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2017 (3) TMI 1377 - AT - Income TaxDisallowance of proportionate interest on unsecured loans - Held that:- We find that the A.O has simply computed the disallowance of interest in proportion to the amount of interest bearing unsecured loans obtained amounting to ₹ 502.69 crore and interest free advances given amounting to ₹ 172.59 crore. The fact that the assessee did pay interest on such unsecured loans has not been disputed. In view of the fact that the assessee paid interest on unsecured loans and did not earn any interest on advances given, we cannot disallow proportionate interest genuinely paid on unsecured loans taken for business purpose. Section 36(1)(iii) simply provides that deduction is allowable for `the amount of interest paid in respect of capital borrowed for the purpose of business.’ As the assessee paid interest on capital borrowed for the business purpose and it is not the case of the AO that the assessee diverted such unsecured loans for a nonbusiness purpose, the disallowance of interest cannot be countenanced. We, therefore, allow deduction of ₹ 23.60 crore. TDS u/s 195 - Disallowance u/s 40(a)(i) - assessee paid the sum to ICC without deducting tax at source - AO formed a view that such payment is in the nature of Royalty or Fees for technical services requiring deduction of tax at source - DRP held that 'the benefits availed by the assessee from ICC did not fall within the ambit of Royalty or FTS’ and accordingly no disallowance was called for - Held that:- Disallowance u/s 40(a)(i) is made when the assessee fails to deduct tax at source etc. in terms of section 195 before making payment to a non-resident. This section, in turn, provides that no payment should be made to non-resident without deduction of tax at source which is chargeable to tax in his hands. Thus, chargeability of income to tax in the hands of a non-resident is a condition precedent. In other words, if such receipt is not chargeable to tax in the hands of the non-resident, there will be no liability on the part of the payer to withhold tax and consequently, there can be no question of disallowance u/s 40(a)(i). We have noted from Appendix 2 that the assessee was to pay `Rights fee’ to ICC even during the preceding year. Taking this factor into consideration, the ld. DR was directed to inform the Bench if the payment by the assessee to ICC during the instant year or in earlier years was subjected to tax in the hands of the latter. Despite allowing time, the ld. DR failed to point out if the amount in question has been subjected to tax in the assessment of ICC. Obligation to deduct tax at source u/s 195 in the hands of a payer is a natural consequence of chargeability to tax of the receipt in the hands of payee. Failure of the Revenue to bring on record any evidence of such payment having been subjected to tax in the hands of ICC also casts shadow on the liability of the assessee to deduct tax at source. We, ergo, hold that the payment made by the assessee to ICC amounting to ₹ 4.56 crore as `Rights fee’ is not in the nature of `Royalty’ or `Fees for technical services’ covered u/s 9(1)(vi) or 9(1(vii) of the Act and as such the assessee was not obliged to deduct tax at source on this payment. Ex consequenti, the provisions of section 40(a)(i) are not attracted. This ground of revenue is not allowed - Decided in favour of assessee
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