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Income Tax Appellate Tribunal, DELHI ‘D’ BENCH,
Before: SHRI VIKAS AWASTHY & SHRI NAVEEN CHANDRA
PER NAVEEN CHANDRA, ACCOUNTANT MEMBER:-
1. This appeal by the assessee is preferred against the order of the ld. CIT(A)-43, New Delhi dated 30.04.2019 pertaining to A.Y 2014-15.
[A.Y 2014-15] M/s Mitsui & Company Ltd 2. The grievances raised by the assessee read as under:
“1. On the facts and circumstances of the case, the order passed by the learned Commissioner of Income Tax (Appeals) [CIT(A)] is bad, both in the eyes of law as well as on facts. 2 (i) On the facts and circumstances of the case, the Ld. CIT(A) has erred both on facts and in law in holding that guarantee commission of Rs. 1,20,95,809/- received by the assessee is liable to tax in India. (ii) That the Ld. CIT(A) has erred in holding that income on account of providing corporate guarantee was taxable in India under Article 22 of the Double Taxation Avoidance Agreement (DTAA) between India and Japan. (iii) That the above said addition has been confirmed despite the fact that guarantee commission received by the assessee did not accrue in India nor it can be deemed to be accrued in India, therefore, not taxable in India under Income Tax Act.
3. Without prejudice to the above, the Ld. CIT(A) erred in applying tax rate at the rate of 40% on the amount of guarantee commission instead of 10% which was applied by the Ld. AO. 4. (i) On the facts and circumstances of the case, the learned CIT(A) has erred in confirming the addition of Rs. 5,94,71,205/- made by the AO on account of Network Maintenance Service Fees. (ii) That the above said addition has been confirmed despite the fact that the said income is not taxable in the hands of the assessee.
Page 2 of 15 [A.Y 2014-15] M/s Mitsui & Company Ltd 5(i) On the facts and circumstances of the case, the learned CIT(A) has erred in confirming the addition of Rs. 20,06,892/- made by the AO on account of Interest Income. (ii) That the above said addition has been confirmed despite the fact that the said income is not taxable in the hands of the assessee. 6(i) On the facts and circumstances of the case, the learned CIT(A) has erred in confirming the addition of Rs. 96,69,835/- made by the AO on account of Professional fees. (ii) That the above said addition has been confirmed despite the fact that the said income is not taxable in the hands of the assessee 7. That the appellant craves leave to add, amend or alter any of the grounds of appeal.”
3. Ground No. 1 is general in nature.
4. Ground Nos. 4 to 6 have not been pressed. It is the say of the ld. counsel for the assessee that similar additions have been held as academic in nature and tax neutral by the decision of the co-ordinate bench in A.Ys 2012-13 and 2013-14.
5. The ld. DR fairly conceded to the same.
6. Accordingly, Ground Nos. 4 to 6 are dismissed as having become academic.
Now the only issue which remains for adjudication is raised vide Ground Nos. 2 and 3 relating to taxability of guarantee Fees. Page 3 of 15 [A.Y 2014-15] M/s Mitsui & Company Ltd 8. Briefly stated, the facts of the case are that the assessee is a company incorporated and resident in Japan and is one of biggest trading houses of the world. The company is involved in a wide range of trading activities, from small items like needles to large items like airplane engines. The assessee also undertakes several projects in connection with big industrial installations power projects. The company is also in the business of providing loan and guarantees and assuming debt.
The assessee filed its return of income on 30.09.2014 declaring income of Rs. 5,78,19,140/-. Thereafter, the case was selected for scrutiny under CASS and notice u/s 143(2) of the Income Tax Act, 1961 (hereafter 'Act') was issued on 30.09.2015. Further, notice u/s 142(1) of the Act along with questionnaire was issued to the assessee on 11.04.2016. In compliance to the notices/ questionnaire filed various details.
The assessee company, during the year under consideration, has received guarantee fees of Rs. 1,16,22,989/- from Busan Auto Finance India Pvt. Ltd. and Rs. 4,72,820/- from Toto India Industries Private Limited in connection with the guarantee given by the assessee to the Mizuho Corporate Bank for the loan taken by Bussan Auto Finance India Pvt. Ltd. and to the Bank of Tokyo Mitsubishi UFJ, Ltd. and Mizuho
Page 4 of 15 [A.Y 2014-15] M/s Mitsui & Company Ltd Corporate Bank in respect of the loan taken by Toto India Industries Pvt.
Ltd.
The Assessing Officer considered the amount of Rs. 1,20,95,809/- on account of guarantee fees as taxable @ 10% as interest invoking Article 11 of the DTAA. Although the AO made an addition on account of the said income treating it as taxable at 10%, however, the Assessing Officer did not grant credit of the TDS of 10% deducted by the payers.
