2013 (1) TMI 518 - AT - Income Tax

Interest payable on FCCBs - Liability to TDS u/s 196C r.w.s. 115AC - applicability of sections 5(2) and 9(1)(v) - whether interest income is accruing or arising to the non-resident investors in India? - Held that - As per the provision of Section 5(2) in the case of non-resident, scope of total income includes all income from whatever source which are received or deemed to be received in India or which accrues or arises or is deemed to accrue or arise to such non-resident in India and the provisions of Section 9(1)(v) are regarding the conditions under which income can be deemed to accrue or arise in India in respect of interest payable by a person who is resident in India as per clause (b) of Section 9(1)(v). Hence, there is no contradiction in the provisions of these two sections and there is no overriding effect of anyone provisions over the other provisions. Hence, for the purpose of examining as to whether any income is deemed to accrue or arise in India or not, the applicability of the provisions of Section 9(1)(v)(b) is to be examined and for the purpose of examining the scope of total income of a non-resident, applicability of the provisions of Section 5(2) which includes income received in India, income deemed to be received in India, income accruing or arising in India and incomes deemed to accrue or arise in India. Hence, it is seen that for the purpose of holding that any income is taxable in the hands of non-resident, it has to be shown that either any income is received by him in India or such income is deemed to be received in India or any income is accruing or arising to him in India or any income is deemed to accrue or arise in India. As in the present case it does not come out from the finding of the A.O. as to on what basis, it is stated by him that the income has accrued or arisen in India. It cannot be said that interest income has accrued or arisen in India in all cases where the payer is an Indian resident because if that be so, then the provisions of clause (b) of Section 9(1)(v) becomes redundant. The only basis adopted by the A.O. for holding that the interest income has accrued or arisen in India is this that the payer is an Indian company and he has totally ignored this aspect of the matter as to where the money lending transaction has taken 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 in C.G. Krishnaswami Naidu v. CIT 1965 (9) TMI 38 - MADRAS HIGH COURT . The case of the assessee is falling under clause-b of Section 9(1)(v) because in the present 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 - no hesitation in holding that 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 deducted by the assessee from this payment in question - in favour of the assessee

Issues Involved:
1. Liability of the appellant company to deduct tax at source under section 196C read with section 115AC on interest payable on Foreign Currency Convertible Bonds (FCCBs).
2. Applicability of section 5(2) and section 9(1)(v) in determining the situs of interest income for non-residents.
3. Consideration of the appellant's historical practice of deducting tax at source on similar interest income in previous years.
4. Interpretation of section 115AC as a complete code and its interaction with other charging sections of the Income Tax Act.

Detailed Analysis:

1. Liability to Deduct Tax at Source:
The primary issue was whether the appellant company was liable to deduct tax at source under section 196C read with section 115AC on interest payable on FCCBs. The Assessing Officer (A.O.) contended that the interest paid by the Indian company to non-resident bondholders accrued or arose in India, thus making it taxable under section 5(2). The A.O. argued that the provisions of section 9(1)(v) were not applicable as the income had already accrued in India.

2. Applicability of Section 5(2) and Section 9(1)(v):
The CIT(A) and the Tribunal both examined the interplay between section 5(2) and section 9(1)(v). The CIT(A) concluded that section 9(1) dovetails into section 5(2) and is applicable to determine the situs of interest income. The Tribunal upheld this view, stating that section 9(1)(v) provides specific conditions under which interest income is deemed to accrue or arise in India. The Tribunal noted that the interest income in question was covered by the exceptions in section 9(1)(v)(b), as the funds were used for business activities outside India. Therefore, the interest did not accrue or arise in India.

3. Historical Practice of Deducting Tax:
The A.O. highlighted that the appellant had been deducting tax at source on similar interest income in previous years and had stopped doing so without any change in facts or law. However, the Tribunal found that the appellant's current practice was consistent with the correct legal interpretation of the relevant sections, as the interest income did not accrue or arise in India under the specific circumstances of this case.

4. Interpretation of Section 115AC:
The A.O. argued that section 115AC, being a complete code, mandated the deduction of tax at source on interest payments on FCCBs. The CIT(A) and the Tribunal disagreed, holding that section 115AC applies only when the interest income is taxable in India. Since the interest income was not deemed to accrue or arise in India, section 115AC and consequently section 196C did not apply.

Conclusion:
The Tribunal upheld the CIT(A)'s decision, concluding that the appellant company was not liable to deduct tax at source on the interest payable on FCCBs. The Tribunal emphasized that the interest income did not accrue or arise in India and was not deemed to do so under section 9(1)(v)(b). Consequently, the provisions of section 115AC and section 196C were not applicable. The appeal of the Revenue was dismissed, and the cross-objection filed by the assessee became infructuous.

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