9911796707
|
Home
Forgot password New User/ Regiser ⇒ Register to get Live Demo
2010 (12) TMI 340 - HC - Income TaxDeducted tax at source - Deduction - Computation of income - section 40 (a) (i) of the Income Tax Act read with section 195 of the Act - The appellant is a foreign company incorporated in Netherlands and having its principal branch office in India - The head office of the appellant is not liable to pay any tax under the Act - Therefore, there was and still is no obligation on the part of the appellant s said branch to deduct tax while making interest remittance to its head office or any other foreign branch - The permanent establishment and the head office have to be taken as separate entities for all purposes. But in the making of payment of interest no tax has to be deducted under section 195(1) - 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.
Issues Involved:
1. Whether interest payment made by the Indian branch of the appellant to its head office abroad was to be allowed as a deduction in computing the profits of the appellant's branch in India? 2. Whether in making such payment to the head office, the appellant's said branch was required to deduct tax at source under Section 195 of the Income Tax Act, 1961? Detailed Analysis: Issue 1: Deduction of Interest Payment Discussion and Findings: - The appellant, a foreign company incorporated in the Netherlands, has a branch in India that remits interest to its head office. - Under Section 90 of the Income Tax Act, the Government of India entered into a Double Taxation Avoidance Agreement (DTAA) with the Netherlands, operational from 21st January 1989. - The DTAA's articles are significant in deciding this issue. Article 5(2) defines a branch as a "permanent establishment," and Article 7(2) states that this permanent establishment should be treated as a distinct and separate enterprise. - Article 7(3) read with Article 11(7) allows the deduction of interest paid by the branch to the head office. - The Supreme Court in Union of India vs Azadi Bachao Andolan established that the DTAA provisions override the Income Tax Act provisions if they are more beneficial to the assessee. - The court concluded that the permanent establishment (branch) and the head office should be treated as separate entities for all purposes, including the deduction of interest payments. Conclusion: - The interest payment made by the Indian branch to its head office is allowed as a deduction in computing the profits of the appellant's branch in India, as per the DTAA provisions. Issue 2: Tax Deduction at Source under Section 195 Discussion and Findings: - Section 195(1) of the Income Tax Act mandates tax deduction at source on any interest paid to a foreign company if the interest is "chargeable under the provisions of this Act." - The court interpreted that the term "chargeable" qualifies both "interest" and "any other sum," meaning the interest must result in income chargeable under the Act. - As per the DTAA, the head office is not liable to pay any tax under the Act, implying no obligation for the Indian branch to deduct tax while remitting interest to the head office. - The court dismissed the argument that the branch and head office should be treated as one entity for tax deduction purposes while being separate entities for expense computation. Conclusion: - The Indian branch is not required to deduct tax at source under Section 195 when making interest payments to the head office, as the interest is not chargeable under the Act due to the DTAA provisions. Final Judgment: - The appeal is allowed to the extent that the assessment of the appellant's income for the relevant period should be done in accordance with these findings. - The permanent establishment and the head office are to be treated as separate entities for all purposes, and no tax is to be deducted under Section 195 for interest payments. - The appellant is entitled to deduct the interest paid to the head office in the computation of its income, as permitted by the DTAA.
|
