ITO, Kumbakonam V. Shri S.Venugopal S.Raja, Kumbakonam

ITA 1249/CHNY/2012

• Counselvise Citation: [2013] 120 COUNSELVISE.COM (IT) 1186 (ITAT-CHENNAI)
• Duration Of Justice: 9 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-03-2013
• Appeal Filed By: Department
• Order Result: Allowed
• Bench Allotted: C
• Next Hearing Date: 14-03-2013
• Assessment Year: 2008-2009
• Appeal Filed On: 05-06-2012
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: T N BETGIRI JT
• Assessee Lawyers: S SRIDHAR
• Keywords: Capital asset; Residential status; Double taxation relief; Deemed to accrue or arise in india; Permanent establishment
• Section: 5(2)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH : CHENNAI [BEFORE SHRI N.S. SAINI, ACCOUNTANT MEMBER AND SHRI CHALLA NAGENDRA PRASAD, JUDICIAL MEMBER] I.T.A.NO.1249/MDS/2012 ASSESSMENT YEAR : 2008-09 THE INCOME TAX OFFICER WARD I(1) KUMBAKONAM VS SHRI S. VENUGOPAL S. RAJA 40, TOWN HIGH SCHOOL ROAD KUMBAKONAM [PAN AAFPR 5570 F] (APPELLANT) (RESPONDENT) C.O.NO.115/MDS/2012 ASSESSMENT YEAR : 2008-09 SHRI S. VENUGOPAL S. RAJA 40, TOWN HIGH SCHOOL ROAD KUMBAKONAM VS THE INCOME TAX OFFICER WARD I(1) KUMBAKONAM (CROSS OBJECTOR) (RESPONDENT) DEPARTMENT BY : SHRI T.N.BETGIRI, JT.CIT ASSESSEE BY : SHRI S. SRIDHAR, ADVOCATE DATE OF HEARING : 14-03-2013 DATE OF PRONOUNCEMENT : 21-03-2013 O R D E R PER N.S. SAINI, ACCOUNTANT MEMBER THIS IS AN APPEAL FILED BY THE REV ENUE AND THE CROSS OBJECTION FILED BY THE ASSESSEE AGAINST THE ORDER OF THE LD. CIT(A), TIRUCHIRAPALLI, DATED 20.3.2012. I.T.A.NO.129/12 C.O 115/12 :- 2 -: 2. THE SOLE ISSUE IN THE REVENUES APPEAL IS THAT THE LD. CIT(A) ERRED IN DELETING THE ADDITION MADE U/S 40(A)(IA) O F THE ACT ON THE GROUND THAT THE ASSESSEE IS NOT LIABLE TO DEDUCT T AX. 3. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE IS A PARTNER IN THE PARTNERSHIP FIRM M/S RAJA HOLDINGS. IN THE RETURN OF INCOME FILED, THE ASSESSEE CLAIMED INTEREST PAYMENT TO CO UTTS BANK, SINGAPORE, OF ` 39,73,091/-, ON THE LOAN FROM THE SAID BANK AND INVESTED IN THE FIRM M/S RAJA HOLDINGS IN WHICH THE ASSESSEE IS A PARTNER. ACCORDING TO THE ASSESSING OFFICER, AS PE R SECTION 195 OF THE ACT, THE PAYEE BEING A FOREIGN COMPANY, THE ASSESS EE OUGHT TO HAVE DEDUCTED TAX AT SOURCE AT THE PRESCRIBED RATE WHEN THE INTEREST WAS PAID. FURTHER, THE ASSESSEE MUST HAVE SUBMITTED A N APPLICATION IN THE PRESCRIBED FORM IN DUPLICATE ALONGWITH A CERTIFICAT E OBTAINED FROM AN ACCOUNTANT AS DEFINED IN SECTION 288 OF INCOME-TAX ACT, TO THE AUTHORIZED BANK WHICH WAS REMITTING THE AMOUNT TO T HE NON-RESIDENTS, WHO WILL, IN TURN, FORWARD THE SAME TO THE ASSESSIN G OFFICER. IN THIS CASE, NEITHER TAX WAS DEDUCTED AT SOURCE FROM THE I NTEREST PAYMENT MADE TO A FOREIGN COMPANY I.E COUTTS BANK NOR THE UNDERTAKING WAS FILED WITH THE REMITTING BANK. HENCE, THE DISALLOW ANCE U/S 40(A)(IA) OF THE ACT WAS MADE BY THE ASSESSING OFFICER. I.T.A.NO.129/12 C.O 115/12 :- 3 -: 4. THE ASSESSEE, BEING AGGRIEVED BY THE SAID ORDER OF THE ASSESSING OFFICER, FILED APPEAL TO THE LD. CIT(A) A ND CONTENDED THAT IN VIEW OF THE DECISION OF THE HON'BLE SUPREME COURT I N THE CASE OF GE INDIA TECHNOLOGY CENTER PVT. LTD VS CIT, 327 ITR 45 6(SC), SECTION 195 WAS APPLICABLE ONLY IN A CASE WHERE IN THE PAYMENT MADE TO A NON- RESIDENT AN ELEMENT OF INCOME WAS EMBEDDED WHICH WA S CHARGEABLE TO TAX IN INDIA. FURTHER, AS PER SECTION 5(2) OF T HE INCOME-TAX ACT, IN THE CASE OF A