TDS liability on interest payable to foreign company arises on accrual basis: ITAT Chennai

 

LS Automotive India Private Limited vs. ACIT – [2024] 162 taxmann 600 (Chennai – Trib.)

 

Facts:

1. Assessee, a private limited company, was engaged in the manufacture and sale of automotive components. The assessee was a subsidiary of foreign company.

 

2. 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 of the Income Tax Act on such interest payment.

 

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

 

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

 

ITAT Chennai held as under:

1. 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.

 

2. 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.

 

3. 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.

 

4. Therefore, the assessee is liable to deduct tax at source under section 195 on interest payable to the foreign company at the time of credit.