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2015 (9) TMI 1184 - ITAT AHMEDABAD

2015 (9) TMI 1184 - ITAT AHMEDABAD - TMI - Interest payable on FCCBs - liability to deduct tax at source u/s 196C r.w.s. 115AC - accrual of income - Held that:- Identical issue came up before the Tribunal in assessee’s own case for AY 2009-10 [2013 (1) TMI 518 - ITAT AHMEDABAD] wherein held a specific exclusion is provided in clause (b) of Section 9(1)(v) to exclude interest payment to non resident investors by an Indian resident if such interest payment is in respect of amount borrowed outside .....

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contention because for the purpose of deciding as to whether any income is falling within the ambit of income accrued or arise in India, we have to consider the total factual and legal position and it is admittedly an income falling within the ambit of deemed income to accrue or arise in India, because there is a specific exclusion on that account. There cannot be an exclusion clause if it is not falling within that provision but for the exclusion. Hence, the presence of exclusion in Section 9( .....

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e revenue that the income in question has accrued and arisen in India and consequently, we do not find any reason to interfere in the order of Ld. CIT(A).

In the light of above discussion, we have no hesitation in holding that in the present case, interest payment by the assessee to non-resident investors cannot be said to have accrued or arisen in India and it also cannot be said that this interest income can be deemed to have accrued or arisen in India. Therefore, no TDS is to be de .....

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.DR For The Respondent : Shri P. M. Mehta ORDER PER Shailendra Kumar Yadav, Judicial Member. This appeal has been filed by the Revenue against the order dated 6.6.2011 passed by the CIT(A) for assessment year 2010-11. The Revenue has raised the following grounds in this appeal :- 1. The ld. CIT(A), Gandhinagar has erred in law and on facts in holding that the assessee was not liable to deduct tax at source u/s 196C r.w.s. 115AC on the interest payable on FCCBs. 2. Ld. CIT(A) has erred on facts a .....

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are not applicable. 3. The ld. CIT(A) erred in law and on facts in bringing the deeming fiction in action to determine the situs of interest income in case of non-resident when the issue is squarely covered under section 5(2) of the Act. 4. The ld. CIT(A) also erred in law and on facts in holding that the interest paid by the appellant on its FCCBs is covered by exception to section 9(1)(v)(b) of the Act and not hit by first limb of section 5(2) of the Act and not deemed to accrue or arise in In .....

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facts and law. 7. The ld. CIT(A) has erred in law by contradicting his own observation that section 115AC is a code itself and then travelling to another changing section of the Act for deciding the taxability of interest income. 8. In view of the above facts and circumstances, it is prayed that the order of ld. CIT(A) Gandhinagar be cancelled and that of Assessing Officer may be restored to the above extent. 2. Briefly stated the facts are that in this case, the Assessing Officer noticed that t .....

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ons of section 201(1) of the Act for non-deduction of tax at source on the above referred interest payment and why interest should also not be charged as per section 201(1A) of the Act. In reply thereto, the assessee submitted that it has made detailed submissions in respect of the same issue for the A.Y, 2009-10 and relied upon the same and further placed reliance on the order of the CIT(A) for AY 2009-10. Further, assessee contended as under: The definition of total income in Section 5 is subj .....

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it of section 5 of I. T. Act. 2.1 The Assessing Officer has considered assessee s submissions as under: The FCCB have been issued by Adani Enterprises Ltd to Nofiresident investors. It is not disputed that the Bonds are issued by the Indian company and the interest is paid by the Indian company from India. From the prospectus issued by the assessee, it is clear that the bonds are the obligation of Adani Enterprise Ltd and the obligation to pay the interest rests with Adani Enterprise Ltd only. T .....

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ily falls u/s.5(2), the resort to section 9 is impermissible. It is also to be noted that Subject to the provisions of this Act occurring in section 5(2) of the Act does not lead to the conclusion that the charging provision of section 5(2) of the Act is controlled by another charging provision in section 9(1) of the Act. Section 5(2) & 9(1) of the Act, should be read harmoniously so that the charge in both the provisions of Act is effectively enforced. Therefore, where the income is actuall .....