NON-RESIDENT, THE NEXUS FOR THE PURPO SE OF CHARGEABILITY TO INCOME-TAX WAS EITHER RECEIPT OR ACCRUAL OF INCO ME IN INDIA. STILL FURTHER, SECTION 9(1) PROVIDES THAT FOR TAXING THE INCOME IN INDIA, THE INCOME ACCRUING OR ARISING EITHER DIRECTLY OR INDIR ECTLY SHOULD BE THROUGH OR FROM ANY BUSINESS CONNECTION IN INDIA, T HROUGH OR FROM ANY PROPERTY IN INDIA, THROUGH OR FROM ANY ASSET OR SOU RCE OF INCOME IN INDIA OR THROUGH TRANSFER OF A CAPITAL ASSET SITUAT ED IN INDIA. THUS, IT IS PROVIDED THAT THE INCOME SHOULD HAVE A NEXUS WITH I NDIA FOR TAXING THE SAME IN INDIA. THE ASSESSEE FILED A CERTIFICATE F ROM RBS COUTTS BANK TO PROVE THAT THE FOREIGN BANK DOES NOT HAVE PRESEN CE IN INDIA. 5. IT WAS ALSO SUBMITTED THAT THE EXPRESSION ANY PER SON IN SECTION 195 MEANS ANY PERSON WHO IS A RESIDENT IN INDIA. SECTION 195 APPLIES ONLY IF THE PAYMENTS ARE MADE BY A RESI DENT TO ANOTHER I.T.A.NO.129/12 C.O 115/12 :- 4 -: NON-RESIDENT AND NOT BETWEEN TWO NON-RESIDENTS SITU ATED OUTSIDE INDIA. IN THE CASE OF THE ASSESSEE, SECTION 195 W AS NOT APPLICABLE BECAUSE IT IS A TRANSACTION BETWEEN TWO NON-RESIDEN T ENTITIES, THROUGH AN ARRANGEMENT EXECUTED OUTSIDE INDIA AND INTEREST WAS PAYABLE OUTSIDE INDIA. THE TRANSACTION HAS NO NEXUS WITH A NY ASSETS IN INDIA AND THAT THE ASSESSING OFFICER HAS MISTOOK THE ASS ESSEE AS A RESIDENT AND PROCEEDED TO COMPLETE THE ASSESSMENT AGAINST TH E FACTS OF THE CASE. 6. THE LD. CIT(A) AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE HELD THAT INTEREST INCOME OF THE RECIPIENT FOREIGN BANK WAS NOT TAXABLE IN INDIA AND THEREFORE, SECTION 195 WAS NOT APPLICABLE IN THE CASE OF THE ASSESSEE. CONSEQUENTLY, THE ASSE SSEE WAS NOT LIABLE TO DEDUCT ITDS FROM THE PAYMENT OF INTEREST TO THE FOREIGN BANK AND VACATED THE DISALLOWANCE BY OBSERVING AS UNDER: 3. SECTION 195 IS REPRODUCED HEREIN BELOW: 195. (1) ANY PERSON RESPONSIBLE FOR PAYING TO A NON- RESIDENT, NOT BEING A COMPANY, OR TO A FOREIGN COMP ANY, ANY INTEREST OR ANY OTHER SUM CHARGEABLE UNDER THE PROVISIONS OF THIS ACT (NOT BEING INCOME CHARGEABLE UNDER THE HEAD 'SALARIES') SHALL, AT THE TIME OF CR EDIT OF SUCH INCOME TO THE ACCOUNT OF THE PAYEE OR AT THE T IME OF PAYMENT THEREOF IN CASH OR BY THE ISSUE OF A CHEQUE OR DRAFT OR BY ANY OTHER MODE, WHICHEVER IS EARLIER, DEDUCT INCOME- TAX THEREON AT THE RATES IN FORCE: I.T.A.NO.129/12 C.O 115/12 :- 5 -: 4. FROM THE ABOVE, IT COULD BE SEEN THAT SEC 195 AP PLIES ONLY WHEN THE PAYMENT MADE TO THE NON RESIDENT HAS AN EL EMENT OF INCOME EMBEDDED IN IT WHICH IS CHARGEABLE TO TAX IN INDIA. IF THE SUM PAID OR CREDITED BY THE PAYER IS NOT CHARGEABLE TO TAX, THEN OBLIGATION TO DEDUCT TAX DOES NOT ARISE. IN OTHER W ORDS, IF THE SUM IS ASSESSABLE IN INDIA, THE PAYER HAS A DUTY TO DED UCT TAX AT SOURCE U/S 195. 5. THE AUTHORISED REPRESENTATIVE OF THE APPELLANT H AS CONTENDED THAT TDS IS A VICARIOUS LIABILITY ON BEHALF OF THE RECIPIENT AND IF THE RECIPIENT DOES NOT HAVE PRIMARY LIABILITY TO BE TAX ABLE IN RESPECT OF INCOME EMBEDDED IN THE PAYMENT, THE VICARIOUS LIABI LITY ALSO CANNOT BE INVOKED. SO TAX CANNOT BE DEDUCTED UNLESS THE NON- RESIDENT IS LIABLE TO TAX IN INDIA IN RESPECT OF TH E RECEIPT. RELIANCE WAS PLACED ON THE DECISION OF THE SUPREME COURT IN THE CASE OF GB INDIA TECHNOLOGY CENTER PVT. LTD WHERE THE SUPREME COURT HELD THAT TDS OBLIGATIONS UNDER SECTION 195 ARISES ONLY WHEN THE PAYMENT IS CHARGEABLE TO TAX IN THE HANDS OF NON-RE SIDENT IN THIS REGARD. 