AI Drafter 
TaxTMI 
TaxTMI 
2017 (12) TMI 470
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....e fee of Rs. 1,49,15,090 is taxable as "Other Income" in terms of Article 23 of the India UK Double Taxation Avoidance Agreement ("Tax Treaty"). 3. On the facts, in the circumstances of the case and in law, the Ld. AO/ Ld. DRP failed to appreciate that the income arising to appellant providing guarantee for its Associated Enterprises ('AEs') is under the normal course of business and thus could not be held taxable as "Other Income" in terms of Article 23 of the India UK Double Taxation Avoidance Agreement ('India UK Tax Treaty'). 4. On the facts, in the circumstances of the case and in law, while coming to the aforementioned conclusion, the Ld. AO/ Ld. DRP erred in: 4.1 not appreciating that the guarantee fee is arising from debt raised by the principal debtors and that the Appellant's liability visa- vis the debt raised by the principal debtors is coextensive and hence, the guarantee fee is in the nature of "Interest Income" under Article 12 of the India UK Tax Treaty, as claimed by the Appellant. 4.2 mechanically relying upon Technical Explanation to US Model Tax Convention 2006 without appreciating that the Appellant has pr....
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....r withdraw any ground of appeal either before or at the time of hearing of this appeal. Any consequential relief to which the Appellant may be entitled under law in pursuance of the aforesaid grounds of appeal, or otherwise may be granted." 2. Relevant facts are that the assessee i.e., JM Plc is the ultimate parent company of both Johnson Matthey India Private Limited (JMIPL) and Johnson Matthey Chemicals India Private Limited (JMCIPL). JM Plc provides various types of guarantees in relation to the business of its subsidiaries companies. In the relevant previous year JM Plc provided guarantees to support credit facilities extended to JMIPL and JMCIPL by banks in India. Guarantees provided to HSBC and Citibank on a global basis outside India include guarantee for the facilities extended to JMIPL and JMCIPL. While filing its return of income for Assessment Year ('AY) 2011-12, the assessee treated the Guarantee fees received from Indian subsidiaries to be in the nature of Interest Income under Article 12 of India UK tax treaty and offered it to tax @ 15%. So stated that a sum of Rs. 50,79,860/- was reimbursement is on account of disbursement of salary of a seconded employee on ....
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.... tax and consequently, the tribunal has the power to grant relief if it is found that a non-taxable item is taxed or a permissible deduction is denied and thus an assessed income can be lesser than the returned income. He placed reliance on the decision of the Apex Court in NTPC Vs. CIT, 229 ITR 383 wherein it was held that since the purpose of the assessment proceedings before the taxing authorities is to assess correctly the tax liability of an assessee in accordance with law, the assessee should not be prevented from raising that question before the Tribunal for the first time, so long as the relevant facts are on record in respect of that item. He also placed reliance on the decisions reported in the case of Capgemini S.A. vs ADIT (International Taxation) for the Assessment Years 2009-10 & 2012-13 rendered by the Mumbai Tribunal in ITA Nos. 7198/Mum/2012 and 888(Mum) of 2016 respectively for the principle that when the Indian subsidiaries avail credit facilities pursuant to the corporate guarantee agreement entered into by the foreign parent outside India with a financial institution, the guarantee commission received by the foreign parent does not accrue nor does it deem to ha....
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....the case of NTPC (supra), we admit the additional ground, and proceed to decide the same. 7. In support of the contention that the guarantee commission received by the foreign parent pursuant to the availment of the loan by the Indian subsidiary basing on the global guarantee agreement entered into by the foreign holding company with a banker outside India, is not taxable in India, Ld.AR placed reliance on the decision of the Mumbai Tribunal in Capgemini SA Vs. DCIT (International Taxation) for Assessment Year 2009-10 vide ITA No. 7198/Mum/2012 dated 28.3.2016, which needs to be extracted hereunder:- "3. Rival contentions have been heard and record perused. Facts in brief are that the assessee is a resident of France and does not have a permanent establishment in India. During the year assessee has given a corporate guarantee BNP Paribas, a French Bank in France, on behalf of its various subsidiaries worldwide. During the year under consideration, in India, two subsidiaries of the assessee M/s.Capgemini India Pvt. Ltd. and Capgemini Business Services (India) Ltd. were sanctioned credit facilities by the Indian Branches of BNP Paribas, which credit facilities to the exte....
