TaxTMI 
TaxTMI 
2024 (5) TMI 1415
X X X X Extracts X X X X
X X X X Extracts X X X X
....tal corporate guarantee charges of Rs. 1,49,15,090/- received from the Indian Subsidiaries cannot be held taxable in India?" 2. Subsequently and more particularly on 24 November 2023 the following additional question of law came to be framed by the Court for consideration: "Whether the Income Tax Appellate Tribunal/DRP/AO erred on fact and in law in concluding that guarantee commission, amounting to Rs. 1,49,15,090/- received by the appellant/assessee, did not come within the ambit of the expression interest as found in Article 12 (5) of the Indo-UK DTAA?" 3. The issue itself arises out of the receipt of guarantee charges by the appellant from its Indian subsidiaries in terms of an Intra Group Parental Guarantee and Counter Indemnity Services Agreement [Intra Group Agreement] dated 29 March 2010. It had been the case of the appellant that it had initially and out of abundant caution characterized the amount of guarantee charges as being interest and taxable in terms of Article 12 of the Agreement for Avoidance of Double Taxation & Prevention of Fiscal Evasion with United Kingdom of Great Britain and Northern Ireland [DTAA]. During the course of assessment undertaken ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Commissioner of Income Tax I.T.A. No. 2873/Ahd/10 as well as a decision rendered by the Calcutta Bench of the Tribunal in Metso Outotec OYJ vs DCIT ITA No. 300/KOL/2022. 7. While it was on the aforesaid basis that we had upon conclusion of oral submissions reserved this matter for judgment, it becomes apparent from a reading of the two solitary questions on which the appeal stands admitted are confined to the characterization of guarantee charges under Article 12 of the DTAA and whether income derived from the receipt of guarantee fee could be said to arise or accrue in India. 8. We are also constrained to observe that the appellant did not address any request for the framing of an additional question pertaining to business income and the ambit of Article 7 of the DTAA. We thus and, consequently, find ourselves unable to deal with the various contentions which were addressed on that score. 9. Insofar as the question pertaining to guarantee charges being liable to be viewed as interest under Article 12 of the DTAA is concerned, we note that the Tribunal has while examining this aspect observed as follows: "17. A bare reading of these provisions indicate that eithe....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r 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 considered opinion, that, so long as the assessee is a stranger to the privity of contract of loan between the Indian entity and the banker, they cannot categorize the corporate/ bank guarantee recharge amount a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e parental/bank guarantee commission was accrued to and received by the assessee in India as such the assessee cannot succeed in their plea that such a receipt is not taxable in India." 11. Proceeding further to deal with the aspect of business income, the Tribunal took the view that since the appellant was not engaged in the business of providing corporate or bank guarantees, guarantee charges cannot be held to be business income and would thus not fall within Article 7 of the DTAA. It additionally and in this regard bore in consideration the fact that the global corporate guarantee was for the limited purposes of securing loans to its subsidiaries. This aspect was answered in paragraph 18 as follows: "18. Alternative request of the assessee is that, if for any reason the Tribunal reaches a conclusion that this Corporate/Bank guarantee recharge cannot be treated as interest, then the question as to whether it amounts to business income may be considered. On this aspect, we find from the record that admittedly the assessee is manufacturing technologically advanced chemicals known as catalysts used in automobile and other industries, it manufactures a variety of precious....
