This tax alert summarizes the recent ruling given by Income Tax Appellate Tribunal, Delhi branch, which rules that TDS u/s. 195 is not applicable on payment of corporate guarantee fees by assessee [an Indian Co.] to its Dutch holding co. [AE] during AYs 2009-10 & 2010-11 and held that guarantee fee neither partakes the nature of interest under Article 11 of the India-Netherlands DTAA nor Fees for Technical Services (FTS) under Article 12  of the DTAA. states that in absence of PE, even taxability under Article 7 cannot be invoked, thus deletes disallowance u/s. 40(a)(i).

Background and facts of the case: –

Lease Plan India Pvt. Ltd. (assessee) is a company engaged in the business of leasing of motor vehicles, financial services, and fleet management. It filed its return of income for AY 2009-10 on 30/9/2009 at ₹ 86,71,804/-. During assessment proceedings, AO noted that assessee has paid guarantee charges to its associated enterprise based in Netherland and in tax audit report same is disallowed for non-deduction of tax at source. AO held that tax was required to be deducted at source on the above payment under section 195 of The Income Tax Act. CIT(A) confirmed the disallowance made by the AO.

Aggrieved assessee filed an appeal before Delhi ITAT.

Issues before the Tribunal: –

• whether the Guarantee Fee paid by assessee to its AE in Netherlands can be considered as “interest” in terms of Article 11 of the DTAA.
• whether such guarantee fee can be Fees for technical services (FTS) within compass of Article 12 (5) of the DTAA.
• Whether Article 7 of DTAA can be invoked, and disallowance u/s. 40(a)(i) is justified or not.

The Tribunal’s findings and contentions: –

ITAT observes that “There is no dispute between the parties that the sum is chargeable to tax as per the domestic law. It is not also in dispute that the recipient of the income is entitled to invoke the provisions of Double Taxation Avoidance Agreement.”

ITAT further explained that “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 favor of those lenders.” ITAT held that guarantee fee paid by the assessee to Netherlands company, cannot be covered in the definition of interest as per Article 11 of the DTAA.

ITAT relied on the decision of the Container Corporation Versus Commissioner of Internal Revenue of United States Tax Court Report, and held that in absence of provision of capital and any debt claim between the parties the impugned guarantee fees paid by the appellant to the Netherlands based company cannot be held to be “interest” in terms of Article 11 of the DTAA.

ITAT held that “Looking at the nature of “Service‟ provided by the Netherlands company in providing guarantee, it is a financial service and can by no stretch of imagination is called a “Consultancy services”.” ITAT held that provision of Guarantee fees service is not fees for Technical services under article 12 of the DTAA.

ITAT further agreed that Guarantee Fees is not chargeable to tax under Article 7 in absence of any PE of the Netherlands company and Article 7 cannot be invoked in absence of PE.

ITAT referred to the co-ordinate bench ruling in In the case of Johnson Matthey Public Ltd. Company v. Deputy Commissioner of Income-tax (International Taxation), wherein it was held that Guarantee fess commission paid by the assessee is not interest, nor Fees for technical services and also not business income ultimately held it to be chargeable in terms of Article 23- “Other income.”

Thus, ITAT allowed assessee’s appeal and deleted Sec. 40(a)(i) disallowance.

Ruling of the case: –

Thus, Delhi ITAT rejects treatment of the amount as interest, Article 11 of the India-Netherlands DTAA nor Fees for Technical Services [FTS] under Article 12 of the DTAA and Article 7 of the DTAA cannot be invoked.

[TS-282-ITAT-2020(DEL)]