2024 (12) TMI 897 - AT - Income Tax

Korean manufacturer's guarantee fees from Indian subsidiaries ruled non-taxable under Article 22 DTAA provisions

ITAT Chennai ruled in favor of a Korean automobile manufacturer regarding guarantee fees received from Indian subsidiaries. The assessee, a non-resident ... TP Adjustment - Guarantee fees received from subsidiaries for providing guarantee to foreign banks - assessee is a foreign company incorporated in Korea, a non resident and do not have PE in India, which is engaged in the business of manufacture of automobile and auto parts - HELD THAT:- Since, the guarantee fees has been assessed as income from other sources but not a business Income, the same cannot be taxed in the hands of the assessee in India as per Article 22 of the DTAA and hence the we do not countenance the action of the ld.CIT(A). Further, we note that, the similar issue for the A.Y. 2014-15 & 2015-16 with the same facts and circumstances in assessee’s own case has been held as not taxable in India in [2023 (7) TMI 343 - ITAT CHENNAI] Thus Guarantee fees received by the assessee during the impugned A.Y. 2016-17 from Indian Subsidiaries is not taxable in India and hence we set aside the order of the Ld.CIT(A) by allowing the grounds of appeal of the assessee. Issues Involved:1. Adjustment made by the Commissioner of Income Tax (Appeals) under section 250 of the Income-tax Act, 1961.2. Taxability of guarantee fees received from Indian subsidiaries under the Double Taxation Avoidance Agreement (DTAA) between India and Korea.3. Applicability of Article 22 'Other Income' of the DTAA between India and Korea.4. Classification of guarantee fees as 'Business Profits' or 'Other Income' under the DTAA.5. Precedent cases and their applicability to the current case.Issue-wise Detailed Analysis:1. Adjustment made by the Commissioner of Income Tax (Appeals):The assessee challenged the adjustment made by the Commissioner of Income Tax (Appeals), arguing that it was contrary to law, facts, and circumstances. The assessee contended that the guarantee fees should not be taxable in India as per the DTAA between India and Korea. However, the Commissioner of Income Tax (Appeals) dismissed this ground, noting that the assessee had included the guarantee fees as taxable income in its return, thereby not invoking the beneficial provisions of the DTAA.2. Taxability of Guarantee Fees under the DTAA:The primary contention revolved around whether the guarantee fees received from Indian subsidiaries were taxable in India. The assessee argued that the fees were erroneously offered to tax in India, despite being taxable only in Korea under the DTAA. The assessee claimed that the guarantee fees should be excluded from total income as they arise only in Korea, the contracting state, and not in India.3. Applicability of Article 22 'Other Income' of the DTAA:The assessee asserted that the guarantee fees should be classified under Article 22 'Other Income' of the DTAA, which stipulates that such income is taxable only in the country of residence, i.e., Korea. The Commissioner of Income Tax (Appeals) had upheld the assessment of the fees as taxable in India, but the Tribunal found that under Article 22, the fees should not be taxed in India.4. Classification of Guarantee Fees:The assessee argued that the guarantee fees should not be classified as 'Interest' or 'Fees for Technical Services' under the Act or the DTAA. Instead, they should be considered as 'Business Profits.' Since the assessee did not have a permanent establishment in India, the fees should not be taxable in India. The Tribunal agreed with this view, noting that the fees partake the character of business income and should not be taxed in India as per Article 7 of the DTAA.5. Precedent Cases:The assessee cited previous judgments in its favor, including decisions by the Chennai Tribunal for earlier assessment years and the Mumbai Tribunal in similar cases. These cases supported the view that the guarantee fees should not be taxed in India under the DTAA. The Tribunal noted these precedents and found them applicable, reinforcing the decision that the guarantee fees were not taxable in India.Conclusion:The Tribunal concluded that the guarantee fees received by the assessee during the assessment year 2016-17 from Indian subsidiaries were not taxable in India. The decision of the Commissioner of Income Tax (Appeals) was set aside, and the appeal of the assessee was allowed, consistent with the provisions of the DTAA and relevant judicial precedents.