KIA CORPORATION,ANANTAPUR vs. THE ASSISTANT COMMISSIONER OF INCOME-TAX, INTERNATIONAL TAXATION 1(2), BANGALORE, BANGALORE

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ITITA 644/BANG/2025Status: DisposedITAT Bangalore30 June 2025AY 2022-239 pages

In favour of the assessee: the assessee's appeal was allowed. From the AI summary of this appeal.

AI SummaryAllowed

What did the Tribunal hold?

The Tribunal held that the guarantee fees received by the assessee, a resident of South Korea, are not taxable in India. The Tribunal reasoned that the income in question does not fall under Articles 6 (immovable property), 7 (business profits), or 11 (interest) of the India-Korea DTAA. As these specific articles were not applicable, the residual clause of Article 22 ('Other Income') squarely applied. Since the assessee is a resident of South Korea, the income is taxable only in Korea as per Article 22 of the treaty. The Tribunal distinguished the reliance placed by the revenue on the Johnson Matthey Public Ltd. case, noting that the India-UK DTAA had a differently worded Article 23, whereas the India-Korea DTAA's Article 22 provides for exclusive taxation in the state of residence unless otherwise covered. Consequently, the addition made by the AO was deleted, and the appeal of the assessee was allowed. The stay petition was dismissed as infructuous.

What were the facts?

The assessee, KIA Corporation, a South Korean resident, received guarantee fees amounting to ₹ 9,74,81,953 from its Indian subsidiary, KIA India Private Limited. The subsidiary had obtained a loan from a bank, for which the assessee provided a corporate guarantee. The assessee did not offer this income to tax in India. The Assessing Officer (AO) held that the guarantee fees were taxable in India under sections 5(2) and 9(1)(i) of the Income-tax Act, 1961, as they accrued or arose in India due to the subsidiary's loan utilization in India. The AO also rejected the applicability of Article 22 of the India-Korea Double Taxation Avoidance Agreement (DTAA). The Dispute Resolution Panel (DRP) upheld the AO's order. The assessee appealed to the Income Tax Appellate Tribunal (ITAT).

What were the issues?

1. Whether the guarantee fees amounting to ₹ 9,74,81,953 paid by the Indian subsidiary to the South Korean holding company are taxable in India, considering the provisions of the Income-tax Act, 1961, and the India-Korea Double Taxation Avoidance Agreement (DTAA)? Assessee's contention: The income is not taxable in India as it falls under Article 22 ('Other Income') of the India-Korea DTAA, which allows taxation only in the state of residence (Korea). The AO admitted that the income is neither business profit nor interest income, making Articles 6, 7, and 11 of the treaty inapplicable. Revenue's contention: The revenue vehemently supported the order of the AO and DRP, arguing that the guarantee fees are taxable in India. The revenue relied on the judgment of the Hon'ble Delhi High Court in the case of Johnson Matthey Public Ltd. Vs CIT.

Which sections of the Income-tax Act were involved?

Section 5(2),Section 9(1)(i)

AI-generated summary — verify with the full judgment below

Income Tax Appellate Tribunal, ‘C’ BENCH: BANGALORE

Before: SHRI WASEEM AHMED & SHRI PRAKASH CHAND YADAV

For Appellant: Shri Sharath Rao & Smt. Vaidhehi G, AR
For Respondent: Shri Vilas V Shinde, CIT(DR)
Hearing: 04.06.2025Pronounced: 30.06.2025

PER WASEEM AHMED, ACCOUNTANT MEMBER:

This is an appeal filed by the assessee against the order passed by the AO dated 22/01/2025 in DIN No. ITBA/AST/S/143(3)/2024- 25/1072439028(1) for the assessment year 2022-23. The assessee has also filed Stay Application.

2.

The only issue raised by the assessee is that the AO/learned DRP erred in holding that the guarantee fees amounting to ₹ 9,74,81,953 paid by the subsidiary company based in India is subject to tax in India.

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3.

The necessary facts as culminated from the order of the authorities below are that the assessee in the present case is registered in South Korea and has a subsidiary company in India with the name KIA India Private Limited. The subsidiary company was provided a corporate guarantee by the assessee, being the holding company, in order to obtain a loan from the bank. The assessee was given a guarantee fee by the subsidiary company on account of guarantee provided by it, which was not offered by the assessee to tax in the return of income filed by it. On questioning by the AO, the assessee responded that the impugned income by way of guarantee fees falls under the head "Other Income" as per Article 22 of the India-Korea Double Taxation Avoidance Agreement (DTAA). As per such article, the income in the form of guarantee fees is taxable in the state of the contracting state, being Korea in the present case.

4.