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come becomes vested to the Bond holders. Thus, the interest income accrues or arises to the Nonresident Bond holders in India and when the interest becomes due to be paid by the assessee who is Indian resident. Therefore, when the income actually accrues or arises in India there is no scope for the argument that such accrual is nullified by clause (b) of section 9(l)(v) of the Act. The clause (b) does not have the effect of preventing the accrual or income all together. Therefore, it was held th .....

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y a resident is chargeable to income tax except in the following two situations: 1. When the interest is payable in respect of any debt incurred for the purposes of a business or profession carried on by such person outside India or 2. When the interest is payable in respect of any debt incurred for the purposes of making or earning any income from any source outside India. 2.6 Assessing Officer held that the interest paid by the assessee on FCCB is not covered by the two exclusions provided by .....

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ers the cases where the interest is paid by the resident for the purpose of making or earning any income from any source outside India. This clause covers the situation where the interest is related to earning income from source outside India and such interest is deductible from the earning of the income from source outside India. Since in present case, assessee do not have any income arising from source outside for which the debit has been specifically raised. 2.7 The A.O. mentioned that intere .....

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h Depository Receipt Mechanism) Scheme is the notified scheme for purposes of section 115AC(l)(a), in respect of assessment year 2002-03 and subsequent assessment years vide CBDT notification in S.O. 987(E) dated 10/9/2002, which is reproduced in the order by the Assessing Officer and held that no exclusion is provided in the scheme of taxation of FCCB in respect of end use of proceeds from FCCBs. 2.8 The Assessing Officer has relied on Issue of Foreign Currency Exchangeable Bonds (FCEB) Scheme, .....

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e of end use of the proceeds. It is also to be noted that,. FCCBs as well as FCCBs are notified by the CBDT for the purpose of sec. >. 115AC. Further, the AO mentions that assessee has placed reliance on the decision of the Ld. CIT(A) for AY 2009-10 on similar issue which was in favour of the assessee. The decision of the QT(A) is not acceptable as the matter is yet to be decided by the Hon ble UAT. Accordingly, it was held by the AO that the interest on FCCBs is chargeable to tax under secti .....

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appeal before us. Before us the ld. Departmental Representative supported the order of Assessing Officer whereas the ld. Aauthorised Representative supported the order of CIT(A) and submitted that the issue is now covered by the decision of the Tribunal in assessee s own case for Assessment Year 2009-10 in ITA No.3072/Ahd/2009 vide order dated 18.01.2013. He placed a copy of the Tribunal s order on record. 4. We have considered the rival submissions and gone through the material on record. We f .....

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, the issue was decided by him. The relevant paras of the order of ld. CIT(A) are para 2.3.8 to 2.3.20 which are reproduced below:- 2.3.8. If both are read together, it would be clear that as per scheme of the Act, there is no question of choosing between the two. Section 9 in fact dovetails into section 5(2) in as much as it puts in very clear terms that in the listed situations income shall be deemed to be accruing or arising in India. These are specific situations and wherever the exception h .....

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es into operation. 2.3.10. In law, there is no concept of redundancy. If one looks at the provisions of section 9, some of the situations included appear so straight forward that one can wonder about the need of the Act for including it in the category of deemed to have arisen or accrued, e.g., Interest paid to non-resident by Government. The source of this payments is clearly in India and therefore as per straight logic, as applied by the Assessing Officer also, the income should have arisen in .....

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a section to clarify the situation. The circular dated 01/06/1976 referred to above vindicates looking at the issue from this angle. 2.3.11. Therefore considering all aspects, in my view, both the sections 5(2) and 9(1)(v) are applicable to determine the situs of the interest income in case of non-resident. 2.3.12. As per the facts of the present case, as discussed earlier, the monies of the debts raised in foreign currencies by the assessee are primarily invested in the foreign subsidiary, whic .....

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ting in Joint Ventures or wholly owned subsidiaries is one of two categories of end-use conditions imposed by R.B.I. for raising foreign funds through these types of bonds. As is well accepted, business is wide enough a term to include investment in subsidiaries or joint ventures which are further involved in business or commerce. Therefore, the Assessing Officer s observation that the appellant is not earning out of a business outside India is not correct. The appellant has invested the borrowe .....

