Applicability of section 195 on payments made by Indian Co. to foreign branch

[vdboss]

Whether tax needs to be deducted on payments by an Indian Company to its branch in the UK ? The branch of the Indian Company is assessed to tax in the UK as per UK tax regulations.

[probal_shome]

Hi vdboss,

Welcome.

The answer is in the negative because the transactions between the company and its own branch can never give rise to income. A man can never trade with himself.

This issue has been considered in detail in ABN AMRO Bank vs. A.D.I.T 98 TTJ (Cal) (SB) and it was held that payment by the Indian permanent establishment to its foreign head office, which is not an independent entity, cannot be treated as anything but a payment to oneself. Such payment is not chargeable to tax and there is accordingly no scope for the applicability of sections 195 or 40 (a) (i) of the Act.

Hope this answers your question.

Regards,

Probal.

[sivaiah G]

However, the profits earned by the branch are taxable in India also. But the taxes paid outside India will be given credit proportinate to the income offered here in India. Therefore, there is no injustice done in any manner.

[brett_lee38]

But i do not agree with the view of probal shom becuase in view of Delhi High Court decision in the case of Moserbear wherein the goods were transferred to the branch office in foreign and the ITO was of the view that the goods so transferred are not fall under the definition of sale. Hon'ble Delhi High Court held that it is a sale. Therefore, the concept of no person can make profit is not good stand. Further recently Hon'ble Supreme Court in the case of CIT Vs Eilly lilly has held that the provisions of TDS are exhastive though the facts are different but one should take note of this also.The citation of moserbear is 177 Taxman 42 (Del).However, the nature of the transaction plays an important role suppose the payment is mere reimbuesment of the expenses then the provisions of seciton 195 are not applicable and if the payment has been made for their work done on behalf of Indian Company then TDS would be applicable therefore you must ascertained the nature of transaction in the hands of the payee. 

[bhaskar rao]

Dear Sir,

Can you pl give reference of judgements of Mosebear and Eliliy. These are imp judgements on imp topic.

Yours faithfully,

Bhaskar Rao ITP.

[brett_lee38]

The citation of Mosrebear is 177 Taxman 72 (del) and of the eillylilly is a recent judgment available on the site of ITAT under the judgment colum of Supreme Court