6. FURTHER, THE CHARGE OF INCOME-TAX UNDER SUB-SECT ION (1) OF SECTION 4 IS ON THE TOTAL INCOME OF EVERY PERSON FO R A PREVIOUS YEAR AT THE RATES ENACTED IN THE CENTRAL ACT. 7. IN THE CASE OF A NON-RESIDENT, SUB-SECTION (2) O F SECTION 5 ENUNCIATES THAT THE TOTAL INCOME OF ANY PREVIOUS YE AR WOULD INCLUDE ALL INCOME FROM WHATEVER SOURCE DERIVED, WH ICH ( I) IS RECEIVED OR IS DEEMED TO BE RECEIVED IN INDIA BY OR ON BEHALF OF SUCH PERSON; OR ( II) ACCRUES OR ARISES OR IS DEEMED TO ACCRUE OR ARISE TO HIM IN INDIA DURING SUCH YEAR. BREAKING DO WN SUB-SECTION (2) INTO COMPONENTS, IT COVERS INCOME OF A NON-RESI DENT, WHICH ( I) IS RECEIVED IN INDIA, ( II) ACCRUES IN INDIA,( III ) ARISES IN INDIA, (IV) IS DEEMED TO BE RECEIVED IN INDIA, ( V) IS DEEMED TO ACCRUE IN INDIA, OR ( VJ) IS DEEMED TO ARISE IN INDIA. HENCE, IN THE CASE OF A NON- RESIDENT THE NEXUS FOR THE PURPOSE OF CHARGEABILITY TO INCOME-TAX IS PROVIDED BY THE RECEIPT OR ACCRUAL OF THE INCOME IN INDIA. 8. SECTION 9(1) DEFINES THE CIRCUMSTANCES IN WHICH INCOME IS DEEMED TO ACCRUE OR ARISE IN INDIA. SUB-SECTION (1) OF SECTION 9 DEFINES IN CLAUSE ( J) INCOME WHICH SHALL BE DEEMED TO ACCRUE OR ARISE IN INDIA. SUB-CLAUSE (I) IS, IN TURN, DISTRIBUTED INTO FOUR CATEGORIES. THESE CATEGORIES COVER INCOME ACCRUING OR ARISING.WHETHER DIRECTLY OR INDIRECTLY:( I) THROUGH OR FROM ANY BUSINESS CONNECTION IN INDIA; ( II) THROUGH OR FROM ANY PROPERTY IN INDIA;( III) THROUGH OR FROM ANY ASSET OR SOURCE OF INCOME IN IN DIA; OR ( IV)) THROUGH THE TRANSFER OF A CAPITAL ASSET SITUATED IN INDIA. IN EACH OF THESE FOUR CATEGORIES, THE LAW HAS POSTULAT ED THE I.T.A.NO.129/12 C.O 115/12 :- 6 -: EXISTENCE OF A NEXUS WITH INDIA, WHICH INVOKES TAXI NG JURISDICTION. 9. TO PROVE THAT THE FOREIGN BANK DOES NOT HAVE PRE SENCE IN INDIA, THE CERTIFICATE RECEIVED TO THE EFFECT FROM RES COUTTS BANK, SINGAPORE IS ATTACHED HEREWITH. 10. ANOTHER POINT TO BE CONSIDERED HERE IS WHETHER NON-RESIDENTS WITH NO 'TAX PRESENCE' IN INDIA ARE LIABLE U/S 195? A LITERAL CONSTRUCTION OF THE WORDS 'ANY PERSON RESPONSIBLE F OR PAYING' AS INCLUDING NON RESIDENTS WOULD LEAD TO ABSURD CONSEQ UENCES. A PLAIN READING OF SEC.191A, 194B, 194C, 194D,194E, 1 941, AND 1941 READ WITH SEC. 115BBA, 1941, 1941 WOULD SHOW T HAT THE INTENTION OF THE PARLIAMENT WAS FIRST TO APPLY SEC. 195 ONLY TO THE RESIDENTS WHO HAVE A TAX PRESENCE IN INDIA. IT IS A LL THE MORE SO, SINCE THE PERSON RESPONSIBLE HAS TO COMPLY WITH VAR IOUS STATUTORY REQUIREMENTS SUCH AS COMPLIANCE OF S. 200(3), 203 A ND 203A. THE EXPRESSION 'ANY PERSON' IN SEC. 195 SHOULD MEAN ANY PERSON WHO IS A 'RESIDENT' IN INDIA. SEC. 195 APPLI ES ONLY IF PAYMENTS ARE MADE BY A RESIDENT TO ANOTHER NON-RESI DENT AND NOT BETWEEN TWO NON- RESIDENTS SITUATED OUTSIDE INDIA. SEC. 195 DID NOT APPLY TO THE PRESENT TRANSACTION B ECAUSE IT WAS BETWEEN TWO NON-RESIDENT ENTITIES, THROUGH AN ARRANGEMENT EXECUTED OUTSIDE INDIA AND INTEREST WAS PAYABLE OUTSIDE INDIA. THE TRANSACTION HAD NO N EXUS WITH THE UNDERLYING ASSETS IN INDIA. IN ORDER TO ES TABLISH A NEXUS, THE LEGAL NATURE OF THE TRANSACTION HAS TO B E EXAMINED. FOR THIS ASST. YEAR, THE APPELLANT IS A N ON RESIDENT. THE ASSESSING OFFICER HAS MISTOOK HIM AS A RESIDENT AND PROCEEDED TO COMPLETE THE ASSESSMENT WHICH IS AGAINST THE FACTS OF THE CASE. 11. EVEN ASSUMING FOR ARGUMENT SAKE THAT THE APPELL ANT IS A RESIDENT, THE DECISION OF THE HON'BLE CALCUTTA HIGH COURT IN HE CASE OF