In this case, the taxpayer (the Taxpayer), a foreign company and a United Kingdom (UK) tax resident, provided a guarantee under a global agreement to a foreign bank on behalf of its Indian subsidiaries and received a guarantee fee. The Indian Appellate Tribunal (the Tribunal) held that the guarantee fee is taxable in India. It further stated that the fee is neither in the nature of interest income despite the wide scope of the definition of interest pursuant to the Indian Income Tax Law (ITL) nor is it interest covered by Article 12(5) of the India-UK Income Tax Treaty (the Treaty). The Tribunal reasoned that the guarantee fee cannot be characterized as interest since the Taxpayer was not a party to the loan agreement between the foreign lender and the Indian subsidiary. The guarantee fee is also not in the nature of business income since the Taxpayer was predominantly engaged in the manufacturing business, and not in the business of providing corporate/bank guarantees to earn income on a regular basis. Accordingly, the guarantee fee is taxed at 40% under the ITL, since it would be treated as "Other Income" under Article 23 of the Treaty, which grants full taxing rights to India.

A Global Tax Alert, attached below, provides additional details.

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ATTACHMENT

Full text of Tax Alert 2017-2191