2025 (8) TMI 1333 - AT - Income Tax

Assessee held liable to deduct TDS under s.195 on interest to foreign bank; s.40(a)(i) disallowance confirmed

Venugoopal Subramaniyam Raja Versus The Deputy Commissioner of Income Tax, Circle 2 (1), Trichy.

ITAT CHENNAI - AT upheld the CIT(A) and dismissed the assessee's grounds, holding the assessee liable to deduct TDS on interest paid to a foreign bank ... TDS u/s 195 - assessee in his individual capacity and paid interest to RBS Coutts Bank Ltd., Singapore, which is having its Head Office in Switzerland, without deducting TDS - HELD THAT:- The expression 'any person' referred to in section 195 should mean any person who is a resident in India. Section 195 applies only if payments are made by a resident to another non- resident and not between two non-residents. Section 195 of the Act does not apply to the present transaction because it was between two non-resident entities. Admittedly, the assessee neither deducted TDS from interest payment made to foreign bank nor filed undertaking with the remitting bank. In view of the provisions of section 9(1)(v)(c) of the Act, the Assessing Officer disallowed the entire interest expenditure under section 40(a)(i) of the Act for violation of non-deduction of tax under section 195 of the Act. We note that the ITAT in assessee’s own case for AY 2008-09, wherein, the Tribunal has taken due cognizance of Article 11(1) and 11(2) of the DTAA between India and Switzerland and taking cognizance of Article 11(2), held that the rate of tax could not exceed 10% and the assessee was liable to deduct tax at source on the payment of interest under section 195 of the Act. Considering the order of the Tribunal in assessee’s own case for AY 2008-09, the ld. CIT(A) observed that non-deduction of tax at source under section 195 of the Act, the provisions of section 40(a)(i) of the Act clearly attracts and confirmed the disallowance made by the Assessing Officer. In the absence of any contrary view, having no option except to follow the ITAT order in assessee’s own case, the submissions of the ld. AR are not acceptable, therefore, we are of the opinion that the ld. CIT(A) is justified in holding that the assessee is liable to deduct tax on interest payment made to RBS Coutts Bank Ltd., Singapore. Thus, the grounds raised by the assessee are dismissed. ISSUES PRESENTED AND CONSIDERED 1. Whether interest paid by the assessee to a foreign bank (RBS Coutts Bank Ltd., Singapore) was taxable in India under section 9(1)(v)(c) of the Act. 2. Whether the assessee was obliged to deduct tax at source on such interest payments under section 195 of the Act. 3. Whether failure to deduct tax at source attracted disallowance of the interest expenditure under section 40(a)(i) of the Act. 4. Whether the Double Taxation Avoidance Agreement (DTAA) provisions (Articles 11(1), 11(2) and 11(3) of the India-Switzerland DTAA) affect the liability to deduct tax at source and the rate of tax applicable to the interest payments. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Taxability under section 9(1)(v)(c) of the Act Legal framework: Section 9(1)(v)(c) deems certain income (including interest) to accrue or arise in India notwithstanding payment to non-residents where the income arises from sources in India. Precedent Treatment: The Tribunal in the assessee's own earlier year examined and found the interest taxable in India under the relevant provisions and DTAA (see cross-reference to earlier ITAT finding relied upon by the first appellate authority). Interpretation and reasoning: The factual finding is that interest payments were made in respect of liabilities connected to India and therefore fall within the deeming provisions of section 9(1)(v)(c). The present Tribunal accepted the earlier Tribunal's treatment that the interest was taxable in India. Ratio vs. Obiter: Ratio - the interest in question is held to be income deemed to accrue or arise in India under section 9(1)(v)(c). Conclusion: The Court upheld the position that the interest payments were taxable in India under section 9(1)(v)(c). Issue 2 - Obligation to deduct tax at source under section 195 Legal framework: Section 195 requires any person making a payment to a non-resident which is chargeable to tax in India to deduct tax at source. Precedent Treatment: The Tribunal's earlier decision for the assessee's preceding assessment year took cognizance of DTAA Articles 11(1) and 11(2) and held that the assessee was liable to deduct tax under section 195; that decision was treated as binding on