DTAA with Switzerland Does Not Exempt Assessee from TDS Obligation on Interest Paid Abroad: ITAT Chennai

The Income Tax Appellate Tribunal (ITAT), Chennai, has passed an important ruling on the issue of whether the assessee, being a non-resident, was liable to deduct TDS under Section 195 of the Income Tax Act, 1961. on interest paid to a foreign bank.

The assessee, Mr Venugoopal Subramaniyam Raja, is a partner in M/s Raja Holdings, Kumbakonam and paid interest to RBS Coutts Bank Ltd, Singapore (head office in Switzerland), without deducting TDS. This was the violation of Section 195 of the Act, due to which the Assessing Officer disallowed the interest expenditure under Section 40(a)(i) of the Act of the Income Tax Act. The assessee filed an appeal before the ld. CIT(A), upholding the disallowance made by the assessing officer, referring to the earlier decision of ITAT for AY 2008-09 in the same assessee’s case. The ld. CIT(A) dismissed the appeal of the assessee, confirming the disallowance of interest payments for AYs 2007-08, 2009-10, and 2010-11 in the order dated 09.09.2024. Therefore, the assessee approached the ITAT Chennai.

The assessee argued that Section 195 of the Income Tax Act does not apply, as the assessee was a non-resident. As per Section 195 of the Act, the tax must be deducted only when the payment is made by “any person” to a non-resident and such payment includes income that is taxable in India. The assessee argues that the term “any person” should refer to any person who is a resident in India. The assessee also argued that:

• Interest was paid to a foreign bank that had no Permanent Establishment in India.
• The transaction was between two non-resident entities.
• Claimed that interest was not taxable in India, so no TDS was needed.
• The previous ITAT decision did not consider Section 195 properly and only decided the issue under Section 9(1)(v)(c) of the Act.

The assessee claimed that he was not obligated to deduct the TDS.

The ITAT referred to its earlier decision for AY 2008-09, of the assessee’s own case, where it had held that under Article 11(2) of the India-Switzerland DTAA, the rate of tax cannot be more than 10% and the assessee was liable to deduct the TDS on the payment towards interest under section 195. The Tribunal concluded that the provisions of section 40(a)(i) of the Act confirm the disallowance made by the Assessing Officer.

The ITAT upheld the decision of the ld. CIT(A) and confirmed that the assessee is liable to deduct TDS on the interest payment made to RBS Coutts Bank Ltd, Singapore. The assessee did not deduct TDS, so interest payments were disallowed. Accordingly, the appeals for AYs 2007-08, 2009-10, and 2010-11 were dismissed by the ITAT.