X X X X Extracts X X X X
X X X X Extracts X X X X
....o be accrued in India, therefore, not taxable in India under Income Tax Act. Furthermore, as per Article 23.3, income can be taxed in India, only if it arises in India. In the instant case, the income clearly arises in France because the guarantee has been given by the assessee, a French company to BNP Paribas, a French Bank, in France and, therefore, Article 23.3 has no applicability as income does not arise in India." Our attention was also drawn to a subsequent decision rendered by the Tribunal in yet another matter of Capgemini S.A. vs DCIT (International Taxation)-2(1)(1), Mumbai ITA No. 888/Mum/2016 and where the earlier decision came to be reiterated. 13. For the purposes of explaining the source of income and the nature of services which are concerned with the extension of guarantees, Mr. Pardiwalla also sought to draw sustenance from a decision handed down by the United States Court of Appeals for the Fifth Circuit in Container Corporation vs Commissioner of Internal Revenue No. 10-60515 [Appeal from the decision of the United States Tax Court USTC No. 3607-05]. Mr. Pardiwalla invited our attention to the following passages from that decision: "To determine ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... decision in Container Corporation was principally concerned with the issue of identifying the jurisdiction within which income could be said to have arisen or accrued. The Court of Appeals ultimately found that since the secondary obligation was to be performed outside the United States, the view taken by the Tax Court was correct. 15. Appearing for the respondents, Mr. Maratha, learned counsel, submitted that the Tribunal has correctly come to conclude that income had accrued in India since, and in terms of Section 5 (2) of the Act, the same was received as a consequence and a corollary to the loans availed by the Indian subsidiaries. Learned counsel submitted that since the loan transaction had undoubtedly taken place in India, it would clearly not be open for the appellant to contend that no income had accrued to them in India. For the purposes of elucidating the meaning to be ascribed to the word 'accrue' and 'arise' as appearing in Section 5 of the Act, Mr. Maratha commended for our consideration the judgment of the Supreme Court in E.D. Sassoon & Company Ltd. vs. The Commissioner of Income-Tax, Bombay [(1954 ) 1 SCC 992] and which over the decades has acquired a classical....
X X X X Extracts X X X X
X X X X Extracts X X X X
....h 2010 between JOHNSON MATTHEY PLC, a company registered and operating under the laws of England and Wales with its registered office at 40-42 Hatton Garden, London, ECIN 8EE England (the "PROVIDER") AND JOHNSON MATTHEY INDIA-PRIVATE LIMITED a company registered and operating under the laws of INDIA with its registered office at 103, Ashoka Estate, 24 Barakhamba Road, New Delhi -110001 (the "RECIPIENT"). WHEREAS: a) The Recipient is engaged in the business of (i) the production of catalyst products (ii) the production of and/or sale of products and provision of services related to precious metals and/or (iii) the development of technology related to (i) and (ii) above or (iv) is a holding company of another company or companies engaged in the business of (i) to (iii) above. b) The Provider is the ultimate parent company of the Recipient. c) The Provider is able to provide services to the Recipient in the form of parent company guarantees and counter-indemnification of the Recipient's liabilities, in connection with its business outlined at a) above which the Recipient may wish to avail itself of for its own commercial b....
X X X X Extracts X X X X
X X X X Extracts X X X X
....l make an order to that effect; b) make any voluntary arrangement with its creditors or become subject to an administration order; c) have a receiver or administrative receiver appointed of it or over any part of its undertaking or assets; or d) any equivalent even occurs under any jurisdiction in which either of the parties are established. 9) If any sum payable by the Recipient under this Agreement is not paid by the due date the Provider shall be entitled to suspend provision of the Services to the Recipient until such time as payment is made. 10) Upon termination of the Agreement, the Provider shall render an account for all unpaid Services plus UK VAT where applicable to the Recipient and the Recipient shall pay such invoice in accordance with the instructions set out therein. 11) All amounts payable pursuant to this Agreement are exclusive of any sales, business or similar tax other than withholding tax ("WHT") thereon which may be payable in addition on the rendering by the Provider of an appropriate invoice. For the avoidance of doubt, such payments shall be made net of any WHT which may be payable, provided that the Rec....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... income'. In order to appreciate the contentions that were advanced on this score, Articles 12 and 23 of the DTAA are extracted hereinbelow: "ARTICLE 12 - Interest - 1. Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. 2. However, such interest may also be taxed in the Contracting State in which it arises and accordingly to the law of that State, provided that where the resident of the other Contracting State is the beneficial owner of the interest the tax so charged shall not exceed 15 per cent of the gross amount of the interest. 3. Notwithstanding the provisions of paragraph 2 of this Article: (a) where the interest is paid to a bank carrying on a bona fide banking business which is a resident of the other Contracting State and is the beneficial owner of the interest, the tax charged in the Contracting State in which the interest arises shall not exceed 10 percent of the gross amount of the interest; (b) where the interest is paid to the Government of one of the Contracting States or a political sub-division or local authority of that State or the Reserve Ba....
