Corporate guarantee fee taxation under the DTAA depends on characterisation as interest, business income, or residuary income and absence of a PE.

Corporate guarantee fee received by a non-resident from its Indian subsidiary was analysed under the India-Korea DTAA and the Income-tax Act, 1961. The fee was not treated as interest because it was not paid in respect of a debt owed by the subsidiary to the non-resident and there was no direct loan relationship with the lenders. It was considered capable of falling within business income under Article 7 because it arose from commercial support to the subsidiary, but absent a permanent establishment in India, Article 7 did not permit taxation in India. Even if characterised as residuary income, Article 22 allocated taxing rights to the State of residence, so the receipt was not taxable in India.

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Issues: Taxability of corporate guarantee fee received from an Indian subsidiary under the India-Korea DTAA and the Income-tax Act, 1961, including whether it was taxable as interest, business income, or residuary income.

Analysis: The assessee, a South Korean company, received guarantee fee for extending a corporate guarantee to lenders for loans availed by its Indian subsidiary. The fee was held not to be interest because it was not received in respect of any debt owed by the subsidiary to the assessee and there was no privity of loan contract with the lenders. The fee was nevertheless found to be connected with the assessee's commercial activities and the support extended to its subsidiary, and therefore capable of being characterised as business income under Article 7 of the DTAA. Since there was no finding of a permanent establishment in India, Article 7 did not permit taxation in India. Even if the receipt were treated as residuary income, Article 22 allocated taxing rights to the State of residence.

Conclusion: The guarantee fee was not taxable in India in the absence of a permanent establishment, and the addition was liable to be deleted.

Final Conclusion: The appeal succeeded on the substantive issue and the impugned addition was deleted, resulting in a partial allowance of the appeal.

Ratio Decidendi: A corporate guarantee fee received by a non-resident from its Indian subsidiary is not taxable in India where it is not interest, is covered by the DTAA as business income or residuary income, and the non-resident has no permanent establishment in India.

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