2018 (9) TMI 58 - AT - Income Tax

Withholding tax credit deducted by US based subsidiary of the assessee company in USA on payment of interest loan - Indo-US DTAA - tax deduction by source state - credit has been denied by the Revenue authorities on the ground that assessee has not filed its return of income in US for claiming the refund of the withholding tax if the said amount is not taxable in US - there is no scheme under the DTAA for the resident to give credit of the tax withheld in the source country if the same is not taxable in the source country - interest paid by the US company who is a deductor is actually an expenditure for that company and therefore, there is no question of same being taxable in USA and it has not been shown as to under which provision the TDS was made by the deductor in USA Held that - It is not in dispute that tax has been deducted by the source state, i.e., USA on the interest income of the resident of India, however, it is not clear under which provision such amount of interest paid by the US Company to the Indian Company is liable for tax under the US laws. The TDS certificate perhaps will give the clarity in this regard, because there might be mention of provision or code under which the tax has been withheld. Thus, for the limited purpose the matter is remanded back to the Assessing Officer to examine the TDS certificates which shall be submitted by the assessee; or assessee can provide any other documents to show that withholding of the tax by the US Company is in accordance with the law of the US State. If the TDS certificate is produced by the assessee, then such tax which has been withheld, Assessing Officer has to give credit of such withholding tax by the US Company which is the mandate of Article 25. Accordingly, with this direction the matter is restored back to the file of the Assessing Officer - Decided in favour of assessee partly for statistical purposes.

Summary

Issues Involved:
1. Disallowance of credit for withholding tax deducted by a US subsidiary on interest paid to an Indian resident company.
2. Double taxation of interest income earned from a US subsidiary.
3. Applicability of Article 25 of the Indo-US DTAA for claiming credit of tax deducted in the USA.
4. Requirement of filing a return of income in the USA to claim credit for withholding tax.

Detailed Analysis:

1. Disallowance of Credit for Withholding Tax:
The primary issue in these appeals is the disallowance of the claim for credit of withholding tax amounting to ?26,99,165/- deducted by M/s Uniparts USA Ltd., USA on interest paid to the assessee company. The assessee contends that the credit for this tax should be allowed as the interest income has been declared in India and assessed to tax here. The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] disallowed the credit on the grounds that the interest income was not taxable in the USA, and the assessee did not file a return of income in the USA to claim a refund of the withholding tax.

2. Double Taxation of Interest Income:
The assessee argued that it suffered double taxation on the interest income earned from Uniparts USA Ltd. because the withholding tax was deducted in the USA, and the same income was taxed in India. The AO and CIT(A) rejected this claim, stating that the interest income was not taxable in the USA, and thus, there was no double taxation. They emphasized that the DTAA provides relief from double taxation only when the income is taxable in both countries.

3. Applicability of Article 25 of the Indo-US DTAA:
Article 25 of the Indo-US DTAA deals with the relief from double taxation. Paragraph 2(a) of Article 25 states that if a resident of India derives income that may be taxed in the USA, India shall allow a deduction from the tax on the income of that resident equal to the tax paid in the USA. The Tribunal noted that the interest income earned by the assessee from the US subsidiary was liable to tax in India under Section 5 of the Income Tax Act, 1961. The US subsidiary withheld tax on the interest payment as per Article 11 and Article 25 of the DTAA. The Tribunal observed that the relevant TDS certificates or other documents should clarify under which provision the tax was withheld in the USA.

4. Requirement of Filing a Return of Income in the USA:
The AO and CIT(A) held that the assessee should have filed a return of income in the USA to claim a refund of the withholding tax if the interest income was not taxable in the USA. The Tribunal disagreed with this view, stating that the withholding tax was deducted in accordance with the DTAA and domestic laws of the USA. The Tribunal remanded the matter back to the AO to examine the TDS certificates or other documents to verify if the withholding tax was in accordance with US laws. If verified, the AO was directed to allow the credit for the withholding tax as per Article 25 of the DTAA.

Conclusion:
The Tribunal concluded that the AO should examine the TDS certificates or other relevant documents to verify the withholding tax deducted by the US subsidiary. If the tax was withheld in accordance with US laws, the AO must allow the credit for the withholding tax as per Article 25 of the Indo-US DTAA. The appeal was partly allowed for statistical purposes, and the matter was remanded back to the AO for further examination.

Order Pronouncement:
The order was pronounced in the open Court on 2nd July, 2018.