Deduction at source on interest applies only where the interest is chargeable in India; no TDS if interest accrues outside taxable territories.

Where interest paid to a non-resident arises and accrues wholly outside the taxable territories, it is not "chargeable under the Act" for purposes of the statutory deduction obligation; section 18(3B)'s requirement to deduct tax at source therefore applies only to interest that is chargeable to tax in India and does not extend to interest lacking territorial nexus under section 4(1). Operative effect: no TDS obligation arises on interest that neither arises in nor accrues in the taxable territories, favouring the payer.

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Issues: Whether, on the finding that all services by the non-resident were performed outside the taxable territories and the interest therefore accrued outside the taxable territories, the person responsible for payment was liable under section 18(3B) of the Income-tax Act, 1961 to deduct tax at source on the interest payments of Rs. 2,224 to the non-resident.

Analysis: Section 18(3B) requires deduction at source in respect of payments of interest to non-residents which are "chargeable under the provisions of this Act." Section 4(1) restricts the Act's charge to income received or deemed to be received in the taxable territories. The question is whether the interest in issue is chargeable to tax in India when the services giving rise to the interest were performed wholly outside the taxable territories and the interest accrued outside those territories. The statutory scheme shows that heads of payment under section 18 are qualified by chargeability to tax; the exception of interest from the operation of subsection (3C) addresses a different contingency (partial chargeability) and does not indicate that interest under subsection (3B) is outside the requirement of being chargeable under the Act. Applying section 4(1) to the facts found, the interest did not arise within or accrue in the taxable territories and therefore was not chargeable under the Act.

Conclusion: The liability to deduct tax at source under section 18(3B) did not arise because the interest was not chargeable under the Income-tax Act, 1961; the assessee was entitled to the deduction and the reference is answered in the negative in favour of the assessee.

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