DAECHANG SEAT CO LIMITED ,KANCHEEPURAM vs. DCIT1(1), CHENNAI

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ITTPA 4/CHNY/2022Status: DisposedITAT Chennai07 June 20248 pages
AI SummaryAllowed

What did the Tribunal hold?

The Tribunal held that the issue of taxability of guarantee fees received from its Indian subsidiaries was squarely covered by a previous decision of a Coordinate Bench of the Tribunal in the assessee's own case for Assessment Years 2014-15 and 2015-16. In that prior decision, the Tribunal had held that the guarantee fee is not taxable in the hands of the assessee. The reasoning in the prior order was that by virtue of Article 23 of the Indo-Korea DTAA, 'other income' is taxable only in the contracting state, which in this case is Korea, not India. Therefore, taxability under the Income Tax Act was not desirable. The Tribunal deleted the addition of guarantee fees amounting to Rs 5,78,12,677 and allowed the appeal. The operative direction was the deletion of the addition.

What were the facts?

The assessee, Daechang Seat Co. Ltd., filed an appeal against the Assessment Order dated 20.01.2022 for Assessment Year 2018-19. This order was passed consequent to directions from the Dispute Resolution Panel (DRP). The assessee received guarantee fees amounting to INR 57,812,677 from its Indian subsidiaries, Daechang India Seat Pvt. Ltd. and K.M. Seat Company Private Limited. These fees were for corporate guarantees provided to banks for loans availed by the subsidiaries. The Assessing Officer (AO) and DRP held that the situs of the guarantee issue and the loan was in India, making the guarantee fees taxable in India. The assessee contended that the guarantee was given outside India to banks outside India.

What were the issues?

1. Whether the guarantee fees received by the assessee are liable to tax in India, considering the provisions of Sections 5 and 9 of the Income Tax Act, 1961, and Article 22 ('Other Income') of the Double Taxation Avoidance Agreement (DTAA) between the Republic of Korea and India. Assessee's Contention: The AO/DRP erred in holding that the situs of the guarantee issue is in India. The guarantee was given by the appellant outside India to banks outside India. Further, the guarantee fees arise only in Korea (contracting state) as per Article 22 of the Indo-Korea DTAA and are thus not taxable in India. Revenue's Contention: The revenue relied on the orders of the learned AO and DRP, which held that the loan transaction took place in India, and therefore, the related income from guarantee fees also accrued in India.

Which sections of the Income-tax Act were involved?

Section 143(3),Section 144C(13),Section 5,Section 9

AI-generated summary — verify with the full judgment below

Income Tax Appellate Tribunal, ‘D’ BENCH: CHENNAI

Before: SHRI SS VISWANETHRA RAVI & SHRI JAGADISH

Hearing: 22.05.2024Pronounced: 07.06.2024

PER JAGADISH, A.M : This appeal is filed by the assessee against the Assessment Order dated 20.01.2022 passed u/s.143(3) r.w.s.144C(13) of the Income Tax Act, 1961 (hereinafter “the Act”) relevant to the Assessment Year 2018-19 consequent to the directions of the Dispute Resolution Panel [DRP], Bangalore dated 20.12.2021 u/s.143(3) r.w.s.144C of the Act.

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2.

The only issue in this appeal of assessee is as regards to whether the guarantee fees received by the assessee are liable to tax

in India. The assessee has raised following grounds:

“The Appellant Company submits that the below grounds are independent and without prejudice to one another.

1.

Addition of guarantee fees received from Daechang India Seat Private Limited and K.M. Seat Company Private Limited (Indian subsidiaries')

1.

1 The learned Assessing officer (AO) / Dispute Resolution Panel (DRP) has failed to appreciate the facts of the case and has erroneously concluded that the guarantee fees received by the Appellant amounting to INR 57,812,677 was liable to tax in India at the rate of 40 percent plus applicable surcharge and cess.

1.

2 The Ld. AO and DRP erred on facts and in law in holding that the situs of issue of guarantee in respect of loans availed by Indian subsidiaries is in India and therefore, guarantee fees was considered as income in India in terms of section 5 and 9 of the Income Tax Act, 1961 (the Act') without appreciating the fact that the guarantee was given by the Appellant outside India and the guarantee was given to banks outside India.

