2006 (7) TMI 529 - AT - Income Tax

Tribunal Rules Tax Deduction Not Required for Interest to Non-Resident Bank, Affirms Service Charge Deduction Obligation.

Tecumseh Products (I) Ltd. Versus Deputy Commissioner of Income-tax, Circle 6 (TDS), Hyderabad

Tecumseh Products (I) Ltd. Versus Deputy Commissioner of Income-tax, Circle 6 (TDS), Hyderabad - [2007] 13 SOT 489 (HYD.) Issues:1. Whether provisions of section 195 are attracted in respect of interest paid to non-resident bank.2. Whether payment of service charges to holding company is subject to deduction of tax under section 194J.Analysis:Issue 1:The first issue pertains to the applicability of section 195 regarding interest paid to a non-resident bank. The assessee argued that the payment was made by Andhra Bank, not directly by the assessee, and thus the responsibility for deduction of tax lies with the bank. The Departmental Representative contended that the bank acted on behalf of the assessee and, therefore, the assessee is liable for tax deduction. The Tribunal analyzed the situation and concluded that the immediate responsibility for paying interest rested with Andhra Bank, not the assessee. The Tribunal emphasized that the payment was made by the bank as per the Letter of Credit arrangement, and the bank was obligated to pay the interest to the non-resident bank. As the bank acted as an agent, the Tribunal held that the assessee cannot be held responsible for tax deduction under section 195.Issue 2:The second issue concerns the payment of service charges to the holding company and whether it attracts tax deduction under section 194J. The assessee contended that the holding company did not provide technical services, hence tax deduction is not applicable. Conversely, the Departmental Representative argued that the services rendered by the holding company in accountancy, human resources, and taxation qualify as technical services. The Tribunal examined the nature of services provided and determined that they fall within the realm of technical services, thus necessitating tax deduction under section 194J. However, the Tribunal noted that the Commissioner (Appeals) directed the Assessing Officer to verify if the holding company declared the payment for taxation, and based on this verification, the demand may be modified. Consequently, the Tribunal upheld the Commissioner's decision on this issue, affirming the need for tax deduction under section 194J.In conclusion, the Tribunal allowed one appeal and partially allowed another, based on the detailed analysis and interpretation of the provisions of sections 195 and 194J in the context of the specific factual and legal arguments presented by the parties.