X X X X Extracts X X X X
X X X X Extracts X X X X
....er he is a resident of a Contracting State or not, has in a Contracting State a permanent establishment or a fixed base in connection with which the indebtedness on which the interest is paid was incurred, and such interest is borne by that permanent establishment or fixed base, then such interest shall be deemed to arise in the Contracting State in which the permanent establishment or fixed base is situated. 8. Where, owing to a special relationship between the payer and the beneficial owner or between both of them and some other person, the amount of the interest paid exceeds for whatever reason the amount which would have been paid in the absence of such relationship, the provisions of this Article shall apply only to the last-mentioned amount. In that case, the excess part of the payments shall remain taxable according to the law of each Contracting State, due regard being had to the other provisions of this Convention. 9. Any provision in the laws of either Contracting State relating only to interest paid a non-resident company shall not operate so as to require such interest paid to a company which is a resident of the other Contracting State to be treated a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ntracting State not dealt with in the foregoing articles of this Convention, and arising in the other Contracting State may be taxed in that other State." 20. Insofar as the issue of guarantee charges being viewed as interest under Article 12 of the DTAA is concerned, we note that the expression 'interest' is defined by Article 12 (5) to mean income from "debt-claims of every kind" irrespective of whether they be secured by a mortgage or carry a right to participate in the debtor's profit. It becomes pertinent to note that the guarantee charges were not received by the appellant in respect of any debt owed to it by its Indian subsidiary. It also cannot possibly be acknowledged to be income derived from claims that the appellant may have had against its Indian subsidiaries. As per its own stated case, the guarantee charges were received in connection with the credit facilities which were extended by the overseas branches of foreign banks to its Indian subsidiaries. Since the appellant appears to have guaranteed the repayment of the loans so extended to its subsidiaries, it received charges as per the stipulations contained in the Intra Group Agreement noticed above. The aforesaid....
X X X X Extracts X X X X
X X X X Extracts X X X X
....respect of any credit facility which has not been utilized" 24. As is manifest from the above, the expression interest is defined to mean amounts payable in respect of any monies borrowed or debts incurred. Undisputedly the appellant had not borrowed any monies. The debt, if any, which could be said to have been incurred was clearly not one owed to the Indian subsidiaries. The income that it received from its Indian subsidiaries was solely in consideration of any liability that could possibly befall the appellant in case its Indian subsidiaries were to default in their repayment obligations. It thus becomes apparent that the guarantee fee would neither fall within the ambit of Article 12 of the DTAA nor Section 2 (28A) of the Act. 25. That then takes us to the submission of the said income not being liable to be viewed as having arisen or accrued in India. It becomes pertinent to note that the expressions 'accrue' and 'arise' as appearing in Section 5 of the Act have arisen for interpretation on more than one occasion. In E.D. Sassoon the aforesaid expressions were explained as follows: "34. The question still remains whether the remuneration for the broken periods a....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... to make the amount taxable when it is paid or received either actually or constructively. 'Accrues', 'arises' and 'is received' are three distinct terms. So far as receiving of income is concerned, there can be no difficulty; it conveys a clear and definite meaning, and I can think of no expression which makes its meaning plainer than the word 'receiving' itself. The words 'accrue' and 'arise' also are not defined in the Act. The ordinary dictionary meanings of these words have got to be taken as the meanings attaching to them. 'Accruing' is synonymous with 'arising' in the sense of springing as a natural growth or result. The three expressions 'accrues', 'arises' and 'is received' having been used in the section. Strictly speaking 'accrues' should not be taken as synonymous with 'arises' but in the distinct sense of growing or growing up by way of addition or increase or as an accession or advantage; while the word 'arises' means comes into existence or notice or presents itself. The former connotes the idea of a growth or accumulation and the latter of the growth or accumulation with a tangible shape so as to be receivable. It is difficult to say that this dist....