Aggrieved, the assessee preferred an appeal before the CIT(A) who however, invoked Article 22(3) of the India-Japan DTAA and vide order dated 30.04.2019, held that the guarantee fees is liable to tax in the hands of the assessee as “other income” and enhanced the tax rate in respect of the income from guarantee fees from 10% to 40%.
Aggrieved by the order of CIT(A), the assessee is in appeal before us. Before us, the ld. counsel for the assessee submitted vehemently that in the present case, the guarantee fee falls under the business income because it is the business of the assessee to provide loans and guarantees which is reflected from the "Articles of Association” of the assessee company, enclosed at PB pg. 6-12, under clause (O) that "lending money, guarantying and assuming debts" as one of the objects of the Company. It is the say of the ld AR that when a parent company provides services to its subsidiary to protect its interest, the said act in Page 5 of 15 [A.Y 2014-15] M/s Mitsui & Company Ltd itself is construed a business activity. For this proposition, reliance was placed on the Hon'ble Apex Court judgement in the case of SA Builders Ltd. Vs. CIT [2006 (12) TMI 82].
The ld AR further submitted that the assessee does not have any PE in India and therefore in the absence Permanent Establishment [PE] in India, the business income would not be chargeable under the DTAA in terms of Article 7 of the DTAA. The ld. counsel for the assessee submitted that it is a settled law that resort can be made to Article 22 (Other Income) only if the income does not fall under any of the specific Article. This is evident from language of Article 22(1) which covers only income "not dealt with in the foregoing Articles of this Convention". The ld. counsel for the assessee submitted that the income from guarantee fees cannot be treated as other income as it is the business of the assessee to provide loans and guarantees and thus, it is Article 7 that is applicable and not Article 22. For this proposition, the ld. counsel for the assessee relied on the decision of Tricentis Gmbh TMI 364 ITAT Delhi, Dated: 6-11-2024 and Ge Hydro France 2024 (11) TMI 569-ITAT Delhi, Dated. 6.11.2024. The assessee also relied on the decision of Mumbai Tribunal in the case of Capergemini SA Vs DCIT (Int. Tax)
2016(7) TMI 712 for the proposition that guarantee commission do not accrue or arise in India. [A.Y 2014-15] M/s Mitsui & Company Ltd 15. Reliance in this regard was further placed on the following judgments: • ITAT Chennai in the case of Dae Won Kang Up Co Limited vs DCIT, Dated 19.11.2024 • ITAT Delhi in the case of Denso (Thailand) Co. Ltd. T'MI 146, dated 31.05.2024 • ITAT Delhi in the case of Solvay Asia Pacific Pte. Ltd TMI 1004, dated 22.01.2024 • ITAT Vishakhapatnam in the case of Diamond Manufacturing Management and Consultancy Limited TMI 1204, dated 26.03.2024 • Madras High Court in the case of Bangkok Glass Industry Co. Ltd. Vs. ACIT, 2015 (4) TMI 503 16. The ld AR distinguished the case of Johnson Matthey Public Ltd. v. DCIT which was relied upon by the CIT(A) and stated that the assessee in that case had declared in the income tax return guarantee fee as interest income taxable at 10% and the ITAT dealt with the issue whether the guarantee fees received by the assessee is interest income or not. However, in the present case, the assessee has claimed the guarantee fees as not taxable in the income return, treating it as business income under Article 7 of the India-Japan DTAA.
Further, the ld AR submitted that in the said case, while adjudicating the issue whether the guarantee amounts to business income or not, the ITAT has itself observed that it is not the ‘interest’. Further, on appeal filed by Johnson Matthey before the Hon'ble Delhi High Court, the Hon'ble Court has explicitly left open the issue whether
Page 7 of 15 [A.Y 2014-15] M/s Mitsui & Company Ltd guarantee fees can be considered as business income or not since question of law was not framed on the said aspect.
The ld. counsel for the assessee further submitted that in the case of the assessee, in the preceding year, this income has been consistently taxed @ 10% as is evident from the order passed for the AY 2012-13 (PB Page 291-331 relevant page 330) and Revenue has accepted the same and has not come in appeal on this issue as is evident from Revenue's Grounds of Appeal for that year placed at PB Page 332-333. Similarly, for AY 2013-14, the AO has taxed this income @ 10% and CIT(A) has again accepted the same taxing @ 10% only ( PB Page 377-410, relevant page 409 Para 5.15). Thus, on the Principle of Consistency, when the facts are same, and the law has not changed, then the rule of consistency ought to have been followed and there is no reason to deviate from the view which has already been taken. The ld AR stated that the guarantee commission at best can be taxed @ 10% in view of the Rule of Consistency and placed reliance on the judgment of Hon'ble Delhi High Court judgment in the case of PCIT vs. Pepsico India (P) Ltd., 2024 (4) TMI 1154, dated 16.04.2024 where the Court has held that even when the Jurisdictional High Court is against the taxpayer, even then the Principle of Consistency is to be applied.