However, the AO was not satisfied with the contention of the assessee on the reasoning that the guarantee fee was given by the subsidiary company to the assessee in connection with the loan availed by the subsidiary company, which was utilized in India, and therefore, the impugned guarantee fee is accruing/arising in India in terms of the provisions of section 5(2) and 9(1)(i) of the Act. Similarly, the AO also held that the provisions of Article 22 of the treaty between India and Korea relating to "Other Income" do not support the claim of the assessee. Accordingly, the AO treated the guarantee fee as taxable in India and added it to the total income of the assessee.

5.

Aggrieved, the assessee raised objections before the learned DRP, which upheld the finding of the AO.

.

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6.

Being aggrieved by the order of the AO/learned DRP, the assessee is in appeal before us.

7.

The learned AR before us filed a paper book running from pages 1 to 202 and a case law compilation running from pages 203 to 310 and contended that the impugned income in dispute is not taxable in India in view of Article 22 of the treaty between India and Korea. It was also pointed out by the learned AR that the AO in his order has categorically admitted that the income in dispute is neither the business profit of the assessee nor the interest income of the assessee, and therefore, Articles 6, 7 and 11 of the treaty are not applicable to the case on hand.

8.

On the other hand, the learned DR vehemently supported the order of the authorities below.

9.

We have heard the rival contentions of both the parties and perused the materials available on record. From the preceding discussion, we note that the assessee is a company incorporated in South Korea. It provided a corporate guarantee to its Indian subsidiary, KIA India Pvt. Ltd., enabling the later to obtain a loan from a bank. For this, the assessee received a guarantee fee from the Indian subsidiary, which it claimed to be non-taxable in India under Article 22 of the India- Korea Double Taxation Avoidance Agreement (DTAA). The AO, however, treated the same as taxable income under section 5(2) and section 9(1)(i) of the Income-tax Act, 1961, rejecting the applicability of Article 22 of the DTAA.

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9.1 At this juncture, we find pertinent referring to the relevant clause of Article 22 (Other Income) of the India-Korea DTAA which reads as under:

“Items of income of a resident of a Contracting State, wherever arising, not dealt with in the foregoing Articles of this Convention shall be taxable only in that State.”

9.2 It is an accepted fact that the income received by the assessee in the form of guarantee fees does not fall under Articles 6 (immovable property), 7 (business profits), or 11 (interest). The AO has not brought any material on record to establish that the transaction constitutes business profits or interest income. As such the AO has admitted the possession discussed immediately above.

9.3 Accordingly, the residual clause of Article 22 squarely applies. Since the assessee is a resident of South Korea and the income in question does not fall under any specific Article dealt with earlier in the treaty, it shall be taxable only in Korea as per Article 22 of the treaty.

9.4 This interpretation is fortified by the decision of the ITAT in the case of Daechang Seat Co. Ltd. Vs DCIT reported at 152 Taxmann.com 163 (Para 17), where it was held:

17.

We have heard rival contentions and gone through facts and circumstances of the case. We noted that the assessee is a foreign company incorporated in Korea which is engaged in the manufacture of automobile and auto parts. During financial year 2014-15 relevant to assessment year 2015-16, the assessee entered into guarantee agreement with its subsidiaries DISPL and KMSIPL to provide guarantees to foreign banks namely Standard Chartered Bank to provide loan to above subsidiary companies. Pursuant to guarantee agreements, the assessee received a sum of Rs. 5,22,88,362/- from its

.

