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

The ITAT’s Delhi Bench, chaired by Amit Shukla (Judicial Member) and B.R.R. Kumar (Accountant Member), has held that a performance guarantee commission paid by an assessee from a foreign Associated Enterprise is not considered business income under the Double Taxation Avoidance Agreement (DTAA).

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

Dynamic Drilling & Services Pvt Ltd, the assessee, is in the business of providing offshore drilling services to Indian oil exploration and production firms. From its Singapore-based Associated Enterprise Dynamic Drilling Holdco PTE Ltd, the Assessee got a performance guarantee commission (DDHPL). The Associated Enterprise had withheld tax from the Assessee’s performance guarantee commission, which the Assessee used to claim a foreign tax credit under Section 90 of the Income Tax Act of 1961.

The Assessing Officer (AO) held, however, that the performance guarantee commission received by the Assessee from its Associated Enterprise was a business income of the Assessee, and that because the Assessee company did not have any Permanent Establishment (PE) in Singapore under Article 7 of the India-Singapore DTAA, the Singapore Tax Authorities could not withhold tax on the commission because the entire income was taxable in India. As a result, the AO denied the Assessee’s claim for foreign tax credit under the Income Tax Act. The Assessee Dynamic Drilling & Services appealed the AO’s decision to the Commissioner of Income Tax (Appeals) (CIT (A)), who supported the AO’s decision not to award credit for the foreign tax withheld. The Assessee Dynamic Drilling & Services appealed the AO’s decision to the Commissioner of Income Tax (Appeals) (CIT (A)), who supported the AO’s decision not to award credit for the foreign tax withheld. The Assessee filed an appeal with the ITAT against the CIT (A).

Dynamic Drilling & Services, the assessee, argued before the ITAT that the CIT(A) erred in considering the assessee’s performance guarantee commission as business income under the India-Singapore DTAA. It claimed that its business consisted of supplying offshore drilling services to Indian oil exploration and production companies, and that it did not provide bank or performance guarantees. The Assessee claimed that it had made no strategic investments for the advancement of its core company, and that the AO was not authorised to characterise the revenue as business profit for the purposes of applying Article 7 of the India-Singapore DTAA because there was no substance to the same. The departmental representative argued that the performance guarantee commission could not be taxed in Singapore since the entire income was taxable in India, and hence the tax deducted in Singapore could not be credited under the Income Tax Act.

According to Article 7 of the India-Singapore DTAA, profits of a Contracting State’s enterprise are taxable solely in that State unless the enterprise conducts business in the other Contracting State through a permanent establishment there.

The Assessee’s business did not include issuing bank guarantees or performance guarantees, according to the ITAT, and the majority of its revenue came from its core operation of offshore drilling services. The ITAT determined that the AO could not convert a one-time gain from a performance guarantee commission to a business profit in order to bring it under Article 7 of the DTAA.

The ITAT found that the Assessee’s taxability of the commission received under the Income Tax Act was not contested by the Assessee, who had filed the income under the heading ‘Other Income.’ The ITAT also pointed out that the commission paid to the Assessee was taxable under Singapore Income Tax Laws, even if the Assessee did not have a PE in Singapore, because the commission was a deductible expense for the Singapore Entity that paid it.

The ITAT decided that because the income was taxable under both the Singapore and Indian income tax laws, the Assessee was entitled to a tax credit on the same income that had been presented for tax in India.

As a result, the ITAT upheld the Assessee’s appeal and ordered the AO to grant the Assessee tax credit for the relevant assessment years.

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