Treaty residual other-income rule: guarantee fee paid to a Korean resident was held not taxable in India.

Guarantee fees received by a South Korean resident from an Indian subsidiary were treated as not falling within the treaty articles on immovable property, business profits or interest. The receipt was therefore considered under the India-Korea DTAA residual other-income clause, under which taxing rights rested exclusively with the state of residence. Domestic-law accrual and deemed-accrual provisions did not change that treaty allocation. The guarantee fee was consequently held not taxable in India, and the related addition was unsustainable. The connected stay application became infructuous after the substantive taxability issue was resolved.

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Issues: Whether guarantee fees received by a South Korean resident from its Indian subsidiary were taxable in India under the Income-tax Act, 1961, or were taxable only in Korea under the India-Korea Double Taxation Avoidance Agreement.

Analysis: The guarantee fee was held not to fall under the specific treaty articles dealing with immovable property, business profits, or interest. The income was therefore examined under the residual article dealing with other income. Since the assessee was a resident of South Korea and the receipt was not covered by any earlier article of the treaty, the treaty allocated taxing rights exclusively to the state of residence. The domestic-law provisions on accrual and deemed accrual did not alter this treaty position.

Conclusion: The guarantee fee was not taxable in India and the addition was unsustainable.

Final Conclusion: The substantive appeal succeeded on the taxability issue, while the connected stay application became infructuous.

Ratio Decidendi: Where a receipt is not covered by the specific distributive rules of the applicable treaty, the treaty's residual other-income clause governs and exclusive taxing rights remain with the state of residence.

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