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2015 (9) TMI 1184 - AT - Income TaxInterest 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 Indian and is used outside India for investment or for business carried out outside India. It could not be established or shown by the revenue that the facts of the present case are not falling within this exclusion clause of Section 9(1)(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 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(1)(v)(b) proves that it is falling within the ambit of deeming provision. It cannot be accepted that the same income can also fall within the ambit of income accrued and arisen in India. Since, the income in question in the present case is falling within the ambit of this exclusion clause of income deemed to accrue or arise in India as per the provisions of Section 9(1)(v)(b), it cannot fall within the ambit of income accrued and arisen in India and hence, we find no merit in the arguments of the 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 deducted by the assessee from this payment in question. It has neither accrued nor arisen in India nor is deemed to accrue or arises in India in the hands of non-resident investors and therefore, no TDS is deductible. We, therefore, decide this issue in favour of the assessee and decline to interfere with the order of the CIT(A). - Decided against revenue.
Issues Involved:
1. Liability to deduct tax at source under Section 196C read with Section 115AC on interest payable on FCCBs. 2. Applicability of Section 5(2) and Section 9(1) of the Income Tax Act. 3. Determination of situs of interest income for non-residents. 4. Consistency in tax deduction practices by the assessee. 5. Interpretation of Section 115AC as a comprehensive code. Issue-Wise 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 assessee was liable to deduct tax at source on interest paid to non-resident bondholders on Foreign Currency Convertible Bonds (FCCBs) under Section 196C read with Section 115AC. The Assessing Officer issued a show cause notice for non-deduction of tax at source and deemed the assessee in default under Section 201(1) of the Act. The assessee argued that the interest income of non-residents was outside the ambit of Section 5 of the Income Tax Act and was covered by the exclusion provided in Section 9(1)(v)(b). 2. Applicability of Section 5(2) and Section 9(1) of the Income Tax Act: The Assessing Officer held that the interest income accrued or arose in India as soon as it became due to the bondholders, relying on the principle that the income is accrued when the right to receive it becomes vested. The officer argued that Section 5(2) should be read harmoniously with Section 9(1) to effectively enforce the charge in both provisions. The CIT(A) and the Tribunal, however, found that Section 9(1)(v)(b) specifically excludes interest payable on debts incurred for business or investment outside India, thus overriding the general provisions of Section 5(2). 3. Determination of Situs of Interest Income for Non-Residents: The Tribunal observed that the interest income did not accrue or arise in India as the lending transaction took place outside India, and the funds were used for business or investment outside India. The Tribunal cited the judgment of the Hon'ble Madras High Court in C.G. Krishnaswami Naidu v. CIT, which held that the place where the money is actually lent is decisive in determining the situs of income. The Tribunal concluded that since the lending occurred outside India, the interest income did not accrue or arise in India. 4. Consistency in Tax Deduction Practices by the Assessee: The Revenue argued that the assessee had deducted tax at source on similar interest income in earlier years and had stopped doing so without any change in facts or law. The Tribunal, however, upheld the CIT(A)'s decision, noting that the issue was already covered by the Tribunal's decision in the assessee's favor for the Assessment Year 2009-10, where it was held that no tax was deductible on such interest payments. 5. Interpretation of Section 115AC as a Comprehensive Code: The CIT(A) noted that Section 115AC is a comprehensive code dealing with the taxation of interest on FCCBs, including the rate of tax and the requirement for tax deduction at source. The Tribunal agreed with the CIT(A) that if the interest income is not taxable in India, the provisions of Section 115AC and Section 196C do not apply. The Tribunal emphasized that the exclusion in Section 9(1)(v)(b) indicated that such interest income could not be deemed to accrue or arise in India, thus negating the requirement for tax deduction at source. Conclusion: The Tribunal upheld the CIT(A)'s order, concluding that the interest paid on FCCBs did not accrue or arise in India and was covered by the exclusion in Section 9(1)(v)(b). Consequently, the assessee was not liable to deduct tax at source under Section 196C read with Section 115AC. The appeal filed by the Revenue was dismissed.
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