2022 (8) TMI 353 - AT - Income Tax

Credit of TDS by the borrowers on gross interest payment - contention of the assessee is that the borrower was required to bear the cost of the tax i.e. tax-deductible at source and the lender i.e. DZ Bank AG was to be received sum net of any deduction or withholding tax - HELD THAT - As respectfully following the decision of the Hon ble Bombay High Court in the case of Yashpal Sahni 2007 (7) TMI 7 - HIGH COURT , BOMBAY for availing credit of TDS, the assessee has to discharge its responsibility of substantiating whether tax was deducted by the payer of income. From the contract agreement also it is evident that the borrower was required to intimate to the DZ Bank AG regarding the amount of tax deducted at source and paid to the tax authority. Before us, the assessee has even neither furnished any details of the amount of TDS in respect of interest income, which it has shown if any in its profit and loss account, nor furnished any evidence to support deduction of tax at source by the payer of income. The assessee has not furnished any certified copies of ledger account of assessee in the books of borrower parties so as to reflect the amount credited in the account of the assessee. Statutory provisions and judicial precedents, we feel it appropriate to restore this issue of granting credit of tax deducted source to the file of the AO for verification as to whether the assessee has shown interest income corresponding to the TDS in profit and loss account for the year under consideration and whether the tax has been deducted at source by the payer of the income. Assessing Officer need not to insist for demand in respect of said TDS payment to Government account as explained by the CBDT in OM F/No 275/29/2014-IT(B) dated 11.03.2016. The onus is on the assessee to substantiate its claim of tax deducted at source by way of necessary documentary evidence. AO is also at liberty to verify or make necessary inquiries from the borrower of loans as to what amount has been deducted by them in respect of the interest paid or credited to the assessee. It is needless to mention that the adequate opportunity of being heard shall be provided to the assessee. The grounds relating to the credit of the TDS are accordingly allowed for statistical purposes in all the four appeals of the assessee

Issues Involved:
1. Credit for Tax Deducted at Source (TDS) on gross interest payments.
2. Demand for taxes already deducted at source.
3. Verification of tax deduction by the payer of income.

Detailed Analysis:

1. Credit for Tax Deducted at Source (TDS) on Gross Interest Payments:
The Tribunal was tasked with adjudicating the grounds related to the allowance of TDS credit by borrowers on gross interest payments to M/s DZ Bank. The appeals were recalled for this limited purpose. The main contention was whether the assessee should be allowed TDS credit, including for amounts where TDS certificates were not furnished but payments were received net of taxes.

The assessee argued that Indian borrowers paid interest after deducting tax at source per Article 11 of the Double Taxation Avoidance Agreement (DTAA) between India and Germany. The income assessed in the assessee's hands represented the grossed-up amount since the tax was borne by the Indian borrowers. The assessee claimed that under section 205 of the Income Tax Act, it should not be required to pay the tax if the payer of income had deducted the tax at source.

2. Demand for Taxes Already Deducted at Source:
The Tribunal noted that the Assessing Officer had treated the representative office of DZ Bank as a permanent establishment (PE) and taxed the interest income and other fees at 40% as per the Act. However, the Tribunal held that the income, which had already been taxed under Article 11 of the Indo-German tax treaty, could not be taxed again under a different provision of the same treaty. Therefore, the demand raised for taxing the interest income of the head office in the hands of the assessee was deemed unsustainable in law.

The Tribunal emphasized that the assessee should not be called upon to pay the tax again if it had already been deducted at source, aligning with the ruling in the case of Yashpal Sahni by the Hon'ble Bombay High Court, which stated that the revenue could not recover the TDS amount from the assessee if it was already deducted by the employer, even if not deposited with the government.

3. Verification of Tax Deduction by the Payer of Income:
The Tribunal directed the Assessing Officer to verify whether the assessee had shown the interest income corresponding to the TDS in its profit and loss account and whether the tax had been deducted at source by the payer of income. The Tribunal instructed that the Assessing Officer should not insist on the demand in respect of the TDS payment to the government account, as clarified by the CBDT.

The Tribunal restored the issue to the Assessing Officer for verification, allowing the assessee to substantiate its claim of TDS with necessary documentary evidence. The Assessing Officer was also given the liberty to verify or make inquiries from the borrowers regarding the amount deducted in respect of the interest paid or credited to the assessee.

Conclusion:
The appeals were allowed for statistical purposes, with the Tribunal directing the Assessing Officer to verify the claims of TDS credit by the assessee and to ensure that the assessee is not called upon to pay the tax again if it was already deducted at source. The Tribunal emphasized the need for adequate opportunity for the assessee to present its case. The order was pronounced on 04/08/2022.

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