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....isions for the levy of additional income-tax) of the Act in respect of the total income of the previous year of every person, Section 5(2) of the Act says that, the total income of any previous year of a person who is a non-resident shall include all income from whatever source derived which is received or is deemed to be received in India in such year by or on behalf of such person; or accrues or arises or is deemed to accrue or arise to him in India during such year. It is, therefore, clear that in cases covered under section 5(2) of the Act, there are no escapes for the receipts from being included in the total income of the Non-resident Indian. In the case on hand, though it is contended by the assessee that they have entered into the global corporate guarantee agreement with the banker outside India, fact remains that on that account alone, no receipts would accrue to the assessee in the jurisdictions where the loan facility is not availed by the subsidiaries. It is not the entering of the global corporate agreement outside India that occasions the assessee to charge the guarantee commission, but it is the act of the subsidiary in availing the loan that accrues the guarantee c....
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....ilar right or obligation and also any service fee or other charge in respect of the moneys borrowed or debt incurred or in respect of any credit facility which has not been utilised." 12. He also placed reliance on a decision of Gujarat High Court in the case of CIT vs Vijay Ship Breaking Corporation [2003] 261ITR 113 (Gujarat), and Madras High Court in the case of Viswapriya Financial Services and Securities Limited [2002] 258 ITR496 (Madras), in support of his argument that the statutory definition under section 2(28A) of the Act regards such amounts which may not otherwise be regarded as interest to be treated as interest for the purpose of the statute and that too even in cases where there is no relationship of debtor and creditor or borrower and lender, if payment is made in any manner in respect of any moneys received as deposits or on money claims or rights or obligations incurred in relation to money, such payment is, by this statutory definition, regarded as interest." Basing on these provisions and decisions, he contends that the payments by Indian AEs to Appellant in respect of guarantee provided to support credit facilities obtained by them from banks in India could ....
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....bentures but, subject to the provisions of paragraph 9 of this Article, shall not include any item which is treated as a distribution under the provisions of Article 11 (Dividends) of this Convention. Section 2(28A) of the Income- Tax Act, 1961 reads as follows: (28A) " interest" means interest payable in any manner in respect of any moneys borrowed or debt incurred (including a deposit, claim or other similar right or obligation) and includes any service fee or other charge in respect of the moneys borrowed or debt incurred or in respect of any credit facility which has not been utilised;] 16. According to the Ld. AR as is evident from the above, Article 12(5) of the India U.K. DTAA speaks of "income from debt claims of every kind" whereas Section 2(28A) says that the term "interest" includes a deposit claim or other similar right or obligation which shall further include service fee or other charge in respect of moneys borrowed or debt incurred or in respect of any credit facility which has not been utilized, therefore, the guarantee/bank commission is also covered in such definition; whereas According to the authorities below, this definition of interest is ....
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....it does not take into its fold any payments made to stranger to the privity of loan transactions, though such payments have to be made incidentally in relation to such loan. Undoubtedly, assessee is a stranger to the privity of loan transactions inasmuch as the contract of loan is a different from the contract of guarantee, as such in our considered opinion, the expression of "debt claims of any kind" or "the service fee or other charge in respect of moneys borrowed or debt incurred" does not stand extended to the payment of guarantee commission received by the assessee in India. The payments relating to debt claims, service fee or other charge, could be categorized as interest provided they is privity of such contract. Lest we are afraid that the thin line that separates the payment of interest from other payments will be missing and the payments towards consultancy charges, expenditure incurred for the purpose of pre-loan documentation and the host of expenditure incurred with third parties and not relatable to the loan transaction proper, will have to be treated as "interest". Certainly it cannot be the intention of the legislature or treaty-makers. We are, therefore, of the con....
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....of any specific provision dealing with corporate/bank guarantee recharge, the same has to be taxed in India as per the provisions of the Income tax Act, 1961. We do not find any illegality or irregularity in the reasoning given or conclusions reached by the authorities below. We, therefore, dismiss Ground Nos. 2 to 4 & 10. 21. Now, turning to Ground Nos. 5 to 7, is an admitted fact that the assessee received a sum of Rs. 55,80,855/- from JMIPL on account of charges received for the services rendered by senior management employee seconded by the assessee to India. However, the assessee's case is that such an amount represents the expenditure incurred by them on the employee and was reimbursed by the Indian entity. Ld.AO did not accept the contention of the assessee and observed that considering the overall sphere of activities and overall availability of technical and skilled personnel with them in U.K., there remains no doubt that this seconded person was rendering specialist consultancy services for the benefit of India AE, as such these services are fee for technical services u/s 9(1)(vii) of the Act and Article 13 of the DTAA. LD. DRP found that there is similarity of facts b....
