TaxTMI 
TaxTMI 
2013 (3) TMI 901
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....e is a Partner. According to the Assessing Officer, as per section 195 of the Act, the payee being a foreign company, the assessee ought to have deducted tax at source at the prescribed rate when the interest was paid. Further, the assessee must have submitted an application in the prescribed form in duplicate alongwith a certificate obtained from an accountant as defined in section 288 of Income-tax Act, to the authorized bank which was remitting the amount to the non-residents, who will, in turn, forward the same to the Assessing Officer. In this case, neither tax was deducted at source from the interest payment made to a foreign company i.e Coutts Bank nor the undertaking was filed with the remitting bank. Hence, the disallowance u/s 40(a)(ia) of the Act was made by the Assessing Officer. 4. The assessee, being aggrieved by the said order of the Assessing Officer, filed appeal to the ld. CIT(A) and contended that in view of the decision of the Hon'ble Supreme Court in the case of GE India Technology Center Pvt. Ltd vs CIT, 327 ITR 456(SC), section 195 was applicable only in a case where in the payment made to a non- resident an element of income was embedded which was cha....
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....he above, it could be seen that Sec 195 applies only when the payment made to the non resident has an element of income embedded in it which is chargeable to tax in India. If the sum paid or credited by the payer is not chargeable to tax, then obligation to deduct tax does not arise. In other words, if the sum is assessable in India, the payer has a duty to deduct tax at source U/S 195. 5. The Authorised Representative of the appellant has contended that TDS is a vicarious liability on behalf of the recipient and if the recipient does not have primary liability to be taxable in respect of income embedded in the payment, the vicarious liability also cannot be invoked. So tax cannot be deducted unless the non-resident is liable to tax in India in respect of the receipt. Reliance was placed on the decision of the Supreme Court in the case of GB India Technology Center Pvt. Ltd where the Supreme Court held that TDS obligations under section 195 arises only when the payment is chargeable to tax in the hands of non-resident in this regard. 6. Further, the charge of income-tax under sub-section (1) of section 4 is on the total income of every person for a previous year a....
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....ec. 195 should mean any person who is a "resident" in India. Sec. 195 applies only if payments are made by a resident to another non-resident and not between two non- residents situated outside India. Sec. 195 did not apply to the present transaction because it was between two non-resident entities, through an arrangement executed outside India and interest was payable outside India. The transaction had no nexus with the underlying assets in India. In order to establish a nexus, the legal nature of the transaction has to be examined. For this asst. year, the appellant is a non resident. The Assessing Officer has mistook him as a Resident and proceeded to complete the assessment which is against the facts of the case. 11. Even assuming for argument sake that the appellant is a resident, the decision of the Hon'ble Calcutta High Court in he case of ABN Amro Bank, N.V.vs. Commissioner of Income-tax, West Bengal-Ill, Kolkata [2011] 198 TAXMAN 376 (Cal.) will apply on fours to the case of the appellant. In the said case, the branch of the Foreign Bank situated in India was making payment to its Head Office abroad. The High Court after considering the facts held that as the ....
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....rest no tax has to be deducted under section 195(1), for the reasons above. Therefore, if no tax is deductible under section 195(1) section 40(a)(i) of the Act will not come in the way of the appellant claiming such deduction as from its income. Therefore, in the circumstances the appellant would be entitled to deduct such interest paid, as permitted by the convention or agreement, in the computation of its income. In view of our above findings there is no conflict at all between the agreement and the Act. It is only the tax authorities, the tribunal and to some extent the parties who have put a very complicated meaning to the provisions in the convention read with the Act. The appeal is allowed to the above extent That the assessment of the income of the appellant for the relevant period is to be done in accordance with the findings made in this judgment. 12. The Hon'bIe Supreme Court also vide its judgment dated 9.9.2010 in the case of GE India Technologies Pt. Ltd. V Is. CIT and Others (327 ITR 456) explained that expression 'chargeable under the provisions of the Act' in S.195 (1) shows that the remittances have got to be....
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....er is directed to delete the addition made on account of non deduction of tax u/s 40(a)(ia). " 7. Before us, the ld. DR has fully supported the order of the Assessing Officer and submitted that as per Article 11(1) and (2) of the DTAA, interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. It also provides that such interest may also be taxed in the Contracting State in which it arises according to the laws of that State but where the beneficial owner of interest was a resident of the other Contracting State, the tax so charged shall not exceed 10% of the gross amount of interest. He further argued that as per Article 11(3) of the DTAA with Switzerland, the interest was not taxable in India, in the following circumstances pointed out in that Article: (a) interest arising in Switzerland and paid to a resident of India shall be taxable only in India if it is paid in respect of a loan made, guaranteed or insured, or a credit extended, guaranteed or insured by the Government, a political sub-division, a statutory body or a local authority of India or the Export- Import Bank of India, the Reserve Bank o....
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....any, the assessee ought to have deducted tax at source at the prescribed rates when the interest was paid. He, therefore, held that in this case, the assessee has not deducted ITDS from the interest payment made to a foreign company i.e RBS Coutts Bank, hence, the claim of interest expenditure was to be disallowed as per the provisions of section 40(a)(i) of the Act. Accordingly, he disallowed the claim of deduction for interest expenditure. 11. The assessee, being aggrieved by the said order of the Assessing Officer, filed appeal before the ld. CIT(A), who held that interest income of the recipient foreign bank was not taxable in India and therefore, section 195 was not applicable in the case of the assessee. Consequently, when the assessee was not liable to ITDS from the payment of interest to the foreign bank, the question of disallowance u/s 40(a)(i) did not arise. Hence, he deleted the disallowance of interest expenditure. 12. We find that the ld. CIT(A) has accepted the argument of the assessee that section 195 was not applicable when the interest was paid by a non-resident in India to a non-resident in India as the expression "any person" in section 195 means any perso....
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....the interest. "Article 11(3) Notwithstanding the provisions of paragraph 2: (a) interest arising in Switzerland and paid to a resident of India shall be taxable only in India if it is paid in respect of a loan made, guaranteed or insured, or a credit extended, guaranteed or insured by the Government, a political sub-division, a statutory body or a local authority of India or the Export- Import Bank of India, the Reserve Bank of India, the Industrial Finance Corporation of India, the Industrial Development Bank of India, the National Housing Bank, the Small Industries Development Bank of India or by any institution specified and agreed in letters exchanged between the competent authorities of the Contracting States; (b) interest arising in India and paid to a resident of Switzerland shall be taxable only in Switzerland if it is paid in respect of a loan made, guaranteed or insured, or credit extended, guaranteed or insured under the Swiss provisions regulating the Export or Investment Risk Guarantee or by any institution specified and agreed in letters exchanged between the competent authorities of the Contracting States; (c) interest ari....