2022 (4) TMI 274 - AT - Income Tax

Tribunal: Performance guarantee commission not business income under DTAA. Taxable in India & Singapore.

The Tribunal ruled that the performance guarantee commission was not classified as business income under Article 7 of the DTAA. The income was deemed ... Claim of foreign tax credit (FTC) u/s 90 or u/s 91 - Applicability or Rule 128 with retrospective effect - withholding tax deducted by the Singapore company on the payment of performance guarantee commission - Income taxable in India - whether tax credit can be allowed to the assessee company on the income offered to tax in India on the tax deducted by the Singapore Company from the Performance Guarantee Commission during the year under assessment? - main reason for denial of the credit by the Assessing Officer and the ld. CIT (Appeals) is that, Performance Guarantee Commission received by the assessee is a business profit in India and directly linked to the business of the appellant HELD THAT:- AO and Ld. CIT (A) have misconstrued the facts and have given a finding that the provision of performance guarantee to the joint venture partner is for the strategic purpose in the course of business activity and it is therefore attributable to the business activity. They have concluded that the performance guarantee given by the appellant should be attributable to business activity and income earned in respect of performance guarantee should be treated as business profit. The appellant is not in the business of providing bank guarantee or performance guarantee as the business of the appellant is providing offshore drilling services to Exploration and production companies in India. P&L reflects that the revenue of ₹ 739.69 Crore out of total revenue of ₹ 752.13 Crore is from the core activity of Service in oil sector. Assessing Officer on these facts cannot change the characteristic of one time income by way of performance guarantee commission as business profit to bring it under Article 7 of the DTAA, and hold that in order to avail tax benefit the assessee must have a PE under Article 7. Here, in this case, Singapore based company, DDHPL had entered into a put/call option deed to buy 12 million shares of another entity M/s. DODL. The seller/vendor is also a Singapore based company M/s. DOSPL. The assessee company provided a performance guarantee in favour of the buyer company i.e. DDHPL to the above vendor company M/s. DOSPL. A sum of USD 15 million was the consideration for which the assessee was to get fee @ 2%. Now this payment of commission of performance guarantee has been treated as business activity of the assessee by the Revenue authorities and then a view has been taken that it is a business profit of the assessee earned from Singapore and received in Singapore and since assessee does not have a PE under Article 7 of Singapore India DTAA, therefore, the entire profit is to be taxed in India. It is neither the case of the Assessing Officer or the assessee that the amount received by the assessee is otherwise not taxable in India. Assessee has offered it for tax under the head ‘other income’ and not offered as ‘income from business operations’. The entire character of the transaction has been changed by the Revenue authorities to treat it as business income, without even examining the terms of the Agreement by which assessee received the fee or the nature of business activity carried out by the assessee. In view of Singapore Taxation Laws the income in question is taxable in Singapore even if the assessee has no PE in Singapore, on account of the fact that commission of Performance Guarantee fees is deductible expenses to the entity paying in Singapore. Thus, we are unable to subscribe to the view taken by the Assessing Officer and the CIT (Appeals) and the same is rejected. Since income is also taxable in India, the assessee is eligible for payment of such tax much less income has suffered tax in Singapore by virtue of provisions of Section 90(1) of the Act. Thus, we direct the Assessing Officer to allow tax credit in both the assessment years 2014-15 and 2015-16 Rule 128 read with Section 295(2)(ha) no longer, still Assessing Officer was obliged to allow withheld tax deductible in Singapore which is offered to tax in the impugned assessment years subject to the compliance under the Rules which shall be made to claim above benefit of tax. Though this Rule has been 1.04.2017, but the foreign tax credit is available to the assessee showing foreign income. Thus, we direct the Assessing Officer to allow tax credit. Appeal of assessee allowed. Issues Involved:1. Disallowance of tax credit for withholding tax deducted by a Singapore company on performance guarantee commission.2. Classification of performance guarantee commission as business income.3. Applicability of Article 7 of the DTAA between India and Singapore.4. Eligibility for foreign tax credit under Section 90 and Rule 128 of the Income Tax Act, 1961.Detailed Analysis:1. Disallowance of Tax Credit:The assessee challenged the disallowance of Rs. 26,95,950/- for AY 2014-15 and Rs. 28,10,930/- for AY 2015-16, which was withheld by a Singapore company on performance guarantee commission. The assessee argued that under the DTAA with Singapore, no withholding tax was required as the assessee had no Permanent Establishment (PE) in Singapore.2. Classification as Business Income:The Assessing Officer (AO) and the CIT (Appeals) classified the performance guarantee commission as business income. They argued that the performance guarantee was provided for strategic purposes in the course of business activities, making it business income under Article 7 of the DTAA. The assessee contended that it is not in the business of providing guarantees and that the income should not be classified as business income.3. Applicability of Article 7 of the DTAA:The AO and CIT (Appeals) concluded that since the assessee had no PE in Singapore, the entire commission was taxable in India. They relied on precedents such as Vestas Wind Technology India Pvt. Ltd. and Power Machines (India) Ltd. The assessee argued that the performance guarantee commission should fall under the residual head of income (Article 23 of the DTAA) as it does not qualify as business income, FTS, or interest.4. Eligibility for Foreign Tax Credit:The Tribunal had to decide whether the tax credit could be allowed for the tax deducted in Singapore. The assessee provided evidence of tax withholding under Singapore laws and argued that the income was taxable in Singapore under Section 12(6) of the Singapore Income Tax Act. The Tribunal concluded that the assessee is eligible for foreign tax credit under Section 90(1) of the Income Tax Act, 1961, and directed the AO to allow the tax credit.Decision:The Tribunal concluded that the performance guarantee commission could not be classified as business income under Article 7 of the DTAA. The income falls under the residual head (Article 23) and is taxable in both India and Singapore. The assessee is entitled to foreign tax credit for the tax withheld in Singapore, as per Section 90(1) and Rule 128 of the Income Tax Act, 1961. The appeals for both assessment years were allowed, and the AO was directed to grant the tax credit.Conclusion:The Tribunal held that the performance guarantee commission should not be treated as business income and that the assessee is entitled to foreign tax credit for the tax withheld in Singapore. The decision aligns with the provisions of the DTAA and the Income Tax Act, ensuring that the assessee is not subject to double taxation.