Page 8 of 15 [A.Y 2014-15] M/s Mitsui & Company Ltd 19. On the other hand, the ld. DR relied upon the orders of the authorities below.
We have heard the rival submissions and have perused the relevant material on record. The issue in Ground Nos. 2 and 3 is regarding the taxability of guarantee Fee in respect of guarantee extended by the assessee company for and on behalf of its various entities. The assessing officer has considered this guarantee fee income as interest income and taxed the same @ 10% by invoking Article 11 of the Treaty whereas the CIT(A) has considered the guarantee Fee as income falling under the head 'other income' and by invoking Article 22 of Indo-Japan Treaty, has enhanced the tax rate to 40%.
In order to adjudicate on the issues at hand, it is necessary to narrate the provisions of the Articles involved in the case. The relevant extract of Article 7, 11 and 22 of the India-Japan DTAA is as under:
ARTICLE 7 BUSINESS PROFITS 1. The profits of an enterprise of a Contracting State shall be taxable only in that Contracting State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in that other Contracting State but only so much of them as is directly or indirectly attributable to that permanent establishment.
2. Subject to the provisions of paragraph 3, where an enterprise of a Contracting State carries on business in the other Contracting State through a permanent establishment situated therein, there shall in each Contracting State be attributed to that permanent establishment the profits which it might be expected to make if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a permanent establishment.
Page 9 of 15 [A.Y 2014-15] M/s Mitsui & Company Ltd 3. In determining the profits of a permanent establishment, there shall be allowed as deductions expenses which are incurred for the purposes of the permanent establishment, including executive and general administrative expenses so incurred, whether in the Contracting State in which the permanent establishment is situated or elsewhere.
Insofar as it has been customary in a Contracting State to determine the profits to be attributed to a permanent establishment on the basis of an apportionment of the total profits of the enterprise to its various parts, nothing in paragraph 2 shall preclude that Contracting State from determining the profits to be taxed by such an apportionment as may be customary; the method of apportionment adopted shall, however, be such that the result shall be in accordance with the principles contained in this article.
5. No profits shall be attributed to a permanent establishment by reason of the mere purchase by that permanent establishment of goods or merchandise for the enterprise.
6. For the purposes of the provisions of the preceding paragraphs of this article, the profits to be attributed to the permanent establishment shall be determined by the same method year by year unless there is good and sufficient reason to the contrary.
7. Where profits include items of income which are dealt with separately in other articles of this Convention, then the provisions of those articles shall not be affected by the provisions of this article.
ARTICLE 11
INTEREST
Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other Contracting State. 1[2. However, such interest may also be taxed in the Contracting State in which it arises, and according to the laws of that Contracting State, but if the recipient is the beneficial owner of the interest the tax so charged shall not exceed 10 per cent of the gross amount of the interest.]
The term 'interest' as used in this article means income from debt-claims of every kind, whether or not secured by mortgage and whether or not carrying a right to participate in the debtor's profits, and in particular, income from Government securities and income from bonds or debentures, including premiums and prizes attaching to such securities, bonds or debentures.
The provisions of paragraphs 1, 2 and 3 shall not apply if the beneficial owner of the interest, being a resident of a Contracting State, carries on business in the other Contracting State in which the interest arises, through a permanent establishment situated therein, or performs in that other Contracting State independent personal services from a fixed base situated therein, and the debt-claim in respect of which the interest is paid is effectively connected with such permanent establishment or Page 10 of 15 [A.Y 2014-15] M/s Mitsui & Company Ltd fixed base. In such case, the provisions of article 7 or article 14, as the case may be, shall apply.
7. Interest shall be deemed to arise in a Contracting State when the payer is that Contracting State itself, a political sub-division or a local authority thereof or a resident of that Contracting State. Where, however, the person paying the interest, whether he is a resident of a Contracting State or not, has in a Contracting State a permanent establishment or a fixed base in connection with which the indebtedness on which the interest is paid was incurred, and such interest is borne by such permanent establishment or fixed base, then such interest shall be deemed to arise in the Contracting State in which the permanent establishment or fixed base is situated.
