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2018 (11) TMI 330 - HC - Income TaxTDS u/s 195 - payments made to a non resident - DTAA between India and UK - income accrued to India - principle of grossing up - Held that - In the decision in the case of M/s.TVS Motor Company Ltd. Vs. ITO 2018 (9) TMI 81 - MADRAS HIGH COURT , to which, one of us (TSSJ) was a party, this Court decided the substantial question of law against the assessee. In the absence of the definition of income and definition of gross amount under the treaty, the assessee has to necessarily compute the income in terms of Section 195A of the Act. Admittedly, in the instant case, there is no exemption granted under Section 10(6A) of the Act for the assessee to contend that the said payment does not form part of total income. For the purpose of deduction of tax at source on the payment made by the assessee to the University of Warwick, the income should be computed in terms of the provisions of the Act and in so doing, it shall be increased by taking into consideration the amount of tax liability undertaken to be borne by the assessee. In other words, the obligation to pay the tax is on the University of Warwick and since the assessee in terms of the agreement agreed to pay the taxes, the same has to be necessarily added to the income of the University of Warwick and therefore, the principle of grossing up has to be applied. No hesitation to hold that the Assessing Officer, the CIT(A), and the Tribunal rightly held that the principles of grossing up would apply to the assessee s case.
Issues Involved:
1. Liability of the assessee to deduct tax at source from payments made to a non-resident under the Double Taxation Avoidance Agreement (DTAA) between India and the UK. 2. Application of the principle of grossing up for tax deduction at source. 3. Interpretation of "gross amount" and "income" under the DTAA and the Income Tax Act, 1961. Detailed Analysis: 1. Liability of the Assessee to Deduct Tax at Source: The primary issue was whether the assessee's obligation to deduct tax at source from payments made to a non-resident (University of Warwick) should be computed on the gross amount, including the tax liability undertaken by the assessee. The court referred to the DTAA between India and the UK and Section 90 of the Income Tax Act, which allows an assessee to opt for provisions that are more beneficial. The assessee contended that the tax to be deducted should be based on the net payment made, as per the DTAA, which prescribes a maximum tax rate of 15% on gross receipts for technical services. 2. Application of the Principle of Grossing Up: The court examined the principle of grossing up under Section 195A of the Income Tax Act, which requires that when the tax chargeable on any income is to be borne by the payer, the income should be increased to an amount that, after deduction of tax, equals the net amount payable. The court noted that the DTAA does not define "gross amount" or provide a mechanism for computing income, necessitating reliance on the Income Tax Act's provisions. The Revenue argued that the tax borne by the assessee constitutes part of the income of the University of Warwick and should be grossed up accordingly. 3. Interpretation of "Gross Amount" and "Income": The court discussed the definitions of "gross amount" and "income" under the DTAA and the Income Tax Act. It highlighted that the DTAA's Article 13 specifies tax rates but does not define "gross amount" or "income." Consequently, the court referred to Section 2(24) of the Income Tax Act, which includes net of tax payments in the definition of income. The court concluded that the tax borne by the assessee forms part of the income of the University of Warwick, and the principle of grossing up under Section 195A applies. Conclusion: The court held that the Assessing Officer, the CIT(A), and the Tribunal correctly applied the principle of grossing up. The substantial question of law was answered against the assessee, and the appeals were dismissed. The court emphasized that the income should be computed under the provisions of the Income Tax Act, and the tax liability borne by the assessee must be added to the income of the University of Warwick for the purpose of tax deduction at source.
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