ABN AMRO BANK, N.V.VS. COMMISSIONER OF INCOME-TAX, WEST BENGAL-ILL, KOLKATA [2011] 198 TAX MAN 376 (CAL.) WILL APPLY ON FOURS TO THE CASE OF THE A PPELLANT. IN THE SAID CASE, THE BRANCH OF THE FOREIGN BANK SITUA TED IN INDIA WAS MAKING PAYMENT TO ITS HEAD OFFICE ABROAD. THE HIGH COURT AFTER CONSIDERING THE FACTS HELD THAT AS THE HEAD OFFICE IS NOT SITUATED IN INDIA, THE INTEREST PAID ITS INDIAN BRANCH IS NOT CHARGEABLE TO TAX IN INDIA AND HENCE THERE IS NO QUESTION OF DEDUCTION OF TAX AT SOURCE. THE RELE VANT PORTION FROM THE SAID DECISION IS REPRODUCED HEREIN BELOW I.T.A.NO.129/12 C.O 115/12 :- 7 -: AN UNNECESSARY COMPLICATION HAS BEEN CREATED BY THE INTERPRETATION MADE OF SECTION 40 (A) (I) OF THE IN COME TAX ACT READ WITH SECTION 195 OF THE ACT BY BOTH TH E APPELLANT AND THE RESPONDENTS. FIRST OF ALL, A PROP ER MEANING HAS TO BE ASCRIBED TO THE EXPRESSION 'CHARGEABLE' UNDER THE PROVISIONS OF THIS ACT. SECT ION 195(1) SAYS THAT, IF ANY INTEREST IS PAID BY A PERS ON TO A FOREIGN COMPANY, WHICH INTEREST IS CHARGEABLE UNDER THE PROVISIONS OF THIS ACT TAX SHOULD BE DEDUCTED AT SO URCE. THE WORD 'CHARGEABLE' IS NOT TO BE TAKEN AS QUALIFY ING ONLY THE PHRASE 'ANY OTHER SUM' ONLY BUT IT QUALIFI ES THE WORD 'INTEREST' ALSO. THIS INTERPRETATION IS SUPPOR TED BY THE PHRASE IN PARENTHESIS, NAMELY, NOT BEING INCOME CHARGEABLE UNDER THE HEAD 'SALARIES'. THEREFORE, TH E MEANING OF THIS SECTION IS THAT SUCH INTEREST MUST BE CHARGEABLE UNDER THE PROVISIONS OF THIS ACT. TO SIM PLIFY THE MATTER, THIS INTEREST MUST BE ACCOUNTED FOR OR CREDITED IN THE ACCOUNT OF SOME PERSON WHO IS CHARGEABLE UNDER THE ACT. IN OTHER WORDS, THIS REMI TTANCE OF INTEREST MUST RESULT IN AN INCOME WHICH IS CHARG EABLE 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 VIR TUE OF THE ABOVE CONVENTION, THE HEAD OFFICE OF THE APPELL ANT IS NOT LIABLE TO PAY ANY TAX UNDER THE ACT. THEREFORE, IN OUR OPINION, THERE WAS AND STILL IS NO OBLIGATION ON TH E PART OF THE APPELLANT'S SAID BRANCH TO DEDUCT TAX WHILE MAK ING INTEREST REMITTANCE TO ITS HEAD OFFICE OR ANY OTHER FOREIGN BRANCH. THEREFORE, IN THE CIRCUMSTANCES THERE IS NO SCOPE F OR ANY ARGUMENT THAT FOR THE PURPOSE OF COMPUTATION OF EXPENDITURE THE BRANCH AND THE HEAD OFFICE ARE TO B E TAKEN AS SEPARATE ENTITIES BUT FOR THE PURPOSE OF P AYMENT OF TAX TO BE DEDUCTED AT SOURCE ON INTEREST PAYMENT , IT IS TO BE TAKEN AS ONE BANK AND NO DEDUCTION IS TO BE M ADE AS SOUGHT TO BE MADE BY THE LEARNED COUNSEL FOR THE APPELLANT. SUCH CONTENTIONS ARE TOTALLY UNFOUNDED I N OUR OPINION. THE PERMANENT ESTABLISHMENT AND THE HEAD OFFICE HAVE TO BE TAKEN AS SEPARATE ENTITIES FOR AL L PURPOSES. BUT IN THE MAKING OF PAYMENT OF INTEREST NO TAX HAS TO BE DEDUCTED UNDER SECTION 195(1), FOR THE RE ASONS ABOVE. THEREFORE, IF NO TAX IS DEDUCTIBLE UNDER SECTION 19 5(1) SECTION 40(A)(I) OF THE ACT WILL NOT COME IN THE WA Y OF THE APPELLANT CLAIMING SUCH DEDUCTION AS FROM ITS INCOME. I.T.A.NO.129/12 C.O 115/12 :- 8 -: 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. IN VIEW OF OUR ABOVE FINDINGS THERE IS NO CONFLICT AT ALL BETWEEN THE AGREEMENT AND THE ACT. IT IS ONLY THE T AX AUTHORITIES, THE TRIBUNAL AND TO SOME EXTENT THE PA RTIES WHO HAVE PUT A VERY COMPLICATED MEANING TO THE PROVISIONS IN THE CONVENTION READ WITH THE ACT. THE APPEAL IS ALLOWED TO THE ABOVE EXTENT THAT THE ASSESSMENT OF THE INCOME OF THE APPELLANT FOR THE RELEVANT PERIOD IS TO BE DONE IN ACCORDANCE WIT H THE FINDINGS MADE IN THIS JUDGMENT. 