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subsidiaries after deducting TDS @ 10%. We noted that the Assessing Officer in his draft assessment order passed on 29-12-2017 treated the guarantee fee as 'other income' by observing as under:- "The Guarantee agreement is entered into for the limited purpose of enabling its subsidiaries to secure loans and the guarantee income is incidental in nature, since the assessee was not in the business of providing corporate/bank guarantee to earn income on a regular basis. Accordingly, the guarantee fee cannot be treated as business income which, in the absence of a permanent establishment in India is not taxable in India under Article 7 of the Treaty. As a result, the guarantee fee falls under Article 22 "Other Income" of India and Republic of Korea Treaty and fully taxable in India. Therefore the Guarantee fee received Rs. 5,22,88,362/- is added back to total income for the relevant AY 2015-16" Similarly, when the matter was carried by assessee before DRP, the DRP also confirmed the position taken by the Assessing Officer and noted that the position taken by the Assessing Officer to tax the income from other sources as normal income of the foreign company is upheld and to be taxed accordingly. It means that the DRP treated the guarantee fee as income from other sources. This direction of the DRP was complied by the Assessing Officer and further noted that the guarantee fee is not in the nature of business income since the assessee company was predominantly engaged in the manufacturing business and not in the business of providing corporate/bank guarantee to earn income on regular basis. Hence, according to Assessing Officer the guarantee agreement is entered into for limited purpose for enabling its subsidiaries to secure loans and the guarantee income is incidental in nature, since the assessee was not in the business of providing corporate/bank guarantee to earn income on regular basis. Hence, the Assessing Officer held that the guarantee fee received from Indian Subsidiaries namely DISPL and KMSIPL has accrued and arised in India as income from other sources. We noted that this is a clear cut case of applicability of DTAA of Indo-Korea, whereby by virtue of Article 23, the other income has to be taxed in the contracting state i.e., Korea and not India. We also noted that reliance placed by ld. CIT-DR on the decision of Johnson Matthey Public Ltd., supra relates to Indo-UK Treaties and this has been distinguished by Co-ordinate Bench of ITAT, Mumbai in the case of Draegerwerk AG & Co. KGAA (supra), wherein while dealing with Indo-German Treaty it has clearly distinguished the decision cited by ld. CIT-DR. We noted that this issue has been considered by Co-ordinate Bench of Mumbai in the case of Capgemini SA v. DCIT (International Taxation) in [IT Appeal No. 6323 (Mum) of 2016, dated 9-1-2017], wherein the Tribunal considering another decision of the same assessee for Capgemini SA v. Dy. CIT (International Taxation) [2016] 72 taxmann.com 58/160 ITD 13 (Mum.) AY 2012-13, in [ITA No. 888/MUM/2016, order dated 13-7-2016] and further following AY 2009-10 in Capgemini SA (supra) held that the guarantee commission received by French Company in that case neither accrued in India nor deemed to be accrued in India and therefore, not taxable in India under the Act. For this, the Tribunal observed in para 2.4 as under:- "2.4 If the observation made in the assessment order, leading to addition made to the total income, conclusion drawn in the impugned order, material available on record, assertions made by the ld. representative counsels, if kept in juxtaposition and analyzed, broadly, the ld.DRP has followed its own order, in

.

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the case of assessee, for Assessment Year 2012-13 on the resons that the Tribunal has not still overrules the order of the ld.DRP and further the guarantee is normally sought at the instance of the guarantee seeker and not at the instance of guarantor. However, under the facts available before us, we find that for Assessment Year 2012-13, the Tribunal vide its order dated 13/07/2016 (ITA No. 888/Mum/2016), by following the order of the Tribunal, in the case of assessee itself, for Assessment Year 2009-10 (ITA No. 7198/Mum/2012) dated 28/03/2016, decided the issue in favour of the assessee. The relevant portion from the order of the Tribunal is reproduced hereunder for ready reference:- 3. Insofar as Ground of appeal nos. 1 to 4 are concerned, they relate to a single issue arising from the action of income-tax authorities in holding that guarantee commission earned by the assessee amounting to Rs. 33,40,347/- was liable to tax in India. 4. In this context, the relevant facts are that the appellant is a foreign company incorporated in France and is a tax resident of France. It is engaged in the business of providing various support, sustenance and developmental service to Capgemini Group companies across the world. During the year under consideration, assessee-company had earned royalty from two of its associate concerns in India, viz., Capgemini India Pvt. Ltd and Capgemini Business Services India Pvt. Ltd. In the return of income filed by the assessee for the assessment year under consideration it declared an income of Rs. 9,52,52,240/- on account of such royalty income. In the course of assessment proceedings, the Assessing Officer noticed that assessee had received guarantee commission of Rs. 33,40,347/-from the two associate Indian concerns in return for assessee having extended corporate guarantee to BNP Paribas, France for the credit facilities extended by BNP Paribas, France to the associate concerns in India. Before the Assessing Officer the plea of the assessee was that such guarantee commission was not chargeable to tax in India either under the domestic law or even in terms of Double Taxation Avoidance Agreement (DTAA) between India and France. The pertinent point made out by the assessee was that no service was rendered by the assessee, much less a professional/Technical service, and in any case, no service can be said to have been rendered in India. The plea of the assessee did not find favour even with the DRP and accordingly, the Assessing Officer held the guarantee commission of Rs. 33,40,347/- as taxable. 5. At the time of hearing, the learned representative for the assessee pointed out that an identical controversy was considered by the Mumbai Bench of the Tribunal in the assessee's own case for Assessment Year 2009-10 vide ITA No. 7198/Mum/2012 dated 28-3-2016. The relevant discussion in the order of the Tribunal dated 28-3-2016 (supra) reads as under :- "3. Rival contentions have been heard and record perused. Facts in brief are that the assessee is a resident of France and does not have a permanent establishment in India. During the year assessee has given a corporate guarantee BNP Paribas, a French Bank in France, on behalf of its various subsidiaries worldwide. During the year under consideration, in India, two subsidiaries of the assessee M/s.Capgemini India Pvt. Ltd. and Capgemini Business Services (India) Ltd. were sanctioned credit facilities by the Indian Branches of BNP Paribas, which credit facilities to the extent of USD 15 million4and 2 million respectively, were secured by the said corporate

.

