2023 (1) TMI 1312 - AT - Income Tax

Chargeability of redemption premium on FCCBs borrowed from outside India and utilized for the purpose of making investments or loans to overseas subsidiaries in the hands of the recipient of such premium - TDS u/s 196C r.w.s. 115 AC on the interest payable on FCCBs - assessee had remitted FCCBs without deduction of tax at source, thus should be treated as an assessee in default u/s 201(1) - as per CIT(A) no interest income had accrued to the non-recipient in terms of provisions of section 5(2) r.w.s. 9(1)(v) - whether both sections 5(2) and 9(1)(v) of the Act, are applicable to determine the situs of interest income in case of non-resident? - HELD THAT - As per scope of the provisions of section 9(1)(v) explained by the CBDT Circular dated 05.07.1976 it would be cleared that the interest paid by the resident in respect of loan that was incurred or money borrowed utilized for the purpose of making or earning any income from outside India is not taxable in India. In the present case, it is not disputed that FCCBs were utilized for the purpose of making investments in share of overseas subsidiaries or on the loans given to overseas subsidiaries. No doubt, the redemption premium partakes interest as defined u/s 2(28A) of the Act, however, by virtue of exclusive clause of the provisions of section 9(1)(v), the interest income in the hands of recipient cannot be said to have accrued or arisen in India. When the income has not arisen in India in the hands of recipient/non-resident, there is no obligation on the part of the respondent-assessee to deduct tax at source on payment of interest as held by GE India Technology Cen. (P.) Ltd 2010 (9) TMI 7 - SUPREME COURT followed by Karnataka Power Transmission Corporation Ltd 2016 (2) TMI 412 - KARNATAKA HIGH COURT We find that the order of the ld. CIT(A) is in consonance with the legal position discussed above. Therefore, the order of the ld. CIT(A) is just, proper and reasoned order. Thus, we do not find any reason to interfere with order of the ld. CIT(A). Penalty u/s 271C - failure on the part of the assessee to deduct tax at source on the redemption premium - HELD THAT - As Tribunal sustained the findings of the ld. CIT(A) in quashing of the order u/s 201(1) of the Act. Since the basis on which the penalty was levied, no longer survive, therefore, the penalty order cannot be sustained in the eyes of law. Therefore, the ld. CIT(A) rightly deleted the penalty levied u/s 271C.

Summary

Issues Involved:
1. Liability to deduct tax at source under Section 196C read with Section 115AC on interest payable on Foreign Currency Convertible Bonds (FCCBs).
2. Determination of situs of interest income for non-residents under Section 5(2) and Section 9(1)(v) of the Income Tax Act.
3. Applicability of Section 115AC as a self-contained code versus Section 5(2) for deciding taxability.
4. Validity of penalty under Section 271C for failure to deduct tax at source.

Detailed Analysis:

1. Liability to Deduct Tax at Source under Section 196C Read with Section 115AC on Interest Payable on FCCBs:
The Revenue contended that the appellant company erred in not deducting tax at source on the interest payable on FCCBs, arguing that the liability arose under Section 196C read with Section 115AC. The respondent-assessee argued that the FCCBs were utilized outside India for investments/loans to overseas subsidiaries, and thus, no tax deduction was required as the income did not accrue or arise in India under Section 9(1)(v) of the Act. The CIT(A) ruled in favor of the respondent, stating that the interest paid on FCCBs utilized outside India does not accrue in India, thus no tax deduction was necessary.

2. Determination of Situs of Interest Income for Non-Residents under Section 5(2) and Section 9(1)(v) of the Income Tax Act:
The Revenue argued that the interest income should be considered to have accrued in India under Section 5(2). However, the CIT(A) held that both Section 5(2) and Section 9(1)(v) should be considered, and concluded that the interest paid on FCCBs falls under the exception provided in Section 9(1)(v)(b), thus, it does not accrue in India. The Tribunal upheld this view, emphasizing that the provisions of Section 9(1)(v) specifically exclude such interest income from being deemed to accrue or arise in India when the funds are utilized outside India.

3. Applicability of Section 115AC as a Self-Contained Code versus Section 5(2) for Deciding Taxability:
The Revenue contended that Section 115AC should be considered a self-contained code, and thus, the taxability should be determined under this section alone. However, the CIT(A) and the Tribunal concluded that Section 115AC does not override the provisions of Section 5(2) and Section 9(1)(v). The Tribunal noted that the interest income, as defined under Section 2(28A), when utilized for business or investments outside India, does not accrue in India under the exclusion provided in Section 9(1)(v)(b).

4. Validity of Penalty under Section 271C for Failure to Deduct Tax at Source:
The penalty under Section 271C was levied based on the TDS Officer's order under Section 201(1) and 201(1A). Since the CIT(A) quashed the TDS Officer's order and the Tribunal upheld this decision, the basis for the penalty no longer existed. Consequently, the CIT(A) rightly deleted the penalty, and the Tribunal confirmed this deletion, stating that without the underlying liability, the penalty could not be sustained.

Conclusion:
The Tribunal dismissed both appeals filed by the Revenue. The Tribunal upheld the CIT(A)'s decision that no tax deduction at source was required on the interest payable on FCCBs utilized outside India, as the interest income did not accrue or arise in India under Section 9(1)(v). Additionally, the Tribunal confirmed the deletion of the penalty under Section 271C, as the basis for the penalty was invalidated by the quashing of the TDS Officer's order.