12. THE HON'BIE SUPREME COURT ALSO VIDE ITS JUDGMENT DA TED 9.9.2010 IN THE CASE OF GE INDIA TECHNOLOGIES PT. L TD. V IS. CIT AND OTHERS (327 ITR 456) EXPLAINED THAT EXPRESSION 'CHARGEABLE UNDER THE PROVISIONS OF THE ACT' IN S.195 (1) SHOWS THAT THE REMITTANCES HAVE GOT TO BE TRADING RECEIPT WHOLE OR PART OF WHICH IS LIABLE TO TAX IN INDIA. IF THE TAX IS NOT SO ASS ESSABLE, THERE IS NO QUESTION OF TAX AT SOURCE BEING DEDUCTED. IN OTHER WORDS, IT WAS HELD THAT THE MOMENT A REMITTANCE IS MADE TO A NON RESIDENT; OBLIGATION TO DEDUCT TAX AT SOURCE UNDER SECTION 19 5 OF THE ACT DOES NOT ARISE. IT ARISES ONLY WHEN SUCH REMITTANCE IS A SUM CHARGEABLE TO TAX UNDER THE INCOME TAX ACT UNDER SE CTIONS 4, 5 AND 9 OF THE ACT. THE RATIO LAID DOWN BY THE KARNAT AKA HIGH COURT JUDGMENT IN THE CITED CASE (320 ITR 209) HAS BEEN SET ASIDE IN THAT CASE. 13. FROM THE ABOVE IT COULD BE SEEN THAT WHAT IS RE LEVANT IS WHETHER THE PAYMENT INCLUDES ANY INCOME COMPONENT A ND IF SO WHETHER THE SAME IS CHARGEABLE TO TAX. IN THE APPEL LANT'S CASE FROM THE FACTS DISCUSSED ABOVE, THE CERTIFICATE ISS UED BY THE SAID BANK AND FROM THE LEGAL POSITION DISCUSSED AS ABOVE , THE PAYMENT MADE IS NOT LIABLE TO TAX IN INDIA. SO IT I S REQUESTED THAT THE PAYMENT MAY BE TREATED AS NOT LIABLE FOR TDS AN D HENCE NOT DISALLOWABLE ULS 40(A) (I) OF THE ACT. 14. THE ABOVE ARGUMENTS OF THE APPELLANT WERE CAREF ULLY CONSIDERED. IT IS A FACT THAT THE PAYMENT WAS MADE TO A NON RESIDENT ENTITY. THE SAME HAS ALSO BEEN ACCEPTED BY THE DEPARTMENT. THE SAME HAS BEEN FURTHER REITERATED BY WAY OF A CERTIFICATE FROM COUTTS BANK. I.T.A.NO.129/12 C.O 115/12 :- 9 -: 15. THE HON'BLE SUPREME COURT IN THE CASE OF GE IND IA TECHNOLOGIES PT. LTD. VS CIT AND OTHERS REFERRED TO SUPRA OBSERVED THAT THE EXPRESSION 'CHARGEABLE UNDER THE PROVISIONS OF THE ACT' IN S.195 (1) SHOWS THAT THE REMITTANCES HA VE GOT TO BE TRADING RECEIPT WHOLE OR PART OF WHICH IS LIABLE TO TAX IN INDIA. IF THE TAX IS NOT SO ASSESSABLE, THERE IS NO QUESTION OF TAX AT SOURCE BEING DEDUCTED. IN OTHER WORDS, IT WAS HELD THAT TH E MOMENT A REMITTANCE IS MADE TO A NON RESIDENT; OBLIGATION TO DEDUCT TAX AT SOURCE UNDER SECTION 195 OF THE ACT DOES NOT ARISE. IT ARISES ONLY WHEN SUCH REMITTANCE IS A SUM CHARGEABLE TO TAX UNDER THE INCOME TAX ACT UNDER SECTIONS 4, 5 AND 9 OF THE ACT . 16. IN VIEW OF THE CATEGORICAL FINDING OF THE HON'B LE SUPREME COURT IN THE CASE REFERRED TO ABOVE, I HOLD THAT IN THE INSTANT CASE ON HAND, THE PROVISIONS OF SEC 195 ARE NOT ATTRACTE D. ONCE THIS CONCLUSION IS ARRIVED AT, THE QUESTION OF DISALLOWA NCE ON ACCOUNT OF NON DEDUCTION OF TAX AT SOURCE U/S 40(A)(I) DOES NOT ARISE. THEREFORE THE ASSESSING OFFICER IS DIRECTED TO DELE TE THE ADDITION MADE ON ACCOUNT OF NON DEDUCTION OF TAX U/S 40(A)(I A). 7. BEFORE US, THE LD. DR HAS FULLY SUPPORTED THE ORDER OF THE ASSESSING OFFICER AND SUBMITTED THAT AS PER ARTICLE 11(1) AND (2) OF THE DTAA, INTEREST ARISING IN A CONTRACTING STATE AND P AID TO A RESIDENT OF THE OTHER CONTRACTING STATE MAY BE TAXED IN THAT OT HER STATE. IT ALSO PROVIDES THAT SUCH INTEREST MAY ALSO BE TAXED IN TH E CONTRACTING STATE IN WHICH IT ARISES ACCORDING TO THE LAWS OF THAT ST ATE BUT WHERE THE BENEFICIAL OWNER OF INTEREST WAS A RESIDENT OF THE OTHER CONTRACTING STATE, THE TAX SO CHARGED SHALL NOT EXCEED 10% OF T HE GROSS AMOUNT OF INTEREST. HE FURTHER ARGUED THAT AS PER ARTICLE 11 (3) OF THE DTAA WITH SWITZERLAND, THE INTEREST WAS NOT TAXABLE IN INDIA, IN THE FOLLOWING CIRCUMSTANCES POINTED OUT IN THAT ARTICLE: I.T.A.NO.129/12 C.O 115/12 :- 10 -: (A) INTEREST ARISING IN SWITZERLAND AND PAID TO A RESIDENT OF INDIA SHALL BE TAXABLE ONLY IN INDIA IF IT IS PAID IN RESPECT OF A LOAN MADE , GUARANTEED OR INSURED , OR A CREDIT EXTENDED , GUARANTEED OR INSURED BY THE GOVERNMENT , A POLITICAL SUB-DIVISION , A STATUTORY BODY OR A LOCAL AUTHORITY OF INDIA OR THE EXPORT- IMPORT BANK OF INDIA , THE RESERVE BANK OF INDIA, THE INDUSTRIAL FINANCE CORPORATION OF INDIA, THE INDUSTRIAL DEVELOPMENT BANK OF INDIA , THE NATIONAL HOUSING BANK , THE SMALL INDUSTRIES DEVELOPMENT BANK OF INDIA OR BY ANY INSTITUTION SPECIFIED AND AGREED IN LETTERS EXCHANGED BETWEEN THE COMPETENT AUTHORITIES OF THE CONTRACTING STATES; (B) INTEREST ARISING IN INDIA AND PAID TO A RESIDENT OF SWITZERLAND SHALL BE TAXABLE ONLY IN SWITZERLAND IF IT IS PAID IN RESPECT OF A LOAN MADE , GUARANTEED OR INSURED, OR CREDIT EXTENDED, GUARANTEED OR INSURED UNDER THE SWISS PROVISIONS REGULATING THE EXPORT OR INVESTMENT RISK GUARANTE E OR BY ANY INSTITUTION SPECIFIED AND AGREED IN LETTERS EXCHANGED BETWEEN THE COMPETENT AUTHORITIES OF THE CONTRACTING STATES ; (C) INTEREST ARISING IN A CONTRACTING STATE AND PAID TO A RESIDENT OF THE OTHER CONTRACTING STATE ENGAGED IN THE OPERATION OF AIRCRAFT IN INTERNATIONAL TRAFFIC SHALL BE TAXABLE ONLY IN THAT OTHER STATE TO THE EXTENT T HAT SUCH INTEREST IS PAID ON FUNDS CONNECTED WITH SUCH ACTIVITY ; (D) INTEREST ARISING IN INDIA AND PAID TO A RESIDENT OF SWITZERLAND SHALL BE EXEMPT FROM INDIAN TAX IF THE LOAN OR OTHER INDEBTEDNESS IN RESPECT OF WHICH THE INTEREST IS PAID IS AN APPROVED LOAN. THE TERM 'APPROVED LOAN ' MEANS ANY LOAN OR OTHER INDEBTEDNESS APPROVED BY THE GOVERNMENT OF INDIA IN THIS BEHALF . I.T.A.NO.129/12 C.O 115/12 :- 11 -: 8. HE SUBMITTED THAT NO MATERIAL WAS PLACED ON RECORD BY THE ASSESSEE EITHER BEFORE THE ASSESSING OFFICER OR BEF ORE THE LD. CIT(A) TO SHOW THAT THE ASSESSEES CASE FALLS IN ANY OF THE CATEGORIES PROVIDED IN ARTICLE 11(3) OF THE DTAA WITH SWITZERLAND. THE REFORE, THE LD. CIT(A) WAS NOT JUSTIFIED IN DELETING THE DISALLOWAN CE MADE BY THE ASSESSING OFFICER. 9. THE LD. A.R OF THE ASSESSEE SUPPORTED THE ORDER OF THE LD. CIT(A). 10. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS, PERUSED T HE ORDERS OF THE LOWER AUTHORITIES AND MATERIALS AVAIL ABLE ON RECORD. IN THE INSTANT CASE, THE ASSESSEE IS A NON-RESIDENT I NDIVIDUAL AND A PARTNER IN A PARTNERSHIP FIRM, M/S RAJA HOLDINGS. IN THE RETURN OF INCOME FILED, THE ASSESSEE CLAIMED DEDUCTION FOR I NTEREST PAYMENT OF ` 39,73,091/- TO RBS COUTTS BANK WHICH IS A BANKING C OMPANY REGISTERED IN SWITZERLAND FOR THE REASON THAT THE ASSESSEE HAD BORROWED LOAN FROM THE SAID BANK AND INVESTED THE S AME IN M/S RAJA HOLDINGS. ACCORDING TO THE ASSESSING OFFICER, AS P ER SECTION 195 OF THE ACT, THE RECIPIENT, BEING A FOREIGN COMPANY, THE A SSESSEE OUGHT TO HAVE DEDUCTED TAX AT SOURCE AT THE PRESCRIBED RATES WHEN THE INTEREST WAS PAID. HE, THEREFORE, HELD THAT IN THIS CASE, T HE ASSESSEE HAS NOT I.T.A.NO.129/12 C.O 115/12 :- 12 -: DEDUCTED ITDS FROM THE INTEREST PAYMENT MADE TO A F OREIGN COMPANY I.E RBS COUTTS BANK, HENCE, THE CLAIM OF INTEREST E XPENDITURE WAS TO BE DISALLOWED AS PER THE PROVISIONS OF SECTION 40(A )(I) OF THE ACT. ACCORDINGLY, HE DISALLOWED THE CLAIM OF DEDUCTION F OR INTEREST EXPENDITURE. 