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March 2018

Direct Tax Amicus: December 2017

by Subhashree R

Guarantee Fee – No interest on lending credit-worthiness

ITAT Delhi has held that ‘guarantee fee’ will not qualify as interest under the India-UK DTAA or the Income Tax Act, 1961, since it can relate only to payment by a person who has received some amount pursuant to a loan transaction. The assessee had entered into a global guarantee agreement outside India with two banks, and in terms of the agreement, the banks advanced loans to the Indian subsidiaries of the assessee and the assessee received guarantee fee. ITAT’s decision is in line with the decision of the US Court holding that guarantee by itself is not a loan or interest but is a payment for services which may be performed in future. According to the author, it may be possible to argue that guarantee fee should be part of business profits and be taxed in terms of Article 7 of the India-UK DTAA, and the fact that assessee was not in the business of extending guarantees need not take it out of the ambit of said Article. However, ITAT, Delhi has held conclusively that guarantee fee arises in India, it is not interest, business income or FTS and is taxable as other income.

 

Ratio decidendi

  • Non-receipt of royalty from overseas subsidiary can be subject to TP adjustment – Delhi High Court
  • Income on cessation of liability arises if no consideration passes to creditor for the same – Allahabad High Court
  • LOB cannot be invoked since entity would have been eligible for similar benefits under another treaty – ITAT Rajkot
  • Agreement to part with profits alone is not a case of diversion of income by overriding title – ITAT Hyderabad

 

News Nuggets

  • US set to bring in new tax system with major overhaul with one of the biggest changes being the lowering of the Corporate tax rate from 35% to 20%.

 

December, 2017/Issue-40 December, 2017/Issue-40

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