Interest Payable to AE is Taxable on Accrual Basis if DTAA is Silent on Taxability of Interest Income | ITAT

Case Details: LS Automotive India Private Limited vs. ACIT - [2024] 162 taxmann.com 600 (Chennai - Trib.)

Judiciary and Counsel Details

• Mahavir Singh, Vice President & Manjunatha G., Accountant Member
• Raghunathan Sampath, & S. Sankara Narayanan, Advs., for the Appellant. 
• A. Sasikumar , CIT, for the Respondent.

Facts of the Case

Assessee, a private limited company, was engaged in the manufacture and sale of automotive components. The assessee was a subsidiary of foreign company. During the relevant assessment year, the assessee debited an amount towards interest payable to the foreign company for delayed payment of import payables. However, the assessee failed to deduct tax at source under section 195 on such interest payment.

The Assessing Officer (AO) disallowed interest expenses under section 40(a)(i). According to the assessee, as per DTAA, interest payment was taxable in the hands of foreign company on receipt basis but not on an accrual basis.

On appeal, the CIT(A) upheld the order of the AO, and the matter reached before the Chennai Tribunal.

ITAT Held

The Tribunal held that interest payable by the assessee was taxable in the hands of associated enterprise (AE) under the Income-tax Act, 1961. Further, as per Article 12 of the Double Taxation Avoidance Agreement (DTAA) between India and Korea, interest was taxable in the hands of AE. There was no dispute on this aspect.

The only dispute was whether the said interest was taxable on an accrual basis or receipt basis. As per the provisions of section 195, any person responsible for paying to a non-resident shall deduct income tax thereon at the rates in force at the time of credit of such income to the account of the payee.

Since the DTAA was silent on the taxability of interest income, i.e., whether on an accrual basis or receipt basis, as per the provisions of section 195 of the Act, the payee was responsible for deducting tax at the time of credit or payment, whichever was earlier. Therefore, the Tribunal held that the assessee was liable to deduct tax at source under section 195 on interest payable to the foreign company.

List of Cases Referred to

• Shah Originals v. CIT Civil Appeal No. 2664/2011 (para 4),
• DCIT v. M/s. Hanil Tube India Pvt Ltd ITA No. 1037/Mds/2014. (para 4),
• M/s. Hyundai Motor India Ltd v. ACIT ITA No. 3192/Chny/2017 (para 7),
• GTS eServices Private Ltd. v. ITO ITA No. 1231/Mum/2017 (para 16),
• Apollo Tyres Ltd. v. CIT [2002] 174 CTR 521/255 ITR 273/122 Taxman 562 (SC) (para 17)
• GTS e-Services Private Ltd v. ITO ITA No. 1231/Mum/2017 (para 18).