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....t is submitted that the sum received by the Appellant could not be brought to tax separately in the hands of Appellant under the deeming provisions of 9(1)(vii) i.e. FTS. Thus, the action of the Ld. AO / Ld. DRP taxing the same as FTS is erroneous and deserves to be quashed on this point alone. 23. Per contra, Ld. DR submitted that the assessee is manufacturing technologically advanced chemicals known as catalysts used in automobile and other industries, it manufactures a variety of precious metal containing catalysts and chemical products which are used in a wide range of industrial applications, one Mr. Dhananajay Tapasvi was an employee of the assessee for over 20 years, that he was appointed as new General Manager of Emission Control Technology Plant (ECT Plant) in India and made the Director on the Board of Jhonson Matthey India Pvt. Ltd. (the subsidiary). This person has been seconded to the India to oversee the Emission Control Technology Plant of the subsidiary. He is an employee of the assessee and the services rendered by him to the Indian entity are Fees for Technical Services. Ld. DR further submits that the assessee did not furnish the necessary documents before the....
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....AE and it cannot be construed that the Assessee was providing services to Indian AE by appointing MD of Indian AE. According to the Ld. DR, the decision of the Hon'ble Delhi High Court in the case of Centrica India Offshore (P.) Ltd vs CIT [2014] 44 taxmann.com 300 (Delhi) is very fact specific, for the reasons that, Centrica India having been newly constituted, was presumably not in a position to render help to the various vendors in the matter of fulfilling their obligations or in the matter of ensuring compliance with the processes and practices employed by the overseas entities, and to provide support for the initial years of operation, till the necessary skill set is acquired by the resident employees, the assessee entered into secondment agreement with overseas group entities. He, therefore, submitted that in this set of facts, it was inferred that the expatriate employees were seconded to Centrica India to essentially oversee the "business functions of the overseas entities", thus advancing the business functions of the overseas entities and thereby resulting into profit generation of the overseas entities in Indian territory. However, according to him, in the case of the As....
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....yee of the Indian subsidiary, managing and overseeing the overall operations, as expected from the role of a MD for the India subsidiary and the AO has grossly erred in taxing the same as FTS relying on decision of the Hon'ble Delhi High Court in the case of Centrica India Offshore (P.) Ltd vs CIT [2014] 44 taxmann.com 300 (Delhi). It was only for administrative convenience to meet the requirements of the expatriate employee in his home country that his salary was disbursed to his designated overseas account. The Indian AE was not in the initial set up phase as it was incorporated in India on 16 January 1998 and had substantial number of local employees who are well qualified and capable of rendering services in their own capacity. 27. Last limb of the arguments on behalf of the assessee is that even if is said that the MD was rendering services on behalf of the Assessee, since the skill involved in rendering the subject services does not get transferred to the recipient of services, since the authorities below failed to demonstrate that how a MD of an Indian AE make available or transfer the technical knowledge to another, such services do not satisfy the available criteria and....
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....ee and the Indian entity. As a matter of fact, Ld.DRP in his order stated that in order to test the case of the assessee on the touchstone of the principles laid down by the Hon'ble Jurisdictional High Court in the case of Centrica (supra), the secondment agreement was required to be examined by the DRP. DRP felt the following questions, namely, - i. Who bears the responsibility or risk for the results produced by the employee's work? ii. Who has the authority to instruct the worker regarding the manner in which the work has to be performed? iii. Who has control and responsibility over the place where the work is performed? iv. Who puts the tools and materials necessary for the work at the employee's disposal? v. Who determines the number and qualifications of the employees? vi. Who has a right to terminate the contractual arrangements entered into with that individual? vii. Whether there is a right to impose disciplinary sanctions related to the work of that individual? viii. Who determines the work schedule of that individual? are to be answered with reference to the secondment contract, secondment agreeme....