Performance Guarantee Commission Is Not Business Income Under DTAA: Delhi ITAT

The ITAT therefore allowed foreign tax credit under Income Tax Act, 1961 to the assessee against the tax withheld under the Singapore Income Tax law on the commission paid by a Singapore Entity.

The Assessee Dynamic Drilling & Services Pvt Ltd is engaged in the business of providing offshore drilling services to oil exploration and production companies in India. The Assessee received performance guarantee commission from its Singapore based Associated Enterprise Dynamic Drilling Holdco PTE Ltd (DDHPL). The Associated Enterprise had withheld tax on the performance guarantee commission paid by it to the Assessee against which the Assessee claimed a foreign tax credit under Section 90 of the Income Tax Act,1961. The Assessing Officer (AO) however held that the performance guarantee commission received by the Assessee from its Associated Enterprise was a business income of the Assessee, and since the Assessee company did not have any Permanent Establishment (PE) in Singapore under Article 7 of the India-Singapore DTAA, therefore, the Singapore Tax Authorities could not have withheld tax on the commission since the entire income was taxable in India. The AO therefore disallowed Assessee's claim for foreign tax credit under Income Tax Act. Against the order of the AO the Assessee Dynamic Drilling & Services filed an appeal before the Commissioner of Income Tax (Appeals) (CIT (A)) who upheld the order of the AO of not granting credit for the foreign tax withheld. Against the order of the CIT (A) the Assessee filed an appeal before the ITAT.

The Assessee Dynamic Drilling & Services submitted before the ITAT that the CIT(A) had erred in treating the performance guarantee commission received by the Assessee as its business income under the India-Singapore DTAA. It contended that its business was providing offshore drilling services to oil exploration and production companies in India and that it was not in the business of providing bank guarantee or performance guarantee. The Assessee averred that no strategic investment was made by it for furtherance of its core business and therefore in absence of any material to suggest the same, the AO was not entitled to characterization the income as business profit for the application of Article 7 of India-Singapore DTAA. The departmental representative contended that since the entire income was taxable in India, the performance guarantee commission could not be taxed in Singapore and therefore the tax deducted in Singapore could not be given credit under the Income Tax Act.

Article 7 of the India-Singapore DTAA provides that the profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein.

The ITAT observed that the business of the Assessee was not of providing bank guarantee or performance guarantee, and that the majority of its revenue came from its core activity of providing offshore drilling services. The ITAT ruled that the AO could not change the characteristic of a one-time income by way of performance guarantee commission to business profit in order to bring it under Article 7 of the DTAA.

The ITAT held that the taxability of the commission received by the Assessee under the Income Tax Act was not disputed by the Assessee who had offered the income for tax under the head 'Other Income'. Also, the ITAT noted that the commission paid to the Assessee was taxable under the Singapore Income Tax Laws, even if the Assessee had no PE in Singapore, since the commission was a deductible expense for the Singapore Entity paying it.

The ITAT held that since the income was taxable both under the Singapore Income Tax law as well as the Indian Income Tax law, tax credit had to be given to the Assessee on the same income which had been offered for tax in India.

The ITAT therefore allowed the Assessee's appeal and directed the AO to allow the Assessee tax credit in the relevant assessment years.

Case Title: Dynamic Drilling & Services Pvt. Ltd Versus ACIT, New Delhi

Dated: 08.03.2022 (Delhi ITAT)

Counsel For The Appellant/Assessee: Suresh K. Gupta, C. A.

Counsel For The Respondent/Revenue Department: Rajesh Kumar, Sr. D.R

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