2008 (3) TMI 52 - AAR - Income Tax

Non-resident want to open a Non-resident Ordinary Deposit A/c with banks in India Authority ruled that as per sec. 115C(a) account can be opened with convertible foreign exchange & only in a bank which wouldn t be a pvt. company deposit would be regarded as specified asset as per sec. 115C(f) repatriation of balance in NRO bank deposit isn t required interest income would be in nature of investment income & tax thereon will be 20% u/s 115E bank had to deduct tax at source only at 20%

Issues Involved:
1. Classification of Non-Resident Ordinary (NRO) deposit as a 'foreign exchange asset' under Section 115C of the Income-tax Act.
2. Treatment of interest on NRO deposits as 'investment income' or 'other income' under Section 115C.
3. Applicability of the 20% tax rate on interest income from NRO deposits under Section 115E.
4. Correctness of banks deducting TDS at 30% on such deposits.
5. Acceptance of Form 15G by banks from Non-Resident Indians.

Issue-wise Detailed Analysis:

1. Classification of NRO Deposit as a 'Foreign Exchange Asset':
The applicant, a non-resident Indian, proposed to open an NRO account with remittances from Saudi Arabia and sought clarification on whether this deposit could be treated as a 'foreign exchange asset' under Section 115C of the Income-tax Act. The Authority noted that 'foreign exchange asset' means any specified asset acquired with convertible foreign exchange. Despite the lack of specific currency details, the Authority assumed the remittances would be in convertible foreign exchange as per the Reserve Bank of India (RBI) guidelines. The Authority concluded that deposits with an Indian banking company, which is not a private company, qualify as 'specified assets' under Section 115C(f).

2. Treatment of Interest on NRO Deposits as 'Investment Income':
The applicant contended that interest income from NRO deposits should be treated as 'investment income' under Section 115C, attracting a 20% tax rate. The Commissioner argued that since NRO deposits are not fully repatriable, they do not qualify as 'foreign exchange assets,' and thus, the interest should be treated as 'other income.' The Authority, however, found that repatriability is not a requirement under Sections 115C, 115D, and 115E. Therefore, the NRO deposit qualifies as a 'foreign exchange asset,' and the interest income is 'investment income.'

3. Applicability of 20% Tax Rate on Interest Income:
The applicant asserted that the interest income on NRO deposits should be taxed at 20% under Section 115E. The Authority agreed, stating that since the interest income qualifies as 'investment income,' it falls under the purview of Section 115E, which prescribes a 20% tax rate for such income.

4. Correctness of Banks Deducting TDS at 30%:
The applicant challenged the banks' practice of deducting TDS at 30% on interest from NRO deposits, arguing it should be 20%. The Authority clarified that since the interest income is 'investment income,' banks should deduct TDS at the rate of 20%, as per clause (b)(i)(A) of Part II of the First Schedule to the Finance Act, 2007.

5. Acceptance of Form 15G by Banks:
The applicant raised the issue of banks refusing to accept Form 15G from Non-Resident Indians. However, the applicant later stated that this issue was not significant if the Authority ruled in his favor on the other questions. The Authority, therefore, deemed this question unnecessary and did not address it.

Conclusion:
The Authority ruled that:
(i) The NRO deposit made with convertible foreign exchange in a banking company, which is not a private company, is a 'foreign exchange asset' under Section 115C.
(ii) Interest income from such NRO deposits is 'investment income' under Section 115C and is taxable at 20% under Section 115E.
(iii) Banks should deduct TDS at 20% on interest from these NRO deposits.

Final Ruling:
The ruling was pronounced in the open court on March 3, 2008, affirming the applicant's position on the classification, tax treatment, and TDS rate for interest income from NRO deposits.

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