Withholding tax on head office expenses turns on no payment to self, no chargeability in India, and treaty protection.

The discussion addresses whether tax had to be withheld under section 195 on head office expenses and whether the Indian entity could be treated as an assessee in default under section 201. It notes that, on the facts, no permanent establishment existed when the expenses were said to have been incurred, the accounting entry was only a notional consolidation for project profit computation, and no actual payment or liability arose from the permanent establishment to the head office. It further states that branch or permanent establishment payments to the head office are treated as payments to self and do not attract withholding tax, especially where the amounts are not chargeable in India and are not fees for technical services or royalty, with treaty non-discrimination also referred to.

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Issues: Whether the assessee was liable to deduct tax at source under section 195 on the expenses debited in respect of the head office, and whether the assessee could be treated as an assessee in default under section 201.

Analysis: The disallowance proceeded on the premise that the permanent establishment in India had incurred or reimbursed expenses to the head office. The factual findings accepted by the first appellate authority showed that, for the relevant year, no permanent establishment had come into existence when the expenses were said to have been incurred, and the debit in the accounts was only a notional consolidation entry for computing project profits. It was also found that no payment had been made by the permanent establishment to the head office and no liability had been incurred by it. The authority further held that, even otherwise, payments between a branch or permanent establishment and its head office would be in the nature of payment to self and would not attract withholding tax. The reasoning also referred to the absence of chargeability in India, the character of the items as not being fees for technical services or royalty, and the non-discrimination clause under the applicable treaty.

Conclusion: The assessee was not liable to deduct tax at source on the head office expenses, and the finding that the assessee was an assessee in default under section 201 was not disturbed.

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