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Bangalore Tribunal concludes that guarantee fees paid to Korean parent is not taxable in India under “other income” article of India-Korea DTAA
KIA Corporation (Taxpayer) [1] a Korean company provided corporate guarantee in relation to loan availed by its Indian subsidiary, KIA India Pvt. Ltd (KIA) from a bank. In consideration KIA paid a guarantee fee to the Taxpayer.
For the relevant tax year, the Taxpayer did not offer the guarantee fee to tax in India. The Taxpayer argued that the guarantee fee is not covered by any specific article of the Double Taxation Avoidance Agreement (DTAA) and hence it would be governed by the “other income” article of India-Korea DTAA in terms of which such income would be taxable only in Korea. However, the tax authority argued that the guarantee provided by the Taxpayer helped to raise a loan that was utilized in India and hence the fee paid for such guarantee arises in India. Further the tax authority rejected Taxpayer’s argument that the guarantee fee would be covered by “other income” article of India-Korea DTAA. The reasoning behind such conclusion is not expressed in the decision.
On appeal, the Bangalore Income Tax Appellate Tribunal concluded that guarantee fee would not fall within the specific articles dealing with income from immovable property, or interest under the India-Korea DTAA. The Tribunal also relied on the decision of Chennai Tribunal in the case of Daechang Seat Co. Ltd. v. DCIT (152 Taxmann.com 163) to conclude that guarantee fee received by the Taxpayer who was not engaged in the business of providing corporate guarantee, would not qualify as business income, instead it would be governed by the "Other Income" article in terms of which guarantee fee would be taxable only in the resident state viz., Korea.
The Tribunal further held that the Delhi High Court (HC) decision in the case of Johnson Matthey Public Ltd. v. CIT (162 Taxmann.com 865), was rendered in the context of “other income” article of the India-UK DTAA, which allocates taxing rights to the source state as well in specified circumstances, and hence distinguishable from the facts of the case.
[1] IT(IT)A No.644/Bang/2025 SA No. 41/Bang/2025