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Income Tax Appellate Tribunal, ‘SMC’ ‘D’ BENCH, CHENNAI
Before: Shri A. Mohan Alankamony
आदेश / O R D E R
This appeal by the Revenue is directed against the order passed by the Ld. Commissioner of Income Tax (Appeals)-8, Chennai dated 20.01.2017 in for the assessment year 2012-13 passed u/s.250(6) r.w.s.143(3) of the Act.
The Revenue has raised several grounds in its appeal, however the crux of the issue is that the Ld.CIT(A) has erred in deleting the disallowance of Rs.49,57,300/- towards penal charges made by the Ld.AO U/s.40(a)(ia) of the Act.
The brief facts of the case are that the assessee is a domestic company, filed its return of income for the assessment year 2012-13 on 30.11.2012, admitting loss of Rs.46,37,509/-. Initially the return was processed U/s.143(1) of the Act.
Subsequently the case was selected for scrutiny under CASS and finally order U/s.143(3) of the Act was passed on 28.03.2015, wherein the Ld.AO made disallowance of Rs.49,57,300/- U/s.40(a)(i) of the Act, being the penal interest payable to trade creditors towards delayed payments.
During the course of scrutiny assessment, it was revealed from Form 3CEB that the assessee had disclosed an amount of Rs.49,57,300/- as payable towards penal charges for delayed payments on import of materials from its holding company located abroad. The Ld.AO opined that the assessee had violated the provisions of Section 195 of the Act by not deducting tax at source, and therefore invoked the penal provisions of Section 40(a)(ia) of the Act, and accordingly disallowed the amount of Rs.49,57,300/- as deduction. While deciding so, the Ld.AO further observed as follows:-
(i) The payment of penal interest charges paid by the assessee company to its holding company in Denmark falls squarely in the field of “income deemed to accrue or arise in India as per Section 9(v) of the Act”. (ii) It is mandatory for the assessee company to deduct tax at source on the interest payment made to non-resident holding company and thereafter claim relief U/s.90 of the Act with respect to double taxation. (iii) Alternatively, the non-resident company could have made an application before the Income-tax authorities for grant of certification U/s.195(3) of the Act. (iv) Reliance was placed in the decision of the Hon’ble Apex court in the case Transmission Corporation of Andhra Pradesh vs. CIT reported in 239 ITR 589, wherein it was held that a person making payment to non-resident is duty bound to file an application to the Income-tax authority U/s.195(2) of the Act.
However on appeal, the Ld.CIT(A) granted relief to the assessee by observing as under:- “4.2 ----------------------------------------------------------------- ---------------------------------------------------------------------------- As rightly pointed out by the appellant, the Article 12(3) of the DTAA specifically excludes the penalty charges for late payment from the purview of interest. Moreover, from a consideration of the various decisions of the Supreme Court and the High Courts and the Circular No.333 dated 2-4-1982,
it would be clear that where the provisions of the DTAA are more beneficial than provisions of the Act, the provisions of the DTAA would prevail. In view of the specific mandate provided for exclusion of such penal charges in the DTAA, the interest in the form of penal charges for late payment cannot be considered chargeable to tax under the provisions of the Income Tax Act. In view of the above, the disallowance of Rs.49,57,300/- made by the Assessing Officer is deleted. The appellant succeeds on this ground.”
Before me, the Ld.DR vehemently argued in support of the Ld.AO by reiterating the reasons adduced by the Ld.AO and pleaded for sustaining his order. On the other hand, the Ld.AR pointed out to Article 12 of the Indo-Denmark Treaty, wherein at para No.4, it was clearly stated that “penalty charges for late payment shall not be regarded as interest for the purpose of this Article” and argued that the penalty charges will fall outside the scope of interest and accordingly such income in the hands of the recipient will not attract tax in India and therefore the assessee is not duty bound to deduct tax at source. The Ld.AR further relied on the order of the Ld.CIT(A) and pleaded that the same may be confirmed.
I have heard the rival submissions and carefully perused the materials available on record. As pointed out by the Ld.AR, the penal charges for late payment fall outside the scope of 5 “interest” as per Article 12 of the Indo-Denmark Treaty. Further, as stated by the Ld.CIT(A) in his order, the circular No.333 dated 02.04.1982, also makes it clear that where provisions of the Treaty are more beneficial than the provisions of the Act, the provisions of the Treaty would prevail. Considering all these aspects, the Ld.CIT(A) has rightly deleted the disallowance made by the Ld.A.O by holding that the assessee is not required to deduct tax at source for the payment made towards penal interest to its holding company abroad. In this situation I do not find it necessary to interfere with the order of the Ld.CIT(A) on this issue.
In the result, the appeal of the Revenue is dismissed.
Order pronounced on the 08th August, 2017 at Chennai.