X X X X Extracts X X X X
X X X X Extracts X X X X
....] at ITR p. 342 and Mukherjea, J. in CIT v. Ahmedbhai Umarbhai & Co. [CIT v. Ahmedbhai Umarbhai & Co., 1950 SCC 94 at p. 104 : (1950) 18 ITR 472 : 1950 SCR 335 at p. 389] at SCR p. 389 where this passage from the judgment of Mukerji, J. in Rogers Pyatt case [Rogers Pyatt Shellac & Co. v. Secy. of State for India, 1924 SCC OnLine Cal 67 : ILR (1925) 52 Cal 1 : (1924) 1 ITC 363 at p. 372] at ITC p. 372 is approved and adopted. It is clear therefore that income may accrue to an assessee without the actual receipt of the same. If the assessee acquires a right to receive the income, the income can be said to have accrued to him though it may be received later on its being ascertained. The basic conception is that he must have acquired a right to receive the income. There must be a debt owed to him by somebody. There must be as is otherwise expressed debitum in praesenti, solvendum in futuro; see W.S. Try Ltd. v. Johnson (Inspector of Taxes) [W.S. Try Ltd. v. Johnson (Inspector of Taxes), (1946) 1 All ER 532 at p. 539 (CA)] , All ER at p. 539 and Webb v. Stenton [Webb v. Stenton, (1883) LR 11 QBD 518 at pp. 522 and 527 (CA)] , QBD at pp. 522 and 527. Unless and until there is created in ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r advantage". The word "arise" is defined as "to spring up, to come into existence". The word "receive" is not used in the same sense as "accrue" and "arise" in para 4(1)(iii) of Part B States (Taxation Concession) Order. The words "accrue" and "arise" do not mean actual receipt of the profits or gains. Both these words are used in contradistinction to the word "receive" and indicate a right to receive. In Colquhoun v. Brooks [(1888) 21 QBD 52 at 59] Lord Justice Fry had to construe the expression "profits or gains, arising or accruing" in 16 and 17 Victoria Chapter 34, Section 2, Schedule 'D' and observed in that connection as follows: "In the first place, I would observe that the tax is in respect of 'profits or gains arising or accruing'. I cannot read those words as meaning 'received by'. If the enactment were limited to profits and gains 'received' by the person to be charged, that limitation would apply as much to all Her Majesty's subjects as to foreigners residing in this country. The result would be that no income tax would be payable upon profits which accrued but which were not actually received, although profits might have been earned in the kingdom and mig....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... "some origin or source of growth for the income in question", as opposed to actual receipt. In Rogers Pyatt Shellac & Co. v. Secretary of State for India [[1924] 1 I.T.C. 363, 372.] Mukerji J. said as follows: "... 'accrues' should not be taken as synonymous with 'arises' but in the distinct sense of growing up by way of addition or increase or as an accession or advantage; while the word 'arises' means comes into existence or notice or presents itself. The former connotes the idea of a growth or accumulation and the latter of the growth or accumulation with a tangible shape so as to be receivable.........both the words are used in contradistinction to the word 'receive' and indicate a right to receive. They represent a stage anterior to the point of time when the income becomes receivable and connote a character of the income which is more or less inchoate...." 5. These observations were adopted in V. Ramaswami Naidu v. Commissioner of Income-tax [[1959] 35 I.T.R. 33.] and E.D. Sassoon & Co. Ltd. v. Commissioner of Income-tax [[1954] 26 I.T.R. 27; [1955] 1 S.C.R. 313.]. In the latter case Bhagwati J. said at page 51: "If the assessee acquires a right to....
