Clarification under section 194lc of tds provison

Dear All,

I am seeking clarification based on scenario mentioned below. Kindly share your expertise on it. Thanks. 

Scenario: There are two legal entities. A Ltd is in India and B Ltd is in UK. Both are private ltd companies and are subsidiaries of common parent company situated in US. A ltd has taken loan from B Ltd under ECB loan agreement on Nov 2014 which is within July 2012 - 2017 thereby attracting provision of section 194LC instead of Section 195. Repayment of principal as well as interest will happen only on maturity of 3 years. Agreement clearly states "The interest payable includes all costs, expenses payable by borrower except witholding taxes if any,payable. 

Now the agreement states interest will be exclusive of TDS annd not Inclusive. As per TDS Provision A Ltd has to deduct 5% of interest or 20% in case B Ltd has no PAN in India. 

B Ltd querry is, Interest must be gross and not net. So, i need your advice on whether it shold be as per Gross basis abiding terms of agreement or TDS has to be deducted and repayment to be donefor Net interest or TDS has to be deducted on Grossing up concept and pay B Ltd interest without any charge???

Kindly let me know. thanks  

Replies (1)

Deposit the TDS on behalf of the B ltd.on the gross amount you paid as interest and recover the amount of tds from the B ltd. 

Because this tds you deducted and paid on behalf of Bltd. will be reflected in 26 AS of B ltd. which is the amount A ltd. has deposited and hence B ltd. will have no problem in refunding the amount of TDS deposited by A ltd. on behalf of B ltd.

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