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TMI Blog2024 (5) TMI 1415X X X X Extracts X X X X X X X X Extracts X X X X ..... 90/- received from the Indian Subsidiaries cannot be held taxable in India?" 2. Subsequently and more particularly on 24 November 2023 the following additional question of law came to be framed by the Court for consideration: "Whether the Income Tax Appellate Tribunal/DRP/AO erred on fact and in law in concluding that guarantee commission, amounting to Rs. 1,49,15,090/- received by the appellant/assessee, did not come within the ambit of the expression interest as found in Article 12 (5) of the Indo-UK DTAA?" 3. The issue itself arises out of the receipt of guarantee charges by the appellant from its Indian subsidiaries in terms of an Intra Group Parental Guarantee and Counter Indemnity Services Agreement [Intra Group Agreement] dated 29 March 2010. It had been the case of the appellant that it had initially and out of abundant caution characterized the amount of guarantee charges as being interest and taxable in terms of Article 12 of the Agreement for Avoidance of Double Taxation & Prevention of Fiscal Evasion with United Kingdom of Great Britain and Northern Ireland [DTAA]. During the course of assessment undertaken in accordance with the procedure prescribed under Section 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecision rendered by the Calcutta Bench of the Tribunal in Metso Outotec OYJ vs DCIT ITA No. 300/KOL/2022. 7. While it was on the aforesaid basis that we had upon conclusion of oral submissions reserved this matter for judgment, it becomes apparent from a reading of the two solitary questions on which the appeal stands admitted are confined to the characterization of guarantee charges under Article 12 of the DTAA and whether income derived from the receipt of guarantee fee could be said to arise or accrue in India. 8. We are also constrained to observe that the appellant did not address any request for the framing of an additional question pertaining to business income and the ambit of Article 7 of the DTAA. We thus and, consequently, find ourselves unable to deal with the various contentions which were addressed on that score. 9. Insofar as the question pertaining to guarantee charges being liable to be viewed as interest under Article 12 of the DTAA is concerned, we note that the Tribunal has while examining this aspect observed as follows: "17. A bare reading of these provisions indicate that either the debt claims of any kind or the service fee or other charge in respect of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fferent 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 payments towards consultancy charges, expenditure incurred for the purpose of pre-loan documentation and the host of expenditure incurred with third parties and not relatable to the loan transaction proper, will have to be treated as "interest". Certainly it cannot be the intention of the legislature or treaty makers. We are, therefore, of the considered opinion, that, so long as the assessee is a stranger to the privity of contract of loan between the Indian entity and the banker, they cannot categorize the corporate/ bank guarantee recharge amount as interest for the purpose of taxation." 10. Dealing with the issue of whethe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uch the assessee cannot succeed in their plea that such a receipt is not taxable in India." 11. Proceeding further to deal with the aspect of business income, the Tribunal took the view that since the appellant was not engaged in the business of providing corporate or bank guarantees, guarantee charges cannot be held to be business income and would thus not fall within Article 7 of the DTAA. It additionally and in this regard bore in consideration the fact that the global corporate guarantee was for the limited purposes of securing loans to its subsidiaries. This aspect was answered in paragraph 18 as follows: "18. Alternative request of the assessee is that, if for any reason the Tribunal reaches a conclusion that this Corporate/Bank guarantee recharge cannot be treated as interest, then the question as to whether it amounts to business income may be considered. On this aspect, we find from the record that admittedly 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 applicat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome can be taxed in India, only if it arises in India. In the instant case, the income clearly arises in France because the guarantee has been given by the assessee, a French company to BNP Paribas, a French Bank, in France and, therefore, Article 23.3 has no applicability as income does not arise in India." Our attention was also drawn to a subsequent decision rendered by the Tribunal in yet another matter of Capgemini S.A. vs DCIT (International Taxation)-2(1)(1), Mumbai ITA No. 888/Mum/2016 and where the earlier decision came to be reiterated. 13. For the purposes of explaining the source of income and the nature of services which are concerned with the extension of guarantees, Mr. Pardiwalla also sought to draw sustenance from a decision handed down by the United States Court of Appeals for the Fifth Circuit in Container Corporation vs Commissioner of Internal Revenue No. 10-60515 [Appeal from the decision of the United States Tax Court USTC No. 3607-05]. Mr. Pardiwalla invited our attention to the following passages from that decision: "To determine what class of income guaranty fees fall within or may be analogized to, the court must look to the "substance of the transa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ave arisen or accrued. The Court of Appeals ultimately found that since the secondary obligation was to be performed outside the United States, the view taken by the Tax Court was correct. 