11. THE ASSESSEE, BEING AGGRIEVED BY THE SAID ORDER OF THE ASSESSING OFFICER, FILED APPEAL BEFORE THE LD. CIT( A), WHO HELD THAT INTEREST INCOME OF THE RECIPIENT FOREIGN BANK WAS N OT TAXABLE IN INDIA AND THEREFORE, SECTION 195 WAS NOT APPLICABLE IN TH E CASE OF THE ASSESSEE. CONSEQUENTLY, WHEN THE ASSESSEE WAS NOT LIABLE TO ITDS FROM THE PAYMENT OF INTEREST TO THE FOREIGN BANK, T HE QUESTION OF DISALLOWANCE U/S 40(A)(I) DID NOT ARISE. HENCE, H E DELETED THE DISALLOWANCE OF INTEREST EXPENDITURE. 12. WE FIND THAT THE LD. CIT(A) HAS ACCEPTED THE ARGUME NT OF THE ASSESSEE THAT SECTION 195 WAS NOT APPLICABLE WHEN T HE INTEREST WAS PAID BY A NON-RESIDENT IN INDIA TO A NON-RESIDENT I N INDIA AS THE EXPRESSION ANY PERSON IN SECTION 195 MEANS ANY PE RSON WHO IS RESIDENT IN INDIA. WE DO NOT AGREE WITH THIS FIN DING OF THE LD. CIT(A). WE FIND THAT SECTION 195 READS AS UNDER: I.T.A.NO.129/12 C.O 115/12 :- 13 -: 195. (1) ANY PERSON RESPONSIBLE FOR PAYING TO A NON- RESIDENT, NOT BEING A COMPANY, OR TO A FOREIGN COMP ANY, ANY INTEREST (NOT BEING INTEREST REFERRED TO IN SECTION 194LC) OR ANY OTHER SUM CHARGEABLE UNDER THE PROVISIONS OF THIS ACT (NOT BEING INCOME CHARGEABLE UNDER THE HEAD SALARIES) SHALL, AT THE TIME OF CREDIT OF SUCH IN COME TO THE ACCOUNT OF THE PAYEE OR AT THE TIME OF PAYMENT THEREOF IN CASE OR BY THE ISSUE OF A CHEQUE OR DRAF T OR BY ANY OTHER MODE, WHICHEVER IS EARLIER, DEDUCT INCOME -TAX THEREON AT THE RATES IN FORCE: 13. FROM A READING OF THE ABOVE SECTION SHOWS THAT IT T ALKS ABOUT ANY PERSON RESPONSIBLE FOR PAYING TO A NON-RESIDEN T. 14. WE FIND THAT SECTION 9(1)(V)(C) READS AS UNDER: 9.(1) THE FOLLOWING INCOMES SHALL BE DEEMED TO ACCRUE ON ARISE IN INDIA:- .. (V) INCOME BY WAYS OF INTEREST PAYABLE BY - .. (C) A PERSON WHO IS A NON-RESIDENT, WHERE THE INTEREST IS PAYABLE IN RESPECT OF ANY DEBT INCURRED , OR MONEYS BORROWED AND USED, FOR THE PURPOSES OF A BUSINESS OR PROFESSION CARRIED ON BY SUCH PERSON IN INDIA; 15. IN THE INSTANT CASE, WE FIND THAT ACCORDING TO THE ASSESSEE, DEDUCTION FOR INTEREST IN QUESTION WAS CLAIMED BECA USE THE ASSESSEE USED THE BORROWED FUNDS FOR THE PURPOSES OF BUSINES S OF M/S RAJA HOLDINGS, WHEREIN HE IS A PARTNER. THEREFORE, IN V IEW OF THE ABOVE PROVISIONS OF LAW, IN OUR CONSIDERED VIEW, THE INTE REST SO PAID IS I.T.A.NO.129/12 C.O 115/12 :- 14 -: DEEMED TO ACCRUE OR ARISE IN INDIA U/S 9(1)(V)(C) AND ACCORDINGLY IS TAXABLE IN INDIA. FURTHER, THE ASSESSEE RELIED UP ON THE DTAA AGREEMENT WITH SWITZERLAND FOR CONTENDING THAT THE INTEREST IN QUESTION IS NOT LIABLE TO BE TAXED IN INDIA. THE R ELEVANT PORTION OF DTAA ON WHICH RELIANCE WAS PLACED BY THE ASSESSEE IS QUOTED AS UNDER: ARTICLE 11(1) AND (2) 1 . INTEREST ARISING IN A CONTRACTING STATE AND PAID TO A RESIDENT OF THE OTHER CONTRACTING STATE MAY BE TAXE D IN THAT OTHER STATE. 2. HOWEVER, SUCH INTEREST MAY ALSO BE TAXED IN THE CONTRACTING STATE IN WHICH IT ARISES, AND ACCORDING TO THE LAWS OF THAT STATE, BUT IF THE BENEFICIAL OWNER OF THE INTEREST IS A RESIDENT OF THE OTHER CONTRACTING STA TE, THE TAX SO CHARGED SHALL NOT EXCEED 10 PER CENT OF THE GROSS AMOUNT OF THE INTEREST. ARTICLE 11(3) NOTWITHSTANDING THE PROVISIONS OF PARAGRAPH 2: (A) INTEREST ARISING IN SWITZERLAND AND PAID TO A RESID ENT OF INDIA SHALL BE TAXABLE ONLY IN INDIA IF IT IS PA ID IN RESPECT OF A LOAN MADE, GUARANTEED OR INSURED, OR A CREDIT EXTENDED, GUARANTEED OR INSURED BY THE