Guarantee Commission is not Taxable in India under India Germany DTAA: ITAT directs AO to delete Transfer Pricing Adjustment [Read Order]

The Income Tax Appellate Tribunal (ITAT), Mumbai Bench directed Assessing Officer (AO) to delete transfer pricing adjustment and held that Guarantee commission is not taxable in India as per India Germany Double Taxation Avoidance Agreement (DTAA).

The assessee, M/s. Draegerwerk AG & Co is a German-based provider of medical technology. It develops, produces and markets system solutions, equipment and services for the optimization of processes at the acute point of care. During the year under consideration, the assessee has supplied equipment and rendered certain services, the activities of which were carried out outside India.

In addition, the assessee has provided corporate guarantee for a working capital term loan availed by its AE, Draeger India Private Limited ('DIPL), from HSBC bank. The said guarantee is continuing in nature and the assessee has not charged its AE any fee/ commission during the year in this regard.

During the transfer pricing assessment proceedings, the TPO concluded that the corporate guarantee provided by the assessee to HSBC Bank, for the loan availed by DIPL, is an international transaction. The TPO concluded that commission from such corporate guarantee would be taxable in India in the hands of the assessee under Article 21 of India Germany DTAA.

The decision relied by the TPO on Delhi Tribunal in the case of Johnson Matthey Public Limited is factually distinguishable as it pertains to India UK DTAA wherein under Article 23, it specifically provided for taxability of other income in source state i.e. India. Whereas under India-Germany DTAA, Article 21 provides for taxability of other income only in Germany and not in India.

A Bench consisting of M Balaganesh, Accountant Member and Kavitha Rajagopal, Judicial Member observed that “We find that the AO in final assessment order had held that objections raised by the assessee before the DRP were rejected and accordingly, added the transfer pricing adjustment made on account of guarantee commission of Rs 1 crore. This action of the AO is merely erroneous.”

To Read the full text of the Order CLICK HERE

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