15. Appearing for the respondents, Mr. Maratha, learned counsel, submitted that the Tribunal has correctly come to conclude that income had accrued in India since, and in terms of Section 5 (2) of the Act, the same was received as a consequence and a corollary to the loans availed by the Indian subsidiaries. Learned counsel submitted that since the loan transaction had undoubtedly taken place in India, it would clearly not be open for the appellant to contend that no income had accrued to them in India. For the purposes of elucidating the meaning to be ascribed to the word 'accrue' and 'arise' as appearing in Section 5 of the Act, Mr. Maratha commended for our consideration the judgment of the Supreme Court in E.D. Sassoon & Company Ltd. vs. The Commissioner of Income-Tax, Bombay [(1954 ) 1 SCC 992] and which over the decades has acquired a classical place in the jurisprudence explaining the meaning of the expressions "arise" and "accrue". Mr. Maratha in light of the above submitted that since a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... don, ECIN 8EE England (the "PROVIDER") AND JOHNSON MATTHEY INDIA-PRIVATE LIMITED a company registered and operating under the laws of INDIA with its registered office at 103, Ashoka Estate, 24 Barakhamba Road, New Delhi -110001 (the "RECIPIENT"). WHEREAS: a) The Recipient is engaged in the business of (i) the production of catalyst products (ii) the production of and/or sale of products and provision of services related to precious metals and/or (iii) the development of technology related to (i) and (ii) above or (iv) is a holding company of another company or companies engaged in the business of (i) to (iii) above. b) The Provider is the ultimate parent company of the Recipient. c) The Provider is able to provide services to the Recipient in the form of parent company guarantees and counter-indemnification of the Recipient's liabilities, in connection with its business outlined at a) above which the Recipient may wish to avail itself of for its own commercial benefit. d) The Provider is willing to provide services to the Recipient on the terms and conditions contained in this Agreement. THE PARTIES THEREFORE AGREE AS FOLLOWS:- 1) The Provider hereby agrees to m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y 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 the Services to the Recipient until such time as payment is made. 10) Upon termination of the Agreement, the Provider shall render an account for all unpaid Services plus UK VAT where applicable to the Recipient and the Recipient shall pay such invoice in accordance with the instructions set out therein. 11) All amounts payable pursuant to this Agreement are exclusive of any sales, business or similar tax other than withholding tax ("WHT") thereon which may be payable in addition on the rendering by the Provider of an appropriate invoice. For the avoidance of doubt, such payments shall be made net of any WHT which may be payable, provided that the Recipient provides to the Provider upon request satisfactory documentary evidence of any deduction of such WHT by the relevant tax authority. 12) All notices which are required to be given hereunder shall be in writing and shall be sent to the address of the Provider or Recipient (as applicable). Any such notice to the Recipient ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the interest. 3. Notwithstanding the provisions of paragraph 2 of this Article: (a) where the interest is paid to a bank carrying on a bona fide banking business which is a resident of the other Contracting State and is the beneficial owner of the interest, the tax charged in the Contracting State in which the interest arises shall not exceed 10 percent of the gross amount of the interest; (b) where the interest is paid to the Government of one of the Contracting States or a political sub-division or local authority of that State or the Reserve Bank of India, it shall not be subject to tax by the State in which it arises. 4. Notwithstanding the provisions of Article 7 of this Convention and of paragraphs 2 and 3 of this Article : (a) interest arising in India which is paid to any beneficially owned by a resident of the United Kingdom shall be exempt from tax in India if it is paid in respect of a loan made, guaranteed or insured, or any other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onship 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 Article shall apply only to the last-mentioned amount. In that case, the excess part of the payments shall remain taxable according to the law of each Contracting State, due regard being had to the other provisions of this Convention. 9. Any provision in the laws of either Contracting State relating only to interest paid a non-resident company shall not operate so as to require such interest paid to a company which is a resident of the other Contracting State to be treated as a distribution or dividend by the company paying such interest or to be left out of account as a deduction in computing the taxable profits of the company paying the interest. The preceding sentence shall not apply to interest paid to a company which is a resident of one of the Contracting State in which more than 50 per cent of the voting power is controlled, directly or indirectly, by a person or persons who are residents of the other Contracting State. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 stated case, the guarantee charges were received in connection with the credit facilities which were extended by the overseas branches of foreign banks to its Indian subsidiaries. Since the appellant appears to have guaranteed the repayment of the loans so extended to its subsidiaries, it received charges as per the stipulations contained in the Intra Group Agreement noticed above. The aforesaid arrangement and its underlying premise is clearly evident from the recitals of that agreement extracted in the preceding parts of this judgment. 21. In our considered opinion insofar as this question is concerned, the Tribunal has correctly found that the appellant was neither a party to the loan agreements that may have been executed nor was there any privity of contract that could be said to exist. It was the aforesaid undisputed facts which weighed upon the Tribunal to hold that the payments received by the appe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ian 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 viewed as having arisen or accrued in India. It becomes pertinent to note that the expressions 'accrue' and 'arise' as appearing in Section 5 of the Act have arisen for interpretation on more than one occasion. In E.D. Sassoon the aforesaid expressions were explained as follows: "34. The question still remains whether the remuneration for the broken periods accrued to the Sassoons and the contention which was strenuously urged before us on behalf of the transferees was that the Sassoons had rendered the services in terms of the managing agency agreements to the respective Companies, that the services thus rendered were the source of income and whatever income could be attributed to those services was earned by the Sassoons and accrued to them in the chargeable accounting period though it was ascertained and paid in the year 1944 to the transferees. 