Johnson Matthey Public Limited Company Vs CIT (Delhi High Court)
Conclusion: Guarantee commission charges received by a foreign parent company from its Indian subsidiaries were taxable in India, not as interest but as “other income” under Article 23(3) of the DTAA. Additionally, the court’s ruling underscored that the location of the economic activity, rather than the contractual formalities, determined the taxability of income.
Held: The issue arose out of the receipt of guarantee charges by the appellant from its Indian subsidiaries in terms of an Intra Group Parental Guarantee and Counter Indemnity Services Agreement. It had been the case of the appellant that it had initially and out of abundant caution characterized the amount of guarantee charges as being interest and taxable in terms of Article 12 of the Agreement for Avoidance of Double Taxation & Prevention of Fiscal Evasion with United Kingdom of Great Britain and Northern Ireland3. During the course of assessment undertaken in accordance with the procedure prescribed under Section 144C of the Income Tax Act, AO as well as the Dispute Resolution Panel took the position that the sum would be liable to be taxed under Article 23(3) of the DTAA and thus liable to be characterized as falling under the head of „other income‟. When the matter reached the Tribunal, assessee assailed the correctness of the view as taken by AO as well as the DRP and reiterated its stand with respect to interest income being liable to be taxed under Article 12 of the DTAA without prejudice to its other submissions that the income was not taxable at all. In that appeal it raised an additional ground with respect to the taxability of guarantee charges asserting that since its source was outside India, it was not taxable under the Act. As would be apparent from the record of submissions by the Tribunal, the appellant alternatively also appeared to have argued that the receipt of guarantee charges could also fall within the ambit of „business income‟ and which would then be governed by Article 7 of the DTAA. The appeal was admitted and were confined to the characterization of guarantee charges under Article 12 of the DTAA and whether income derived from the receipt of guarantee fee could be said to arise or accrue in India. It was held that that the guarantee commission income accrued in India because the loan transactions, which triggered the commission payments, occurred in India. The court relied on the principle that income was deemed to accrue or arise where the underlying economic activity took place, in this case, within India. Guarantee commission charges received by a foreign parent company from its Indian subsidiaries were taxable in India, not as interest but as “other income” under Article 23(3) of the DTAA. Additionally, the court’s ruling underscored that the location of the economic activity, rather than the contractual formalities, determined the taxability of income.