1.

3 Without prejudice to the above, the Ld. AO and DRP erred on facts and failed to appreciate that the guarantee fees received by Appellant arises only in Korea (contracting state) in terms of Article 22 'Other Income' of Double Taxation Avoidance Agreement (DTAA)) between Republic of Korea and India and hence, the same is not taxable in India.

1.

4 Having regards to the facts and circumstances of the case and the provisions of law, the Appellant submits the taxation of guarantee fees is erroneous and the addition requires to bedeleted.”

3.

The brief facts of the case are that the assessee-company has received a sum of Rs. 5,78,12,677/- as guarantee fee from Daechang

India Seat Pvt. Ltd. (DISPL) and KM Seat India Pvt. Ltd. (KMSIPL)

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during the relevant A.Y 2018-19. The assessee-company entered into a corporate guarantee agreement with certain banks for providing

guarantee for loans granted by bank to its group companies across

various countries. In terms of corporate guarantee agreement, the assessee received guarantee fee from the above two group

companies. The AO noted that the foreign banks extended loan facility

to its two subsidiaries, which are resident companies of India and in term of that received loans from foreign banks and the loan availed in India. The AO noted that the guarantee fee received by the assessee

from Indian subsidiaries is accrued and arose in India. Hence, he

proposed to make assessment of the above said guarantee fee.

Aggrieved the same, the assessee moved to DRP, the DRP rejected

the assessee’s objection and held that loan transaction took place in India, the related income from guarantee fee also accrued in India and directed the A.O to pass the order accordingly.

4.

The Ld. A.R submitted that the assessee’s case is squarely

covered by the decision of Coordinate Bench of this Tribunal in the case of Daechang Seat Co. Ltd. Vs. DCIT in ITA No.1643/Chny/2019

& IT(TP)A No.101/Chny/2018 dated 05.07.2023 for AYs 2014-15 &

2015-16 in favour of the assessee on exactly identical transaction.

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5.

The Ld. Departmental Representative fairly agreed that the identical issue involved in assessee’s appeal is squarely covered in assessee’s own case for A.Ys 2014-15 and 2015-16 , and relied on the orders the learned AO and DRP.

6.

We have heard the rival contentions, perused the materials

available on record. The issue of taxability of guarantee fee received

from DISPL and KMSIPL in assesse’s case arose in A.Y 2015-16 and the coordinate Bench vide order dated 05.07.2023 in ITA No 1643/CHNY/2019 and IT(TP) A No 101/CHNY/2018 has held that guarantee fee is not taxable in the hand of assessee. The relevant

extract of order is as under:

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 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.

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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 Coordinate Bench of ITAT, Mumbai in the case of M/s. Draegerwerk AG & Co. KGAA, 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 vs. DCIT (International Taxation) in ITA No.6323/Mum/2016, dated 09.01.2017, wherein the Tribunal considering another decision of the same assessee for AY 2012-13, in ITA No.888/MUM/2016, order dated 13.07.2016 and further following AY 2009-10 in ITA No.7198/MUM/2012, order dated 28.03.2016 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 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 :- 6 -:

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 :- 7 -:

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 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.”

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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.”

7.

Since the facts are identical and the issue is squarely covered by the order of Co-ordinate Bench of this Tribunal, supra, respectfully following the order of the Co-ordinate Bench ,we delete the addition of guarantee fee of Rs 5,78,12,677/- made by AO and allow the appeal of assessee .

8.

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

Order pronounced on 07th June, 2024. (जगदीश) (यस यस िव"ने" रिव) (Jagadish) (SS Viswanethra Ravi) लेखा सद"य लेखा सद"य /Accountant Member लेखा लेखा सद"य सद"य सद"य / Judicial Member "याियक सद"य "याियक "याियक "याियक सद"य सद"य चे"ई/Chennai, "दनांक/Dated: 07th June, 2024. EDN/-

आदेश क" "ितिलिप अ"ेिषत/Copy to: 1. अपीलाथ"/Appellant

2.

""थ"/Respondent 3. आयकर आयु"/CIT, Chennai/Madurai/Coimbatore/Salem 4. िवभागीय "ितिनिध/DR 5. गाड" फाईल/GF

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