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

[28 March 2022] The Delhi Bench of ITAT has ruled that performance guarantee commission received by an assessee from its foreign Associated Enterprise is not its business income under the Double Taxation Avoidance Agreement (DTAA).
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 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.