By Dhishat B. Mehta | Bhaumik Goda
Chartered Accountants
14. [2020] 117
taxmann.com 343 (Delhi-Trib.) Lease Plan India
(P) Ltd. vs. DCIT ITA Nos. 6461 &
6462/Del/2015 A.Ys.: 2009-10
& 2010-11 Date of order: 15th June, 2020
Articles 11, 12 of
India-Netherlands DTAA; section 9 of the Act – Guarantee charges paid by Indian
company to non-resident AE were not: ‘interest’ under Article 11 as there was
no debt and income was not ‘from debt-claim’; FTS under Article 12(5) as
although provision of guarantee was a financial service, it was not consultancy
service contemplated in Article 12(5)
FACTS
The assessee was
engaged in the business of leasing motor vehicles, financial services and fleet
management. It intended to borrow funds for its business from banks in India.
It had an AE in Netherlands (Dutch Co) with which it entered into an agreement
for provision of guarantee to banks in India. On the strength of such
guarantee, banks lent funds to the assessee. As per the agreement, the assessee
paid guarantee charges to Dutch Co.
Before the A.O.,
the assessee contended that the payment being reimbursement of actual expenses,
it was not chargeable to tax in India and hence the tax was not deductible. The
A.O. concluded that since payment was made to a non-resident for rendering
services, it was covered u/s 9(1)(vii) as FTS. As the assessee had not deducted
tax, the A.O. invoked section 40(a)(i) and disallowed the entire amount.
In appeal, the
CIT(A) confirmed the order.
HELD
Whether
guarantee charges interest?
- It was undisputed
that guarantee charges paid by the assessee to Dutch Co were chargeable to tax
in India. However, it was to be examined whether it was in the nature of
‘interest’ in terms of Article 11 of the India-Netherlands DTAA.
- 2Any
income can be characterised as ‘interest’ if it is ‘from debt-claim’.
Thus, two criteria are required to be satisfied. First, capital in the form of
debt (which can be claimed) should have been provided. This predicates the
existence of a debtor-creditor (or lender-borrower) relationship. Second,
income should be from such debt.
- In this case,
Dutch Co had promised the lenders to pay the amount of loan if the assessee
failed to do so. The assessee paid guarantee charges in consideration for that.
As Dutch Co had not provided any capital to the assessee, there was neither
lender-borrower relationship, nor did Dutch Co earn any income from the debt
claim.
- Accordingly,
guarantee charges paid by the assessee to Dutch Co were not in the nature of
‘interest’ in terms of Article 11 of the India-Netherlands DTAA.
- This view is also
supported by the decision in Container Corporation vs. Commissioner of
Internal Revenue of US Tax Court Report [134 T.C. 122 (U.S.T.C. 2010) 134 T.C.
5] wherein the Court held that guarantee is more analogous to service
and hence guarantee fee cannot be considered as interest.
2 Tribunal
noted that though another Bench had set aside orders for A.Ys. 2007-08 to
2009-10 for considering additional evidence submitted by the assessee, that
option was not open to it because for the years under consideration, CIT(A) had
decided after considering all the documents
Whether
guarantee charges FTS?
- Article 12(5) of
the India-Netherlands DTAA defines FTS as payment of any kind to any person in
consideration for the rendering of any technical or consultancy services
(including through the provision of services of technical or other personnel).
Article 12(5) further stipulates that such services should either be ancillary
to grant of license for intellectual property rights (IPRs) or should make
available technical knowledge, etc.
- The provision of
guarantee was a service. Indeed, it was a financial service. However, there was
no way it could be termed ‘consultancy service’. Even otherwise, Dutch Co had
neither provided services which were ancillary to grant of license for IPRs nor
had it ‘made available’ technical knowledge, etc. Hence, payment for such
services was not FTS.
- Since Dutch Co did not have any PE in India,
in terms of Article 7 of the India-Netherlands DTAA, payments were not
chargeable to tax in India.