the first appellate authority and was followed by the present Tribunal. Interpretation and reasoning: The Court examined whether section 195 applies when the payer or payee is a non-resident. The Tribunal and the first appellate authority adhered to the finding that, because the interest was chargeable to tax in India under section 9(1)(v)(c) (and the DTAA did not exempt the interest from Indian taxation), the payer had the obligation to deduct tax at source under section 195. The assessee's contention that section 195 applies only to payments made by residents, or that both parties were non-residents thereby excluding section 195, was rejected in view of the prior Tribunal finding and the statutory scheme which imposes withholding where the payment is chargeable to tax in India. Ratio vs. Obiter: Ratio - where interest is chargeable to tax in India, the payer is liable to deduct tax under section 195 even if the payer or payee status is contested; prior authoritative finding on identical facts is binding unless successfully distinguished. Conclusion: The Court held the assessee was obliged to deduct tax at source under section 195 on the interest payments. Issue 3 - Consequence of non-deduction: applicability of section 40(a)(i) Legal framework: Section 40(a)(i) disallows expenditure to the extent tax required to be deducted at source under the Act has not been deducted or has not been paid. Precedent Treatment: The first appellate authority followed the Tribunal's earlier decision in the assessee's own case, which concluded that non-deduction attracted section 40(a)(i) disallowance. Interpretation and reasoning: Given the settled view that the interest was chargeable to tax in India and that section 195 obligation arose, the admitted non-deduction of tax led inexorably to disallowance under section 40(a)(i). The Court emphasized the absence of any new facts or contrary view to depart from the prior Tribunal decision and therefore upheld the disallowance. Ratio vs. Obiter: Ratio - non-deduction of tax required under section 195 results in disallowance of the corresponding interest expenditure under section 40(a)(i). Conclusion: The Tribunal sustained the disallowance of the interest expenditure under section 40(a)(i) for failure to deduct tax under section 195. Issue 4 - Effect of DTAA Articles 11(1), 11(2) and 11(3) on withholding liability and rate Legal framework: DTAA Articles governing taxation of interest, including possible limiting rates and exemptions subject to interpretation of specific sub-articles. Precedent Treatment: The earlier Tribunal considered Articles 11(1) and 11(2) and examined Article 11(3) as well; it concluded the interest was taxable in India but that the rate could not exceed 10% under Article 11(2). Interpretation and reasoning: The present Tribunal accepted that the earlier Tribunal had duly considered Articles 11(1) and 11(2) and addressed Article 11(3). The prior finding was that, while the interest is taxable in India, the DTAA capped the rate of tax at 10%. That finding informed the Tribunal's view on the extent of tax liability (rate) but did not negate the withholding obligation under section 195 where the income is chargeable to tax in India. Ratio vs. Obiter: Ratio - DTAA may limit the rate of tax payable on interest (here capped at 10%); however, DTAA limitations on rate do not necessarily extinguish the domestic obligation to withhold tax where the income is chargeable to tax in India. Conclusion: The Tribunal upheld that the DTAA limits the applicable rate (to 10%) but does not eliminate the payer's liability to deduct tax at source under section 195 when interest is chargeable to tax in India; the prior DTAA-based findings were followed and applied. Cross-references and Overall Conclusion 1. The Tribunal treated the earlier Tribunal decision on identical facts as binding and followed it (see Issues 1-4 above), noting no new facts were brought forward to distinguish that precedent. 2. The combined effect of sections 9(1)(v)(c), 195 and 40(a)(i), read alongside the DTAA findings, led to the outcome: interest held taxable in India; withholding obligation under section 195; failure to withhold attracted disallowance under section 40(a)(i); DTAA limited the rate to 10% but did not negate withholding or disallowance consequences. 3. Result: Appeals dismissed on the ground that the assessee was liable to deduct tax at source on interest payments to the foreign bank, and the interest expenditure was correctly disallowed under section 40(a)(i) for non-deduction.