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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 ..... sallowance of guarantee commission of Rs. 1,19,88,958/-, on account of non-deduction of tax at source there from, invoking provisions of section 40(a)(i) of the Income-tax Act, 1961 ('the Act'). 2. That the Commissioner of Income-tax (Appeals) erred on facts and in law in holding that the situs of services rendered by way of the issuance of guarantee by Lease Plan Corporation NV was in India and therefore, the same was income of the non-resident in terms of section 9 of the Act. 3. That the Commissioner of Income-tax (Appeals) erred on facts and in law in holding that guarantee commission being an income from a debt claim in the hands of Lease Plan Corporation NV is in the nature of 'interest', covered under Article 11 of the Double Taxation Avoidance 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 paragr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arned assessing officer merely referred to the fact that tax should have been deducted on the amount of reimbursement made under section 195 of the income tax act and therefore the sum is disallowable. Accordingly, he passed an assessment order under section 143 (3) of the act disallowing a sum of Rs. 1,19,88,958/- on account of guarantee charges paid to a non-resident without deduction of tax at source. 8. The above assessment order was challenged by the assessee before the learned CIT - A. 9. The assessee submitted that that appeal on similar issue has been filed before the tribunal for the assessment year 2006 - 07 to 2008 - 09 and therefore the matter may be kept pending till the outcome of those appeals. However, 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 Rs. 11988958/- towards fees for guarantee to the above company an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent proceedings shows that the appellant was having credit facilities with the banks in India and the holding company LP Corporation agreed to stand in as surety in favour of the bank by way of a security for the proper discharge by the appellant of all obligations owed to the bank. The corporate guarantee given by the LP Corporation is maintained until the repayment of entire loan to the bank. The guarantee has to be renewed every year if the facility with the bank is renewed and it replaces the previous corporate guarantees submitted to the bank, by default. Only when all the loans are paid off, the original guarantee is returned back to LP Corporation, although the appellant has not included the details 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, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hnical services, as held by the AO as it represents payment made in consideration for rendering a service that is ancillary or subsidiary to the application or enjoyment of right. Clause 5 of article 12 of the DTAA, in my view, would cover the guarantee fee paid as it is a payment in consideration for the guarantee service which enables the appellant to enjoy unrestricted and easy access to credit in India. Moreover, the fees are payable in respect of services utilized in the business carried on in India and for the purposes of earning income in India. It is not the appellant's case that the loans have been raised outside India since the bulk of the assets owned by the appellant are in the nature of vehicles under operating lease. The appellant had availed of unsecured loans totaling to Rs. 611.94 crores as on 31/3/2009, which stands reduced to Rs. 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 Rs. 132.50 crores and in respect of long-term loans, the repayment is to the tune of Rs. 144.10 crores. The interest burden on fixed loan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pay the bank, the aggregate of all sums owed to it, including interest, cost and expenses. The nature of services referred by the LP Corporation can be said to certainly come within the ambit and sweep of the term 'consultancy services' and therefore it has rightly been held by the AO that the tax at source should have been deducted as the same amount paid as Guarantee Fees could be taxable under the head Fees For Technical Services. In the end, he held that in accordance with Section 5 (2), section 9 (1)(i) and section 90 (2), the payments to LP Corporation represent income of the non-resident which has accrued / arise in India, on which tax needed to be deducted at source. 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 agree ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arch 2016, the decision of Neo-Sports Broadcast Private Limited Versus Commissioner Of Income Tax (TDS) Mumbai 159 ITD 136 & circular number 202 dated 5/7/1976 to submit that guarantee commission is neither an interest and nor a fees for technical services. He further referred to the international jurisprudence on the issue of the guarantee charges where it has been held that they are not in the nature of interest. For this proposition he relied on the decision of the Container Corporation Versus Commissioner of Internal Revenue 134 United States Tax Court Reports (122). He also referred to the decision of the coordinate bench reported in 88 taxman.com 127 in Johnson Mathey 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 prov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s with a common order dated 21/4/2017 the coordinate bench remanded back to the file of the learned assessing officer with the similar direction. On the basis of those directions the AO has framed the assessment order on 31/10/2018 disallowing once again as reasons given by him for assessment year 2007 - 08. The assessee has filed the appeal before the learned CIT - A on 23/1/2019 and which is pending before the learned CIT - A for disposal. 16. He submitted copies of the assessment order as well as the copy of the order of the coordinate bench for all those earlier years along with form number 35 filed by the assessee before the learned CIT - A for the 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 low ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the coordinate bench set aside the same issue back to the file of the learned CIT - A with a direction to consider the additional evidence submitted before him. Thus for assessment year 2006 - 07 to 2008 - 09, the issue is pending before the learned CIT - A. Therefore, in the fitness of the things and in the interest of justice, it would not be appropriate for us to decide this issue here for the impugned assessment years before the decision is taken by the learned CIT - A in the earlier years, if the facts and circumstances of the case are similar. We are also conscious of the fact that for all these earlier years, the coordinate bench has set aside 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... here 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 Container Corporation Versus Commissioner of Internal Revenue of United States 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 mere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (Delhi - Trib.) Johnson Matthey Public Ltd. Company v. Deputy Commissioner of Income-tax (International Taxation), Circle 2(2)(1), New Delhi* where in the coordinate bench after holding that Guarantee fess commission paid by the assessee is not interest, nor Fees for technical services and also not business income ultimately held it to be chargeable in terms article 23 ' Other income ' as under :- "20. 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." 26. We have carefully perused the above decision however, on reading it we did not ..... X X X X Extracts X X X X X X X X Extracts X X X X
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