Facts of the Case

Johnson Matthey PLC, a tax resident of the United Kingdom and engaged in manufacturing specialty chemicals, had provided parent company guarantees to overseas branches of foreign banks in relation to credit facilities extended to its Indian subsidiaries. In consideration of these guarantees, the assessee received guarantee charges aggregating ₹1,49,15,090.

The arrangement was governed by an Intra-Group Parental Guarantee and Counter-Indemnity Services Agreement dated 29 March 2010, under which the UK parent agreed to provide guarantee facilities to Indian subsidiaries for their commercial benefit, with charges calculated quarterly at an arm’s length annual rate.

Issues Involved

  1. Whether corporate guarantee fees received by a non-resident parent company constitute “interest” under Article 12 of the India-UK DTAA or Section 2(28A) of the Income Tax Act.
  2. Whether such income accrues or arises in India under Section 5(2) of the Act.
  3. Whether the income could alternatively be treated as business income taxable only if a Permanent Establishment exists in India.

Petitioner’s (Assessee’s) Arguments

The assessee contended that the guarantee fee was consideration for assuming risk of default by subsidiaries and therefore arose outside India where the guarantor bore financial exposure. It argued that the services were performed outside India and the income should not be regarded as accruing in India.

Reliance was placed on decisions including Capgemini S.A. v. ADIT to argue that guarantee commission does not accrue in India merely because loans are utilized there.

The assessee also submitted that the fee could be characterized as business income, which would not be taxable in India in the absence of a Permanent Establishment.

Respondent’s (Revenue’s) Arguments

The Revenue argued that the guarantee commission arose as a direct consequence of loans availed by Indian subsidiaries in India. Therefore, the source of income was located in India, making it taxable under Section 5(2).

It further contended that the payment did not fall within the definition of “interest,” as the assessee was not a lender and had no debt claim against the subsidiaries.

Court Order / Findings

On Whether Guarantee Fee Is “Interest”:
The Court held that the payment did not arise from any debt claim owed to the assessee. The parent company merely guaranteed loans taken from third-party banks, and there was no privity of debtor-creditor relationship between the parent and subsidiaries. Therefore, the fee could not be classified as interest under Article 12 or Section 2(28A).

On Accrual of Income in India:
Applying settled principles on accrual of income, the Court held that income accrues where the right to receive arises. The guarantee charges became payable periodically from Indian subsidiaries pursuant to the agreement and in connection with loans availed in India. Hence, the income accrued in India even though the guarantor was located abroad.

On Characterization under DTAA:
Since the income did not fall within Articles dealing with interest or business profits, it was rightly taxed as “Other Income” under Article 23(3), which permits taxation in the State where such income arises.

Important Clarification

The judgment clarifies that corporate guarantee fees paid by Indian subsidiaries to foreign parent companies are not automatically treated as interest or business income. Where the payment arises from services facilitating loans availed in India, the income may be taxed in India as “Other Income,” even if the guarantor performs activities abroad and has no Permanent Establishment.

Link to download the order -  https://www.mytaxexpert.co.in/uploads/1772177264_JOHNSONMATTHEYPUBLICLIMITEDCOMPANYVsCOMMISSIONEROFINCOMETAXINTERNATIONALTAXATION2NEWDELHI.pdf 

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