GOVERNMENT, A POLITICAL SUB-DIVISION, A STATUTORY BODY OR A LOCAL AUTHORITY OF INDIA OR THE EXPORT- IMPORT BANK OF INDIA, THE RESERVE BANK OF INDIA, TH E INDUSTRIAL FINANCE CORPORATION OF INDIA, THE INDUSTRIAL DEVELOPMENT BANK OF INDIA, THE NATIONAL HOUSING BANK, THE SMALL INDUSTRIES DEVELOPMENT BANK OF INDIA OR BY ANY INSTITUTION I.T.A.NO.129/12 C.O 115/12 :- 15 -: SPECIFIED AND AGREED IN LETTERS EXCHANGED BETWEEN THE COMPETENT AUTHORITIES OF THE CONTRACTING STATES; (B) INTEREST ARISING IN INDIA AND PAID TO A RESIDENT OF SWITZERLAND SHALL BE TAXABLE ONLY IN SWITZERLAND IF IT IS PAID IN RESPECT OF A LOAN MADE, GUARANTEED OR INSURED, OR CREDIT EXTENDED, GUARANTEED OR INSURED UNDER THE SWISS PROVISIONS REGULATING THE EXPORT OR INVESTMENT RISK GUARANTEE OR BY ANY INSTITUTION SPECIFIED AND AGREED IN LETTERS EXCHANGED BETWEEN THE COMPETENT AUTHORITIES OF THE CONTRACTING STATES ; (C) INTEREST ARISING IN A CONTRACTING STATE AND PAID TO A RESIDENT OF THE OTHER CONTRACTING STATE ENGAGED I N THE OPERATION OF AIRCRAFT IN INTERNATIONAL TRAFFIC SHALL BE TAXABLE ONLY IN THAT OTHER STATE TO THE EXTENT THAT SUCH INTEREST IS PAID ON FUNDS CONNECTED WITH SUCH ACTIVITY; (D) INTEREST ARISING IN INDIA AND PAID TO A RESIDENT OF SWITZERLAND SHALL BE EXEMPT FROM INDIAN TAX IF THE LOAN OR OTHER INDEBTEDNESS IN RESPECT OF WHICH THE INTEREST IS PAID IS AN APPROVED LOAN. THE TERM 'APPROVED LOAN' MEANS ANY LOAN OR OTHER INDEBTEDNES S APPROVED BY THE GOVERNMENT OF INDIA IN THIS BEHALF. 16. WE FIND THAT NO MATERIAL WAS BROUGHT ON RECORD BY T HE ASSESSEE TO SHOW THAT INTEREST IN QUESTION FALLS U NDER ARTICLE 11(3) OF THE ABOVE STATED DTAA. IN THE ABOVE CIRCUMSTANCES, IN OUR CONSIDERED VIEW, THE INTEREST IN QUESTION WAS TAXABLE IN INDIA THOUGH THE RATE OF TAX COULD NOT EXCEED 10%. THEREFORE, IN OUR VIEW, THE ASSESSEE WAS LIABLE TO DEDUCT TAX AT SOURCE ON THE AFORESAID PAY MENT OF INTEREST U/S I.T.A.NO.129/12 C.O 115/12 :- 16 -: 195 OF THE ACT. IT IS NOT IN DISPUTE THAT THE ASS ESSEE HAS NOT DEDUCTED TAX AT SOURCE IN RESPECT OF THE ABOVE PAYMENT OF IN TEREST AND CONSEQUENTLY, INTEREST PAYMENT WAS HIT BY THE PROVI SIONS OF SECTION 40(A)(I) OF THE ACT. IN VIEW OF OUR ABOVE FINDING, THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF GE INDIA TECHN OLOGIES PVT. LTD VS CIT (SUPRA) RELIED UPON BY THE LD. CIT(A) IS NOT APPLICABLE TO THE INSTANT CASE AS BECAUSE THE HON'BLE SUPREME COURT H AS HELD THAT WHERE PAYMENT MADE TO A NON-RESIDENT DOES NOT EMBED ANY AMOUNT OF INCOME WHICH IS CHARGEABLE TO TAX IN INDIA ONLY IN THOSE CASES PROVISIONS OF SECTION 195 IS NOT APPLICABLE. WE, T HEREFORE, SET ASIDE THE ORDER OF THE LD. CIT(A) AND RESTORE THE ORDER O F THE ASSESSING OFFICER IN RESPECT OF THE ISSUE UNDER CONSIDERATION . THUS, THE APPEAL OF THE REVENUE IS ALLOWED. 17. THE LD. A.R OF THE ASSESSEE SUBMITTED THAT THE CRO SS OBJECTION FILED BY THE ASSESSEE IS IN SUPPORT OF T HE ORDER OF THE LD. CIT(A). THERE BEING NO GRIEVANCE AGAINST THE ORDER PASSED BY THE LD. CIT(A), THE CROSS OBJECTION FILED BY THE ASSESSEE IS INFRUCTUOUS AND HENCE, DISMISSED. I.T.A.NO.129/12 C.O 115/12 :- 17 -: 18. IN THE RESULT, THE APPEAL OF THE REVENUE IS ALLOWED AND THE CROSS OBJECTION OF THE ASSESSEE IS DISMISSED. ORDER PRONOUNCED ON THURSDAY, THE 21 ST OF MARCH, 2013, AT CHENNAI. SD/- SD/- (CHALLA NAGENDRA PRASAD) JUDICIAL MEMBER (N.S.SAINI) ACCOUNTANT MEMBER DATED: 21 ST MARCH, 2013 RD COPY TO: APPELLANT/RESPONDENT/CIT(A)/CIT/DR