The Income Tax Appellate Tribunal (ITAT), Delhi bench has held that the guarantee fee paid by the assessee-Company to a Netherland based Company is not taxable as “interest” under the provisions of the Double Taxation Avoidance Agreement (DTAA) between India and Netherlands.
The assessee was aggrieved by the order of the assessing officer disallowing guarantee commission of Rs. 1,19,88,958/-, on account of non-deduction of tax at source therefrom, invoking provisions of section 40(a)(i) of the Income-tax Act, 1961. According to the assessing officer, tax is required to be deducted at source on the above payment under section 195 of The Income Tax Act. He held that the sums were paid by way of an expense to non-resident third parties who had rendered services to the assessee and those payments fall within the purview of section 9 (1) (vii) and therefore are taxable in India as fees for technical services.
The assessee submitted that lease plan Corporation NV is Netherland-based company to whom reimbursement of guarantee charges of ₹ 1 1988958/– has been made. The contention of the assessee was that it is a reimbursement against actual expenses and therefore is not chargeable to tax in India and hence no tax is deductible as the source.
The Tribunal, while considering tax liability of the assessee, held that if the above sum is not chargeable to tax in India as per the provisions of Double Taxation Avoidance Agreement, the assessee is not obliged to deduct tax at source under section 195 of the income tax act and therefore there cannot be any disallowance under section 40 (a) (i) of the income tax act.
“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 a 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 favor of those lenders. Therefore it needs to examine whether there is any provision of capital by the Netherland Company to Indian Company appellant, the answer is 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 arise only when there is a provision of capital. In view of this, we hold that guarantee fee paid by the assessee to Netherlands company, in the above facts, cannot be covered in the definition of interest as per Article 11 of The DTAA,” the Tribunal observed.
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