35. The word "earned" has not been used in S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 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. It is difficult to say that this distinction has been throughout maintained in the Act and perhaps the two words seem to denote the same idea or ideas very similar, and the difference only lies in this that one is more appropriate than the other when applied to particular cases. It is clear, however, as pointed [out] by Fry, L.J. in Colquhoun (Surveyor of Taxes) v. Brooks [Colquhoun (Surveyor of Taxes) v. Brooks, (1888) LR 21 QBD 52 at p. 59 (CA) : (1889) LR 14 AC 493 (HL)] (QBD at p. 59) (this part of the decision not having been affected by the reversal of the decision by the Houses of Lords), that both the words are used ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 539 (CA)] , All ER at p. 539 and Webb v. Stenton [Webb v. Stenton, (1883) LR 11 QBD 518 at pp. 522 and 527 (CA)] , QBD at pp. 522 and 527. Unless and until there is created in favour of the assessee a debt due by somebody it cannot be said that he has acquired a right to receive the income or that income has accrued to him 38. The word "earned" even though it does not appear in Section 4 of the Act has been very often used in the course of the judgments by the learned Judges both in the High Courts as well as the Supreme Court. (Vide CIT v. Ahmedbhai Umarbhai & Co. [CIT v. Ahmedbhai Umarbhai & Co., 1950 SCC 94 at p. 124 : (1950) 18 ITR 472 at p. 502 : 1950 SCR 335] at SCR p. 364 and CIT v. Thiagaraja Chetty & Co. [CIT v. Thiagaraja Chetty & Co., (1953) 2 SCC 353 at pp. 360-61 : (1953) 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lows: "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 accrued but which were not actually received, although profits might have been earned in the kingdom and might have accrued in the kingdom. I think, therefore, that the words 'arising or accruing' are general words descriptive of a right to receive profits." It is clear, therefore, that the income may accrue to an assessee without actual receipt of the same. If the assessee acquires a right to receive the income, the income can be said to accrue 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.- (See E.D. Sassoon and Company Ltd. v. CIT [26 ITR 27, 51] ). 27. As would be evident from a reading of the principles enunciated in the aforenoted two de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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." xxxx xxxx xxxx 7. Commissioner of Income-tax v. Shoorji Vallabhdas & Co. [[1962] 46 I.T.R. 144, 148 (S.C.).] , Commissioner of Income-tax v. Chamanlal Mangaldas & Co. [[1956] 29 I.T.R. 987.] and Commissioner of Income-tax v. Harivallabhadas Kalidas & Co. [[1960] 39 I.T.R. 1; [1960] 3 S.C.R. 50.] lay down that there is no accrual of income if it is surrendered or relinquished by an agreement before it could accrue. 8. Ever ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 have been held not to be income accrued or arisen: (1) income received from property charged under a court's decree with maintenance allowance to a dependant and spent on the maintenance: Bejoy Singh Dudhuria [[1933] 1 I.T.R. 135 (P.C.).] and Commissioner of Income-tax v. D.R. Naik [[1939] 7 I.T.R. 362.]; (2) income from trust property which under the trust deed was to be spent on the maintenance of the assessee and his wife: Commissioner of Income-tax v. Manilal Dhanji [[1962] 44 I.T.R. 876 (S.C.).] ; (3) part of income from a partnership which under an agreement was to be paid to those contributing towards the investment of the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 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 arose from a contract which itself conferred the right of retention upon the Corporation. The right to an income and the obligation to spend it on a particular object do not make out a case of diversion simply because they are incorporated in the same document because the document can make it clear that the obligation is to spend the income after it has accrued. If the obligation is to spend money out of the accrued income it is a case of application, and not of diversion, and the obligation can be imposed by the same document by which the right is conferred." That decision ultimately came to be affirmed by the Supreme Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 opinion cannot be viewed as being either relevant or determinative of the Section 5 question. The guarantee charges stood determined and payable in terms of the Intra Group Agreement noticed hereinabove. The said charges were payable irrespective of a default or a failure on the part of the Indian subsidiary to discharge its obligations to the financial institution from which it may have received credit. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 view taken by the Tribunal for the following reasons. Firstly, the decision appears to proceed on a mere ipse dixit that "from the record" the guarantee commission did not accrue or arise in India. The Tribunal then takes the position that since the guarantee was given by a French assessee to a bank situate in that country, income could not be said to have arisen or accrued in India. 36. We find ourselves unable to agree with the view taken in Capegemini bearing in mind the facts of the present case and where undisputedly the guarantee charges were not founded on any contract that the appellant may have had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany 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 Container Corporation v. 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, a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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