Johnson Matthey Public Ltd. Co. v. CIT (IT) (2024)

🏦 Johnson Matthey Public Ltd. Co. vs. CIT (IT) – Delhi High Court & Supreme Court on Taxability of Guarantee Fees under India–UK DTAA (2024)

📘 Background

The issue of tax characterization of guarantee fees paid by Indian subsidiaries to their foreign parent companies has consistently generated litigation under Section 9(1)(v) of the Income-tax Act, 1961. The key question is whether such payments qualify as “interest” under the Act or under relevant Double Taxation Avoidance Agreements (DTAAs).

In Johnson Matthey Public Ltd. Co. v. CIT (IT) [(2024) 299 Taxman 334 (Delhi)(HC)], the Delhi High Court held that guarantee fees received by a UK-based parent company from its Indian subsidiaries are not “interest” under Article 12 of the India–UK DTAA. Instead, they were held taxable in India as “other income” under Article 23(3).

The Supreme Court, in (2024) 469 ITR 31 (SC), dismissed the assessee’s SLP, affirming the High Court’s view and solidifying the principle that parental guarantee fees are not interest but are income accruing or arising in India and hence taxable.

⚙️ Facts of the Case

• Assessee: Johnson Matthey Public Ltd. Company, a tax resident of the United Kingdom, engaged in manufacturing specialty chemicals.
• Assessment Year: 2011–12.
• Nature of Transaction:
  • The assessee provided corporate guarantees to several overseas branches of foreign banks for credit facilities extended to its Indian subsidiaries.
  • In return, the Indian subsidiaries paid a guarantee fee periodically.
• Return of Income:
  • The assessee classified these guarantee fees as “interest” and offered them to tax at the reduced rate under Article 12 of the India–UK DTAA.
• Assessment by AO:
  • The Assessing Officer (AO) held that such income did not qualify as “interest” because it was not in respect of any debt owed by the subsidiaries to the assessee.
  • Instead, it represented consideration for providing a guarantee service, and thus, taxable in India as “other income” under Article 23(3).
• ITAT Ruling:
  • The Tribunal affirmed the AO’s order, emphasizing that the guarantee charges accrued quarterly on an agreed rate and related to services rendered for the benefit of Indian subsidiaries.

❓ Point of Dispute

Whether guarantee fees received by a UK-resident company from its Indian subsidiaries qualify as:

1. “Interest” under Article 12 of the India–UK DTAA, taxable in the UK only; or
2. “Other income” under Article 23(3), taxable in India as income accruing or arising in India.

📑 Assessee’s Arguments

• Characterization as Interest:
  • The guarantee fee was calculated on outstanding credit balances, similar to interest.
  • Therefore, it should fall within Article 12 as income from debt claims.
• No Business Connection in India:
  • The assessee had no permanent establishment (PE) or business presence in India.
  • Hence, such income could not be taxed under Article 7 (Business Profits).
• Treaty Protection:
  • Even if taxable, the income should be governed by Article 12, ensuring limited taxation in the source country (India).

📑 Revenue’s Arguments

• Nature of Payment:
  • Guarantee fees were not linked to any debt owed to the assessee.
  • They were fees for services rendered — i.e., for providing a corporate guarantee and assuming risk on behalf of Indian subsidiaries.
• Accrual in India:
  • The income accrued and arose in India, since the guarantees were given for loans utilized in India by Indian subsidiaries.
• Article 23(3) – Other Income:
  • The payment did not fall under Articles 7 or 12, making it taxable as “other income” arising in India.

⚖️ High Court’s Findings

1. Not “Interest” under Article 12:
   • “Interest” means income from debt claims, as defined in Article 12(5).
   • The guarantee fee was not in respect of any debt owed to the assessee; it arose from the service of providing a guarantee.
   • Therefore, it could not be considered interest under Article 12 or Section 2(28A) of the Income-tax Act.
2. Accrual of Income in India:
   • The guarantee fee became due quarterly at a predetermined rate.
   • The income was derived from the financial benefit extended to Indian subsidiaries, thus accrued in India under Section 5(2) and Section 9(1)(v).
3. Taxable under Article 23(3):
   • Since it was neither business profit nor interest, it fell under Article 23(3) as “other income” arising in India.
   • Therefore, it was taxable in India.

⚖️ Supreme Court’s Decision

• The Supreme Court dismissed the assessee’s Special Leave Petition (SLP), affirming the Delhi High Court’s ruling.
• It confirmed that:
  • Guarantee fees cannot be characterized as interest.
  • The income accrued and arose in India and is taxable under Article 23(3) of the DTAA.

✅ Held

• Guarantee fees not “interest” under Article 12 of India–UK DTAA.
• Fees represented consideration for guarantee services, not for any debt claim.
• Income accrued in India, as the guarantees benefited Indian subsidiaries.
• Taxable in India as “other income” under Article 23(3).
• SLP dismissed – Supreme Court upheld High Court’s view.

💡 Key Takeaways

1. Guarantee ≠ Loan Relationship:
   Guarantee fees cannot be treated as “interest” unless directly linked to a debt claim owed to the guarantor.
2. Accrual Principle:
   Income accrues in India when the benefit of the transaction is consumed in India, even if services are rendered abroad.
3. DTAA Interpretation:
   The residual clause (Article 23) captures income not explicitly covered under Articles like Interest, Royalties, or Business Profits.
4. Taxation without PE:
   Even in the absence of a PE, such income may still be taxable in India if it arises in India.
5. Supreme Court Seal:
   With the SLP dismissed, this judgment has attained finality, setting a clear precedent for similar cross-border guarantee arrangements.

🌐 Why This Case Matters

This landmark ruling clarifies the taxability of corporate guarantee fees under international tax law. It underscores that:

• Parent company guarantees are service-oriented, not debt-based, and
• Such income can be taxed in India if it arises from Indian economic activity.

It is now binding authority on all similar cases involving foreign parents and Indian subsidiaries, significantly impacting transfer pricing, intercompany financing, and DTAA planning strategies.

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