[2017] 88 taxmann.com 127 (Delhi – Trib.)
Johnson Matthey Plc v. DCIT
A.Y.: 2011-12, Dated: 06thDecember,
2017
Facts
The Taxpayer was a company incorporated in,
and resident of, the UK. ICo 1 and ICo 2 were two Indian subsidiary companies
of the Taxpayer. The Taxpayer, inter alia, provided guarantees for
credit facilities provided by foreign banks to ICo1 and ICo 2. The Taxpayer
offered the guarantee fees received from ICo 1 and ICo 2 as ‘Interest’ taxable
at the rate of 15%, under Article 12 of India-UK DTAA.
The AO concluded that the guarantee fee was
‘Other Income’ under Article 23 of India-UK DTAA and accordingly, was subject
to tax at the rate of 40%.
The Taxpayer contended that the guarantee
fee was in the nature of business income and such fee was not taxable in India,
in absence of a PE. The Taxpayer further contended that it offered the fee to
tax as ‘Interest’ out of abundant caution.
Held
– The term “interest” in Article
12(5) of DTAA and section 2(28A) of the Act is to be understood in the context
of the other words and phrases used in the definition. The term “interest”, in
its widest connotation, will indicate the payments made by the receiver of some
amount, pursuant to a loan transaction. Even the expressions “claims of
any kind” or “service fee or other charge” as appearing in the
DTAA or in the Act, are to be understood in relation to the transaction or
contract of loan.
– A payment can be treated as interest only in
the context and privity of loan contract. though no creditor-debtor
relationship may exist. Payments made to strangers cannot be treated as
interest, even where such payments are incidental to a loan.
– The Taxpayer was a stranger to the privity
of loan transactions as the contract of loan was different from the contract of
guarantee.
– Accordingly,
scope of the expressions “debt claims of any kind” or “the
service fee or other charge in respect of moneys borrowed or debt
incurred” cannot be extended to payment of guarantee commission as the
Taxpayer was a stranger to the privity of contract of loan.
– The Taxpayer was manufacturing
technologically advanced chemicals and was not in the business of providing
corporate/bank guarantee to earn guarantee commission. It had provided
guarantee only to secure finance for its subsidiaries and not to earn fee.
Hence, the fee cannot be considered ‘business profit’ under Article 7 of
India-UK DTAA.
– Such fee was neither for rendering any
technical or consultancy service nor for making available any knowledge,
experience, skill know-how or process, nor was it for any development or
transfer of a technical plan or a technical design. Further, it was also not
covered within Explanation to section 9(1)(vii) of the Act. Hence, it could not
not be considered Fee for technical service (FTS).
– Accordingly, guarantee fee was taxable as
‘Other Income’ in terms of Article 23(3) of India-UK DTAA. _
