2015 (1) TMI 871 - HC - Income Tax

Head office liability to deduct TDS - Interest payment made by the Indian Branch to its head office abroad - whether allowed as a deduction in computing the profits of the appellant s branch in India ? - Held that - Interpreting section 40(a)(i ) of the Income Tax Act read with section 195 of the Act this interest must be accounted for or credited in the account of some person who is chargeable under the Act. In other words, this remittance of interest must result in an income which is chargeable under the Act. In those circumstances tax may be deducted at source. But where this interest is not so chargeable, no tax is deducted. In this case, by virtue of the above convention, the head office of the appellant is not liable to pay any tax under the Act. See ABN Amro Bank NV-vs-CIT, WB-III, Kolkata and Another - 2010 (12) TMI 340 - CALCUTTA HIGH COURT - Decided in favour of assessee.

Summary

Issues:
1. Appeal under section 260A of the Income Tax Act, 1961 against the order of the Income Tax Appellate Tribunal.
2. Whether interest payment made by the Indian Branch to the head office abroad is deductible in computing profits.
3. Whether the Indian Branch was required to deduct tax at source under section 195 of the Income Tax Act, 1961.

Analysis:
The High Court of Karnataka heard an appeal under section 260A of the Income Tax Act, 1961 against the order of the Income Tax Appellate Tribunal related to the assessment year 1995-96. The appellant raised questions regarding the deduction of interest payment made by the Indian Branch to its head office abroad and the requirement to deduct tax at source under section 195 of the Income Tax Act, 1961. The court admitted the appeal and considered the issues in light of a previous judgment in ABN Amro Bank NV-vs-CIT, WB-III, Kolkata and Another: 343 ITR 81 (Cal).

The court analyzed the interpretation of section 40(a)(i) of the Income Tax Act read with section 195 of the Act. It emphasized that the term "chargeable" under the Act implies that the interest must be accounted for or credited to a person who is chargeable under the Act. The court referenced the ABN Amro judgment to support its reasoning that if the interest is not chargeable under the Act, no tax should be deducted. The court noted that the head office of the appellant was not liable to pay any tax under the Act, leading to the conclusion that the appellant's branch was not obligated to deduct tax while making interest remittance to its head office or any other foreign branch.

The court further mentioned that the issues raised in the questions presented were settled by the ABN Amro judgment. It highlighted that a Special Leave Petition filed against the ABN Amro judgment before the Supreme Court was dismissed. Consequently, the court answered the first question affirmatively and the second question negatively, both in favor of the appellant. Based on the reasons provided, the court allowed the appeal in favor of the appellant.