety of precious metal containing catalysts and chemical products which are used in a wide range of industrial applications, one Mr. Dhananajay Tapasvi was an employee of the assessee for over 20 years, that he was appointed as new General Manager of Emission Control Technology Plant (ECT Plant) in India and made the Director on the Board of Jhonson Matthey India Pvt. Ltd. (the subsidiary). This per .....

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ncome-tax-I, New Delhi [2014] 364 ITR 336 (Del) in support of their contention that there was no real employer employee relationship between the Indian subsidiary and Mr. Tapasvi, it is the submission of the Ld. AR that the person being MD / employee of the Indian AE exercised his employment with the Indian AE and it cannot be construed that the Assessee was providing services to Indian AE by appointing MD of Indian AE. According to the Ld. DR, the decision of the Hon ble Delhi High Court in the case of Centrica India Offshore (P.) Ltd vs CIT [2014] 44 taxmann.com 300 (Delhi) is very fact specific, for the reasons that, Centrica India having been newly constituted, was presumably not in a position to render help to the various vendors in the matter of fulfilling their obligations or in the matter of ensuring compliance with the processes and practices employed by the overseas entities, and to provide support for the initial years of operation, till the necessary skill set is acquired by the resident employees, the assessee entered into secondment agreement with overseas group entities. He, therefore, submitted that in this set of facts, it was inferred that the expatriate employees .....

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416 (SC) and Centrica India Offshore (P.) Ltd. v. CIT [2014] 364 ITR 336 (Delhi HC). 26. While enumerating the services performed by the said seconded employee as mentioned in Page No.118 of the Paper Book, Ld.AR submitted that the nature of such activities make it evident that the MD was working as an employee of the Indian subsidiary, managing and overseeing the overall operations, as expected from the role of a MD for the India subsidiary and the AO has grossly erred in taxing the same as FTS relying on decision of the Hon ble Delhi High Court in the case of Centrica India Offshore (P.) Ltd vs CIT [2014] 44 taxmann.com 300 (Delhi). It was only for administrative convenience to meet the requirements of the expatriate employee in his home country that his salary was disbursed to his designated overseas account. The Indian AE was not in the initial set up phase as it was incorporated in India on 16 January 1998 and had substantial number of local employees who are well qualified and capable of rendering services in their own capacity. 27. Last limb of the arguments on behalf of the assessee is that even if is said that the MD was rendering services on behalf of the Assessee, since .....

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that applicability or otherwise of the ratio of the Hon ble Jurisdictional High Court in the case of Centrica (supra), is a fact specific question to be determined with reference to the functions performed and the conduct of the duty of the seconded employee with reference to the business of the assessee and the Indian entity. As a matter of fact, Ld.DRP in his order stated that in order to test the case of the assessee on the touchstone of the principles laid down by the Hon ble Jurisdictional High Court in the case of Centrica (supra), the secondment agreement was required to be examined by the DRP. DRP felt the following questions, namely, - i. Who bears the responsibility or risk for the results produced by the employee s work? ii. Who has the authority to instruct the worker regarding the manner in which the work has to be performed? iii. Who has control and responsibility over the place where the work is performed? iv. Who puts the tools and materials necessary for the work at the employee s disposal? v. Who determines the number and qualifications of the employees? vi. Who has a right to terminate the contractual arrangements entered into with that individual? vii. Whether t .....

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t the salaries of the seconded employees to their overseas accounts and to claim reimbursements. However, record does not reveal that either the Ld. AO or the Ld. DRP directed the production of these documents and in spite of such direction the assessee failed to produce the same, thereby permitting the authorities to draw an adverse inference against the case of the assessee. However, we feel that in order to appreciate the contention of the Ld. AR as to the nature of this particular receipt in the hands of the assessee on account of the services rendered by the seconded employee - whether it is reimbursement or FTS or business income and the existence or otherwise of the PE - these consideration of these documents is absolutely necessary. It is only on such consideration this aspect could be conclusively decided. We find it difficult to give any finding on this aspect without looking into such documents. In these circumstances, we deem it just and proper to direct the assessee to produce such documents before the Ld. AO and to set aside the issue to the file of the AO to give a fresh finding after looking into the documents to be produced by the assessee. We, therefore, restore G .....

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