Corporate guarantee fees are not interest, and they accrue in India when the contractual right to receive them arises.

A guarantee fee paid to a parent company for providing corporate guarantees to secure subsidiary loans is not "interest" under Article 12 of the Indo-UK DTAA or section 2(28A) because it is not referable to a debt-claim or loan transaction in favour of the recipient; the payment is for guarantee services, so the issue was decided against the assessee. The fee also accrued and arose in India under section 5(2) because the contractual right to receive it was created under the agreement with the Indian subsidiaries and became payable there, regardless of any later overseas consequences. The question whether the receipt could be treated as business income under Article 7 was left open.

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Issues: (i) whether guarantee commission received by the assessee from its Indian subsidiaries constituted "interest" under Article 12 of the Indo-UK DTAA and section 2(28A) of the Income-tax Act, 1961; (ii) whether such guarantee commission accrued or arose in India under section 5(2) of the Income-tax Act, 1961.

Issue (i): whether guarantee commission received by the assessee from its Indian subsidiaries constituted "interest" under Article 12 of the Indo-UK DTAA and section 2(28A) of the Income-tax Act, 1961.

Analysis: The expression "interest" in Article 12 was held to cover income from debt-claims and payments referable to a loan or debt transaction. The assessee was not a party to the loan agreements between the Indian subsidiaries and the lending banks, and there was no privity of contract or debt owed by the subsidiaries to the assessee. The guarantee commission was paid for the service of providing parent-company guarantees and counter-indemnification, not for any debt-claim in favour of the assessee. The same reasoning applied to section 2(28A), which also requires money borrowed or debt incurred.

Conclusion: The guarantee commission did not constitute "interest" under Article 12 of the DTAA or section 2(28A) of the Income-tax Act, 1961, and the issue was decided against the assessee.

Issue (ii): whether such guarantee commission accrued or arose in India under section 5(2) of the Income-tax Act, 1961.

Analysis: Income accrues or arises when the assessee acquires a right to receive it, and taxability depends on accrual or arising, not on the ultimate destination or use of the income. The guarantee fee was payable quarterly under the intra-group agreement, at a stipulated annual rate, against services rendered to Indian subsidiaries for their commercial benefit. The right to receive the fee was rooted in the agreement with the Indian subsidiaries, and the obligation to pay was incurred in India in respect of services utilised in India. The possibility of the assessee facing consequences overseas if a subsidiary defaulted did not alter the source or situs of accrual.

Conclusion: The guarantee commission accrued and arose in India, and the issue was decided against the assessee.

Final Conclusion: Both substantial questions were answered against the assessee, and the challenge to taxability failed. The question whether such receipts could be treated as business income under Article 7 was not decided and was left open.

Ratio Decidendi: A guarantee fee paid to a parent company for providing corporate guarantees to secure loans of its subsidiaries is not "interest" unless it is referable to a debt-claim or loan transaction in favour of the recipient, and such fee accrues or arises where the contractual right to receive it is created and becomes payable, irrespective of the later use or destination of the income.

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