X X X X Extracts X X X X
X X X X Extracts X X X X
....o adjust it towards the payment of interest on the loan and part of the principal loaned: Paterson [(1924) 9 Tax Cas. 163.]; (5) income from property, though it was paid as maintenance allowance to dependants under a decree of court (without the maintanance being a charge upon the property yielding the income): Sitaldas Tirathdas [[1961] 41 I.T.R. 367; [1961] 3 S.C.R. 634.]; (6) income received by an assessee from property bequeathed to him by its previous owner with a direction to spend for obtaining probate of the will and on his shradh ceremony expenses: P.C. Mullick v. Commissioner of Income-tax [[1938] 6 I.T.R. 206 (P.C.).]; (7) royalty due from a lessee, though the lessee was to retain and apply it towards adjustment of the debt due to him from the assessee: Manager of Katras Encumbered Estate [[1934] 2 I.T.R. 100.] ; (8) profit arising out of a partnership assigned for a certain term to relations under a deed of settlement: K.A. Ramachar v. Commissioner of Income-tax [[1961] 42 I.T.R. 25; [1961] 3 S.C.R. 380.] ; and (9) dividend assigned by the holder of the shares to his wife for the future, while the shares remained in the asses....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... income after accrual and not of diversion before or at accrual. The Corporation's right itself depended upon the assessee's earning the commission. The commission was payable to the assessee but, instead of its being paid to it, was to be retained by the Corporation. So the commission accrued first to the assessee and then it was retained. It was not that the commission did not accrue at all to the assessee. The contract makes it clear that the whole commission at the rate of Rs. 1.75 per cent. was to accrue annually and that the amount to be retained was to come out of it. There is not a word in any of the contracts and the letters to suggest that the amount to be retained was not to accrue at all. If it did not accrue, there could be no question of its being retained or of its being adjusted. If it did not accrue, it remained the money of the Corporation. The commission was to be paid by the Corporation out of its own money; so what was not payable as commission remained its money. If it were said that the disputed amount did not accrue as commission, it would mean that it remained the. Corporation's money, but then it could not be used for discharge of the debt due ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... and liable to be paid as per the instructions of the appellant. The Intra Group Agreement also provisioned for consequences which would ensue in case the Indian subsidiary were to default in payment of those charges by stipulating that in such an event, it would be open to the appellant to suspend the provision of services. Thus, in case the Indian subsidiary were to fail to honor any invoice raised in respect of guarantee charges, it would have been open for the appellant to discontinue the service of extending guarantees. 31. The guarantee charges were thus anchored to the Intra Group Agreement and were indelibly connected with the extension of services by the appellant in India for the benefit of its subsidiaries. The arrangement between the parties was independent of any other legal obligation or liability which the appellants may have taken over or owed to a lending institution. The only parties to this agreement were the appellants and their corresponding Indian subsidiary. The obligation to pay was incurred in India, was in respect of services utilized in India and was agreed to arise with regularity as per the stipulations forming part of the Intra Group Agreement. 3....
X X X X Extracts X X X X
X X X X Extracts X X X X
....me in land or shares, it can purchase securities, it can buy house property, it can also set up another line of business, it may even pay dividends out of this income to its shareholders. There is no overriding title of anybody diverting the income at source to pay the amount to the creditors of the company. It is well settled that tax is attracted at the point when the income is earned. Taxability of income is not dependent upon its destination or the manner of its utilisation. It has to be seen whether at the point of accrual, the amount is of revenue nature. If so, the amount will have to be taxed. (Pondicherry Rly. Co. Ltd. v. CIT [AIR 1931 PC 165 : 1931 All LJ 481 : 58 IA 239] )" 34. As we examine the facts that obtain, we come to the firm conclusion that the guarantee charges were founded principally and solely upon the Intra Group Agreement and consequently the right to receive was also based on that agreement. The ultimate impact of any guarantee extended or any adverse consequence which the appellant may ultimately face or bear would not be determinative of the question of where the income had arisen or accrued. 35. Much emphasis was laid by the appellant on the judg....
X X X X Extracts X X X X
X X X X Extracts X X X X
....' on that debt and 'form' which income should arise to qualify as 'interest'. Thus, two criteria need to be satisfied:- (1) 'provision of capital' and (2) It should be in the form of debt claim. In the present case apparently, AE has not provided any capital to the appellant on which income is earned. It is a corporate guarantee, being a surety to the lender bank of the appellant that, if in a case, in future, the appellant fails to pay the due amount owed to those lenders, the Netherland Company will pay to those lenders. Thus, there was promise to reimburse the amount to those lenders on happening of an event i.e. failure of payments by the appellant of the dues owed to the lenders and lenders invoking the guarantee issued by the Netherlands company in favour of those lenders. Therefore it needs to examine whether there is any provision of capital by the Netherland Company to Indian Company appellant, answer is in negative. Further, there should be a "debt claim and 'form' such claim income should arise to qualify as 'interest'. Thus the word 'debt claim "predicate the existence of debtor-creditor relationship [lender-borrower]. That relationship can ar....