Leased asset depreciation and guarantee commission treatment upheld as revenue-neutral lease and treaty interest principles prevailed.

Depreciation on financial leased assets was upheld because the lease arrangement was treated as revenue-neutral under CBDT Circular No. 2 of 2001, and the lessee's use of the asset or registration in the lessee's name did not by itself justify denial of the claim. Guarantee commission paid to the holding company was also held outside article 11 of the India-U.S. treaty because "debt-claims" was confined to loan-like obligations and did not extend to such commission. Both Revenue challenges failed, and the appeals were dismissed.

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Issues: (i) Whether depreciation on financial leased assets could be disallowed on the ground that the lessee used the asset and the title was not transferred; (ii) Whether guarantee commission paid to the holding company was in the nature of interest or a debt-claim under article 11 of the Double Taxation Avoidance Agreement between India and the U.S.A.

Issue (i): Whether depreciation on financial leased assets could be disallowed on the ground that the lessee used the asset and the title was not transferred.

Analysis: The depreciation claim was examined in the light of Circular No. 2 of 2001 issued by the Central Board of Direct Taxes. The assessee had offered the principal portion of the lease rentals to tax, and the arrangement was viewed as revenue-neutral. On that basis, there was no justification to disturb the allowance of depreciation merely because the asset was used by the lessee and registered in the lessee's name.

Conclusion: The disallowance of depreciation on financial leased assets was not sustained and the finding was in favour of the assessee.

Issue (ii): Whether guarantee commission paid to the holding company was in the nature of interest or a debt-claim under article 11 of the Double Taxation Avoidance Agreement between India and the U.S.A.

Analysis: The expression "debt-claims" in the treaty definition of interest was understood as referring to a loan carrying interest, secured or unsecured, and not to every kind of debt. Guarantee commission was therefore not regarded as income from debt-claims or as interest within article 11. The view taken was also supported by the cited Tribunal reasoning relied upon in the order.

Conclusion: Guarantee commission was held not to be interest or a debt-claim under the treaty, and the finding was in favour of the assessee.

Final Conclusion: The Revenue's challenges on both depreciation on leased assets and taxability of guarantee commission failed, and all the appeals were dismissed.

Ratio Decidendi: Where a lease transaction is revenue-neutral and the treaty expression "debt-claims" is confined to loan-like obligations, depreciation cannot be denied on the leased asset merely because the lessee uses it, and guarantee commission does not constitute interest under article 11 of the treaty.

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