LI Network
Published on: February 18, 2024 at 20:03 IST
The Delhi High Court has emphasized that the chargeability to tax is the primary condition triggering the obligation to deduct Tax Deducted at Source (TAS) under Section 195 of the Income Tax Act, 1961 (ITA).
This clarification was made in an appeal related to the Assessment Year 2006-07, where the Commissioner of Income Tax (CIT) contested the order of the Income Tax Appellate Tribunal (ITAT).
Justice Rajiv Shakdher, sitting as a Single Bench, stated, “Chargeability to tax is the paramount condition for triggering the obligation to deduct TAS. The plain language of sub-section (1) of Section 195 brings this aspect of the matter to the fore,” while addressing the appeal.
The case involved transactions between the assessee and certain group companies, leading to remittances without TAS deduction.
The Assessing Officer (AO) disallowed the deductions under Section 40(a)(i) of ITA, claiming that TAS should have been deducted.
Senior Standing Counsel Ruchir Bhatia represented the appellant, while Senior Advocate M.S. Syali appeared for the respondent.
The High Court noted a disagreement between judges on questions of law and framed in 2014. These questions included whether the Double Tax Avoidance Agreement affected the application of Section 40(a)(i) and the reversal of findings regarding Permanent Establishments (PEs) in India.
The High Court clarified that the judgment in Transmission Corporation of AP Ltd. v. CIT (1999) 239 ITR 587 (SC) was not applicable, as it involved a composite transaction.
The Court emphasized that payments to entities like MC Metal (Thailand) and Metal One (Singapore) were not chargeable to tax in India due to the absence of a PE, as established by the relevant Double Tax Avoidance Agreements.
Concluding that the business connection test was irrelevant once the absence of PE was established, the High Court ruled in favor of the assessee and against the revenue.
The case is titled “The Commissioner of Income Tax-II v. Mitsubishi Corporation India P. Ltd. (Neutral Citation: 2024:DHC:11).”