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sition, I think, it is fair to say that the interest paid by the appellant on its FCCBs is covered by exceptions to section 9(1)(v)(b) and consequently it shall fall outside the ambit of deemed income arising or accruing in India and as a result out of section 5 also. 2.3.15. Was the assessee-company still required to deduct tax at source before remitting it abroad, notwithstanding whether the interest income on FCCBs is not deemed to have arisen or accrued in India? As per the Assessing Officer .....

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the assumption that the bonds in question are covered by scheme mentioned u/s 115AC. 2.3.16. If one looks at section 115AC in totality, it will be observed that it is a chinery section and is almost a code in itself wherein rate of tax, deduction to be allowed a nonnecessity of filing the return is mentioned. Therefore, the appellant s arguments stand to reasoning that if a non-resident s interest income is not taxable, section 115AC shall not apply. The various provisions come into operation on .....

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here cannot be such patent inequity in dealing with income of same nature, say interest, from two sources, namely conventional borrowing vis-à-vis foreign currency bonds, the argument that section 115AC and section 196C deal with only chargeable income gets further strengthened. This is further vindicated by the fact that while section 195 talks of such sum , section 196C talks of only income . Similarly, some of the case laws cited like Transmission Corporation of A.P. (supra) of Supreme .....

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ry 2009 on FCCBs issued in January 2007. 2.3.19. Since there is no liability to deduct tax at source, as a consequence, therefore, there was no failure u/s 201 and the appellant-company can not be treated as the assessee in default u/s 201(1). 2.3.20. As a result, appellant s grounds of appeal No.1 & 2 are allowed. 8. We also reproduce the provisions of Section 5(2) and Section 9(1)(v) of the Income Tax Act:-Section 5 (2) Subject to the provisions of this Act, the total income of any previou .....

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the purposes of a business or profession carried on by such person outside India or for the purpose of making or earning any income from any source outside India, or (c) a person who is a non-resident, where the interest is payable in respect of any debit incurred, or moneys borrowed and used, for the purpose of a business or profession carried on by such person in India. 9. When we go through the above provisions of Section 5(2) and 9(1)(v), we find that as per the provision of Section 5(2) in .....

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the provisions of these two sections and there is no overriding effect of anyone provisions over the other provisions. Section 9(1)(v) only defines the conditions under which interest payment by a resident of India to the non-resident is deemed to accrue or arise in India. Hence, for the purpose of examining as to whether any income is deemed to accrue or arise in India or not, we have to examine the applicability of the provisions of Section 9(1)(v)(b) and for the purpose of examining the scope .....

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ny income is accruing or arising to him in India or any income is deemed to accrue or arise in India. Now, we have to see as to what is the allegation of the A.O. regarding applicability of the provisions of Section 5(2). As per para 4.7 of the order of the A.O., this is the allegation of the A.O. that interest income is accruing or arising to non-resident bond holder in India as and when the interest become due to be paid by the assessee who is Indian resident and hence, we find that out of fou .....

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ed in India in the hands of the nonresident or that any income is deemed to accrue or arise in India in the hands of the nonresident investors. Hence, we have to examine and decide as to whether in the facts of the present case, interest income is accruing or arising to the non-resident investors in India? While deciding this aspect that income is accruing or arising in India, in the present case, the A.O. has taken help from two judgments, one of Hon ble Apex Court rendered in the case of Perfo .....

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there is no dispute with regard to receipts of such royalty by the society through the Indian agent. Hence, we find that in that case, the income was received in India by the agent of the non-resident society whereas in the present case, income was not received in India by the non-resident investors whether directly or through any agent in India and hence, in our considered opinion, this judgment of Hon ble Apex Court is not applicable in the present case because the facts are different. 10. Now .....

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f Section 4(1)© of 1922 Act. Under these facts, it was held in the facts of that case that the income was received in British India on behalf of assessee and it has also accrued or arisen to the assessee in British India and hence, taxable in British India. In the present case, this is not the allegation of the A.O. that the income was received in India by or on behalf of the assessee and hence, this part of this judgment is not applicable at all in the present case. Regarding second part i .....

