TaxTMI 
TaxTMI 
2022 (4) TMI 274
X X X X Extracts X X X X
X X X X Extracts X X X X
....ccount of withholding tax deducted by the Singapore company on the payment of performance guarantee commission. 4. We will take up appeal of A.Y. 2014-15 as lead case and our finding given therein will apply mutatis mutandis for the AY 2015-16 also. The grounds of appeal raised by the assessee for the assessment year 2014-15, for the sake of ready reference, are as under:- "1. The Ld CIT (A) has erred both in law and in facts of the case in upholding disallowance of tax credit of Rs. 26,95,950/- being withholding tax deducted by the Singapore company on the payment of performance guarantee commission treating such commission as business income in terms of DTAA with Singapore Government and on such business income as per as per DTAA, no withholding tax was required to be deducted by the payer in Singapore when the assessee had no PE in that country. 2. The Ld C1T (A) has erred both in law and in facts of the case in upholding disallowance of tax credit of Rs. 26,95,950/- ignoring the alternate contention on behalf of appellant that the said tax credit is available in terms of sec 91 of IT Act if the claim of appellant was not allowable u/s 90 of the IT Act. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....INR 26,95,950/- @ Rs. 59.9 per USD. 6. AO however held that Performance Guarantee Commission received by the assessee from Singapore company was a business income of assessee and since assessee company did not had any PE in Singapore under Article 7, therefore Singapore Tax Authorities could not have withheld the tax as entire income is taxable in India. He also referred to the decision of Chennai Bench of the ITAT in the case of Vestas Wind Technology India Pvt. Ltd. Vs. ACIT in ITA. No. 177/Mds./2016 dated 22.04.2016 and Delhi Bench of the ITAT in the case of DCIT Vs. M/s. Power Machines (India) Ltd. In ITA. No. 2221/Del//2014 and in the case of M/s. Uniparts India Limited Vs. CIT in ITA. Nos.201 to 205/Del/2015, to arrive at his conclusion. 7. The ld. CIT (Appeals) has upheld the order of the Assessing Officer after observing and holding as under:- "4.2.1 In this case, it is noted that the Performance Guarantee has been given by the ant to DOSPL in favour of its joint venture partner DDHPL which had entered into a put/call option "deed to buy 12 million shares of M/s DODL, Cyprus from DOSPL and for this purpose, DDHPL has given commission of Rs, 1,79/73,000/- @ 2%....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he aforesaid question, first of all, it is required to be decided 'as to whether sum payable on account of bank guarantee commission by the assessee company to VTB bank is chargeable to tax under the Act?' When the Revenue authorities have failed to lay hands on any cogent material that the bank guarantee commission paid by the assessee company paid on account of business transaction between assessee company and VTB hank particularly in the face of the fact that VTB bank has no PE in India, the question of attracting provision contained u/s 195 of the Act does not arise. In other words, when the assessee company has directly made the payments to VTB bank, Russia through ids banker in India, no income can be said, to have accrued or arisen, in India to the VTB bank u/s 4, 5 and 9 of the Act, So, in the given circumstances, assessee Company was not liable to deduct the tax at source on the bank guarantee commission paid to a foreign bank. " 4.2.2 In this case also, the appellant does not have a PE in Singapore and the commission received by it from its joint venture partner based in Singapore on account of business transaction of providing Performs Guarantee is not subje....
