Guarantee fee tax treatment under the India-Japan DTAA: consistency limited the applicable rate and TDS credit was allowed.

Guarantee fee receipts from a non-resident were treated as taxable in India under Explanation 1(a) to section 9(1)(i) of the Income-tax Act, while they were held not to fall within interest under Article 11 or other income under Article 22 of the India-Japan DTAA. The business-income character of the receipts was not examined by the lower authorities and was remitted for fresh consideration. Applying consistency, the same income having been taxed at 10% in earlier years, the rate could not be enhanced on the facts, and credit for tax deducted at source was allowed.

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Issues: Taxability of guarantee fees received by a non-resident assessee, including whether the receipts fell under business profits or other income and the applicable tax rate, and whether the assessee was entitled to credit for tax deducted at source.

Analysis: The guarantee fee was held not to be interest under Article 11 or other income under Article 22 of the India-Japan DTAA. The receipts were treated as taxable in India under Explanation 1(a) to section 9(1)(i) of the Income-tax Act, 1961. At the same time, the issue whether the guarantee fee constituted business income was not examined by the lower authorities and was sent back for reconsideration. The Court also applied the principle of consistency, noting that the same income had been taxed at 10% in earlier years and that the rate could not be enhanced to 40% on the facts of the case.

Conclusion: The guarantee fee was held taxable in India at 10%, and the assessee was held entitled to credit for tax deducted at source. The challenge succeeded only to the extent that the higher 40% rate was rejected, while the business-income issue was remitted for fresh examination.

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