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guarantee given by the assessee. The assessee has charged guarantee commission @ 0.5% per annum for the corporate guarantees given on behalf of its subsidiaries in India. The AO has taxed the same by holding it to be "Other Income" under Article 23 of the DTAA between India and France. 4. The assessee is before us against the said addition. 5. We have considered rival contentions and found that the AO taxed the guarantee commission on the plea that guarantee has been provided for the purpose of raising finance by an India company. As per the AO finance was raised in India. The AO further observed that finance requirement is met by a Indian branch of the bank, the benefits of guarantee are shared by the Indian entity with the assessee by making a compensatory payment. Accordingly the AO held that fees for guarantee arise in India. From the record we found that guarantee commission received by France company did not accrue in India nor it can be deemed to be accrued in India, therefore, not taxable in India under Income-tax Act. Furthermore, as per Article 23.3, income can be taxed in India, only if it arises in India. In the instant case, the income clearly arises in France because the guarantee has been given by the assessee, a French company to BNP Paribas, a French Bank, in France and, therefore, Article 23.3 has no applicability as income does not arise in India." 6. Before us, it was a common point between the parties that the facts and circumstances of the dispute in the instant year are similar to those considered by the Tribunal in Assessment Year 2009-10 (supra). It was also a common point between the parties that decision of the Tribunal dated 28-3-2016 (supra) continues to hold the field and, therefore, following the aforesaid precedent, in the instant year also the guarantee commission of Rs. 33,40,347/- earned by the assessee from the two associate Indian concerns cannot be held to be taxable in India. As a consequence, on this aspect, the assessee succeeds. In the light of the foregoing order, the one of the reason that the order for Assessment Year 2012-13 of Ld.DRP has not been reversed by Tribunal, no more survives. The Tribunal in order dated 28/03/2016 for Assessment Year 2009-10 (ITA No. 7198/Mum/2012) found that guarantee commission, received by France Company neither accrued in India nor deemed to be accrued in India, therefore, not taxable in India under the Income-tax Act. Furthermore, as per Article-23.3, income can be taxed in India only if arises in India and since, in the instant case, the income arose in France, as the guarantee was given by the assessee, a French company to BNP Paribas, a French Bank, in France, therefore, Article-23.3 has no applicability as income arose out of India. Respectfully, following the decisions of the Tribunal, these grounds of the assessee are allowed." 17.1 In view of the above and following Article 23 of Indo-Korea DTAA which specifically provides that taxability of 'other income' is only in the contracting state and in the present case, the contracting state is Korea and not India, hence taxability under the Income-tax Act is not at all desirable. Hence, we delete the addition and allow this appeal of assessee on this very issue. The appeal of the assessee is allowed.

9.5 The situation in the present case is analogous and warrants similar treatment as discussed above. Moving further, we note that the

.

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Revenue has placed reliance on the judgment of the Hon’ble Delhi High Court in the case of Johnson Matthey Public Ltd. Vs CIT reported at 162 Taxmann.com 865, which held that guarantee fees were taxable in India under the India-UK DTAA. However, the facts of the said case are distinguishable: • The relevant treaty in that case (India-UK DTAA) contains a differently worded Article 23 (Other Income), which specifically provides for taxation in the source country under certain conditions.

• In contrast, the India-Korea DTAA, under Article 22, provides for exclusive taxation in the state of residence unless otherwise covered under prior Articles — which is not the case here.

9.6 Therefore, the ratio of the Hon’ble Delhi High Court decision does not apply to the facts of the present case. In view of the above, we hold that the guarantee fees received by the assessee, a resident of South Korea, is covered under Article 22 of the India-Korea DTAA and is not taxable in India. Hence, the addition made by the AO is liable to be deleted.

10.

In the result, the appeal filed by the assessee is allowed.

SA No. 41/Bang/2025

11.

Since, the main appeal of the assessee has been disposed off favouring assessee, the stay petition is not required to be dealt with. As such, the stay petition filed by the assessee is dismissed as infructuous.

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12.

In the result, the stay petition filed by the assessee is dismissed as infructuous.

13.

In the combined results, the appeal filed by the assessee is allowed whereas stay petition filed by the assessee is dismissed as infructuous.

Order pronounced in court on 30th day of June, 2025

Sd/- Sd/- (PRAKASH CHAND YADAV) (WASEEM AHMED) Judicial Member Accountant Member Bangalore Dated, 30th June, 2025 / vms / Copy to: 1. The Applicant 2. The Respondent 3. The CIT 4. The CIT(A) 5. The DR, ITAT, Bangalore. 6. Guard file By order Asst. Registrar, ITAT, Bangalore

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