X X X X Extracts X X X X
X X X X Extracts X X X X
....siness of the appellant is providing offshore drilling services to Exploration and production companies in India. The P&L of the appellant on page 47 will show that the revenue of Rs. 739.69 Crore out of total revenue of Rs. 752.13 Crore is from the core activity of Service to oil sector which can be verified from the audited balance sheet at page 39-72 of the paper book. The income from performance guarantee commission forms part of other income in Schedule 18 of the audited balance sheet at page 59 of the paper book. The AO does not give any material to support the above finding. The AO simply says that the provision of performance guarantee fee is for strategic purpose. Simply because the obligation is taken to support acquisition of shares by the joint venture partner is not sufficient for the AO to hold that it was action taken for strategic purpose. No strategic investment is made by the appellant for furtherance of its core business of offshore drilling. In the absence of any material to suggest that the investment is for the furtherance of the business of the appellant, the AO is not entitled to assume the above fact and on that basis the characterization of this income as ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....pplication. Incidentally, the Article 7 of UK Treaty and Singapore Treaty are similarly worded. 12. Similarly, the reliance placed by the Assessing Officer on Vestas Wind Technology India Pvt Ltd (supra) to support his above finding that the bank guarantees commission is business income. From the copy of the judgment, he submitted that it can be seen that the bank guarantee has been provided by a parent company to the assessee customers to facilitate the purpose of windmill so that image of the assessee company in market increases and therefore the assessee able to sell its product in the Indian Market. The judgment of the ITAT Chennai in the above case is based on above peculiar facts which proves that the provision of bank guarantee for in furtherance of the business of the assessee company and therefore such profits is considered as business profits for DTAA. But AO failed to appreciate the above distinguishing feature of the Chennai ITAT Decision to support the finding that the performance guarantee commission is business profits. The decision in the case of Johnson Matthey (supra) which deals with the guarantee given to a subsidiary where no business exigency or normal busi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he only issue before us is, whether tax credit can be allowed to the assessee company on the income offered to tax in India on the tax deducted by the Singapore Company from the Performance Guarantee Commission during the year under assessment. The main reason for denial of the credit by the Assessing Officer and the ld. CIT (Appeals) is that, Performance Guarantee Commission received by the assessee is a business profit in India and directly linked to the business of the appellant. Since assessee does not have a PE in Singapore, therefore, entire commission received from DDHPL in Singapore on account of business transaction cannot be subject to tax in Singapore. Therefore, entire business profit is taxable in India. The Assessing Officer and the CIT (Appeals) were of the opinion that tax was withheld in Singapore and payment made to the assessee; it is not entitled for credit on taxes paid in India. First of all, assessee's main business was providing offshore drilling services and exploration and production of oil for companies in India. The AO and Ld. CIT (A) have misconstrued the facts and have given a finding that the provision of performance guarantee to the joint venture par....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... guarantee in favour of the buyer company i.e. DDHPL to the above vendor company M/s. DOSPL. A sum of USD 15 million was the consideration for which the assessee was to get fee @ 2%. Now this payment of commission of performance guarantee has been treated as business activity of the assessee by the Revenue authorities and then a view has been taken that it is a business profit of the assessee earned from Singapore and received in Singapore and since assessee does not have a PE under Article 7 of Singapore India DTAA, therefore, the entire profit is to be taxed in India. It is neither the case of the Assessing Officer or the assessee that the amount received by the assessee is otherwise not taxable in India. Assessee has offered it for tax under the head 'other income' and not offered as 'income from business operations'. The entire character of the transaction has been changed by the Revenue authorities to treat it as business income, without even examining the terms of the Agreement by which assessee received the fee or the nature of business activity carried out by the assessee. As stated above, it is neither in the nature of FTS or interest income or any other income falling und....
X X X X Extracts X X X X
X X X X Extracts X X X X
....re by virtue of provisions of Section 90(1) of the Act. Thus, we direct the Assessing Officer to allow tax credit in both the assessment years 2014-15 and 2015-16. 19. While arriving to our aforesaid conclusion we also draw our guidance in support from the decision of Hon'ble Mumbai ITAT in the case of Amarchand Mangaldas and Suresh K Shroff & Co vs ACIT ITA No.2613/Mum/2019 dt: 18.12.2020 where in para 10 at page 8 therein, the Hon'ble Bench held that DTAA provisions don't require that state of residence eliminate the double taxation in all cases where state of source has imposed its tax by applying to an item of income, a provision of convention that is different from state of residence considers to be applicable. Therefore, in all cases in which interpretation of residence country about applicability of a treaty provision is not the same as that of source jurisdiction about the provision and yet the source country levied taxes whether directly or by way of tax withholding, tax credit cannot be declined. 20. Further, Rule 128 read with Section 295(2)(ha) of the Act read as under:- "128. Foreign Tax Credit.- (1) An assessee, being a resident shall be allowed a credi....