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payer i.e. assessee company is an Indian company and the interest is to be paid by Indian company from India. In the present case, it is not even allegation of the A.O. that interest was paid in India. Hence, this judgment is also not applicable in the present case. 11. As per para 4.7 of the order of the A.O. it is stated by the A.O. that the income ccrues or arises when the right to receive the income becomes vested to the bond holders. Thereafter, he has stated that the interest income has a .....

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s accrued or arise when the right to receive the income becomes vested to the Bond holders. Thus, the interest income accrue or arise to the Non-resident Bond holders in India as and when the interest becomes due to be paid by the assessee who is Indian Resident. Therefore, when the income actually accrues or arise in India there is no scope for the argument that such accrual is nullified by Clause b of Section 9(1)(v). Clause b does not have the affect of preventing the accrual or income al tog .....

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is an Indian resident because if that be so, then the provisions of clause (b) of Section 9(1)(v) becomes redundant. In that clause (b) of Section 9(1)(v), an exception has been carved out in respect of interest payable by a person who is resident and the exception is this that where the interest is payable in respect of his debt incurred and the money borrowed outside India and was used for the purposes of business carried on by such person outside India or for the purposes of making investment .....

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are taken note of by the Tribunal in para No.15 of its order rendered in the case of Credit Agricole Indosuzz (supra). One judgement so noted is of Hon ble Madras High Court rendered in the case of C.G. Krishnaswami Naidu v. CIT 62 ITR 686 and it was held in that case that in money lending transaction, the decisive factor would be the place where the money is actually lent irrespective of where it came from. In the present case, this is not in dispute that the money was actually lent by the non- .....

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place. This is admitted factual position that money lending transaction has taken place outside India and hence, it cannot be said that the interest has accrued or arisen in India as per this judgment of Hon ble Madras High Court. We have also seen that none of the judgments, cited by ld. D.R. of the Revenue, is rendering any help to the Revenue whereas as per the judgment of Hon ble Madras High Court, it cannot be said that the interest income has accrued or arisen in India and there is no othe .....

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case, the money borrowed was utilized for the oversees business of the assessee company and the assessee has not deducted tax in respect of that portion of interest payment which is relating to borrowing for investment outside India and hence, as per this clause also, no income can be said to have deemed to accrue or arisen in India in the hands of non-resident investors and therefore no TDS is deductible. 14. We now examine the whole things from a different angle which will conclude the matter. .....

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ome received in India and income accrued or arisen in India. If an income is not received in India, it can be deemed to be received in India in some specific situations and similarly, even if any income has not accrued or arisen in India, it can be deemed to arise or accrue in India under some given situations but if an income has actually been received in India or has actually accrued or arisen in India, it cannot be part of deemed to be received in India or deemed to accrue or arise in India b .....

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o how any income which has actually accrued or arise in India can be excluded specifically from the scope of income deemed to accrue or arose in India. We can understand this with the help of an example also. Suppose an income if actually received by a person in cash in India is liable to tax. Only those incomes will fall within the ambit of this case if the income in question was actually received by the assessee in cash in India. Suppose there is a deeming provision also as per which if the in .....

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ough it does not fall within the ambit of deemed to be received in India. Similarly in the present case, interest paid by the assessee company to non-resident investors is specifically excluded from the deeming provision as per Section 9(1)(v)(b) wherein it is specifically excluded that where the interest is payable in respect of any debt incurred outside India and used for the purpose of business or profession carried on by such person outside India or for the purpose of making any investment o .....

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determine the place where the interest income can be said to have accrued or arisen. 16. As per above discussion, we find that deeming of income accruing or arising in India are those situations where income has not actually accrued or arisen in India but still it will be deemed to accrue or arise in India. Hence, both the situations are mutually exclusive. If one case is falling within the ambit of income accrued and arisen in India, it cannot fall within the ambit of income deemed to accrue o .....

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(v)(b) of the Act and the only argument of the revenue is this that as per the A.O., it is falling within the ambit of income accrued and arisen in India and, therefore, it is not required to examine the provisions of Section 9(1)(v)(b). We find no merit in this contention because for the purpose of deciding as to whether any income is falling within the ambit of income accrued or arise in India, we have to consider the total factual and legal position and it is admittedly an income falling with .....

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