Where, by reason of a special relationship between the payer and the beneficial owner or between both of them and some other person, the amount of the interest, having regard to the debt-claim for which it is paid, exceeds the amount which would have been agreed upon by the payer and the beneficial owner in the absence of such relationship, the provisions of this article shall apply only to the last- mentioned amount. In such case, the excess part of the payments shall remain taxable according to the laws of each Contracting State, due regard being had to the other provisions of this Convention.
ARTICLE 22 OTHER INCOME 1. 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 Contracting State.
The provisions of paragraph 1 shall not apply to income, other than income from immovable property as defined in paragraph 2 of article 6, if the recipient of such income, being a resident of a Contracting State, carries on business in the other Contracting State through a permanent establishment situated therein, or performs in that other Contracting State independent personal services from a fixed base situated therein, and the right or property in respect of which the income is paid is effectively connected with such permanent establishment or fixed base. In such case, the provisions of article 7 or article 14, as the case may be, shall apply.
Notwithstanding the provisions of paragraphs 1 and 2, items of income of a resident of a Contracting State not dealt with in the foregoing articles of this Convention and arising in the other Contracting State may be taxed in that other Contracting State.
The facts of the instant case shows that the guarantee fees earned by the assessee is for the consideration for bearing the risk of default on the part of the Indian subsidiaries (Bussan Auto Finance India Pvt. Ltd.
Page 11 of 15 [A.Y 2014-15] M/s Mitsui & Company Ltd and Toto India Industries Private Limited) which was the principal debtor. The Hon’ble Delhi High Court in identical circumstances and transaction, in the case of Johnson Matthey Public Ltd. v. DCIT (Intt.
Taxation) (ITA No. 1143/Del/2016) has negated the action of the AO in treating the guarantee fee as interest under Article 11 of the DTAA.
Nevertheless, the hon’ble Delhi High Court in the case of Johnson Matthey (supra) has held that the income from guarantee fee accrues and arises in India and therefore is amenable for taxation under Explanation 1(a) of section 9(1)(i) of the Act. The hon’ble Court also disagreed with the decision of Capergemini (supra) where the Tribunal held that guarantee fee could not be said to accrue or arise in India. We are of the considered view therefore, that the said income from guarantee fee liable for taxation in India under Explanation 1(a) of section 9(1)(i) of the Act and not in terms of either Article 11 as Interest income or Article 22 of Indo-Japan Treaty as 'other income'.
We further find that the assessee’s reliance on the decision of Tricentis Gmbh TMI and Ge Hydro France 2024 (11) are not apt as both the decisions did not examine the taxability of the receipts as being accrued or arisen under section 9(1)(i) through business connection. In the instant case, there explicitly exist a business connection as obliquely accepted by the assessee when it relies on the decision of Supreme Court
Page 12 of 15 [A.Y 2014-15] M/s Mitsui & Company Ltd in the case of S.A. Builders (supra) for the proposition that when a parent company provides services to its subsidiary to protect its interest, the said act in itself is construed a business activity.
We however note that though the assessee claims that the assessee is in the business of providing corporate/bank guarantees on a regular basis and with a profit motive, as evidenced by its Articles of Association and financial statements of providing guarantee, the issue whether Guarantee Fee income is business income in the case of the assessee has not been examined and considered both by AO and the CIT(A).
Accordingly, we are of the view that this issue needs to be remitted back to the assessing officer to examine the same. In the event that this guarantee income falls within the meaning of business income, then the same will not be chargeable to tax, in absence of PE in India, under Article 7 of the Indo-Japan Treaty.
Be that as it may, we also note that in the preceding year i.e., AY 2012-13, this income has been consistently taxed @ 10% and Revenue has accepted the same and has not come in appeal on this issue.
Similarly, for AY 2013-14, the AO has taxed this income @ 10% and CIT(A) has again accepted the same taxing @ 10% only. Thus, following the Principle of Consistency and applying the mandate of law as laid down by the Hon'ble Delhi High Court judgment in the case of PCIT vs. Pepsico
Page 13 of 15 [A.Y 2014-15] M/s Mitsui & Company Ltd India (P) Ltd (supra), the guarantee Fee at best can be taxed @ 10% in view of the Rule of Consistency since the facts are same, and the law has not changed. The guarantee fee cannot be taxed at @ 40% as has been done by CIT(A) by ignoring the precedents in assessee's own case.
In view of the discussion as above, we hold that the guarantee fee is liable for tax @ 10% and the assessee is also entitled to get benefit of TDS deducted on the said income. The grounds 2 and 3 are partly partly allowed.
The order is pronounced in the open court on 08.12.2025.