2016 (6) TMI 24 - AT - Income Tax

TDS u/s 196C - non deduction of TDS on premium/interest payable on redemption of FCCB by amortization on pro-rata basis of implicit rate of return over the period of bonds along with the TDS payable and charged to the Securities Premium Account periodically assessee in default u/s. 201(1) & 201(1A) - Held that - As during the financial year ended on 31st March 2011, there was no question of there being any income by way of interest, as the FCCB s were zero percent bonds carrying no interest and only giving the bondholder a right to get a premium of 39.37% on maturity. We also found that no interest whatsoever was payable during the financial year ended 31 March 2011. The word payable requires that a liability must accrue against the assessee during the year ended 31 March 2011 for the payment of the alleged interest and that a corresponding right / debt has to accrue to the bondholder. In this connection reliance is placed on the decision of the Supreme Court in the case of E. D. Sassoon & Company Ltd. and Others v/s. CIT (1954 (5) TMI 2 - SUPREME Court ). The decision in the case of Pfizer Ltd. 2012 (11) TMI 164 - ITAT MUMBAI is of relevance because in that case the ITAT has held that there was no question of treating the assessee as an assessee in default in respect of non-deduction of TDS, even though the assessee had made a provision for expenses in its books of accounts. Now, coming to the observation made by lower authorities to the effect that assessee itself has made entry in the books of accounts, therefore, liable to deduct tax thereon. It is now settled position by several decisions of Hon ble Supreme Court including the latest decision in the case of Tools Ltd. Vs. JCIT (2015 (3) TMI 853 - SUPREME COURT ) that entries in the books of accounts are not relevant. In any event, the assessee has reversed the entry for TDS in the immediate next financial year.In view of the above, we do not find any merit in the AO s action for holding the assessee as assessee in default for non-deduction of tax at source. - Decided in favour of assessee.

Summary

Issues:
- Whether the assessee can be treated as an "assessee in default" for not deducting tax at source u/s.196C of the IT Act in the assessment year 2011-2012.

Analysis:
1. The appeal was filed by the assessee against the order of CIT(A)-Mumbai for the assessment year 2011-12, challenging the holding of the assessee as assessee in default u/s.201(1) & 201(1A) of the Act.

2. The assessee, engaged in IT Enabled Transaction Processing Services, issued Zero Coupon FCCBs of USD 275 million with terms for conversion into equity shares or redemption by a certain date. The AO alleged default under Section 196C for not deducting TDS on the implicit interest/premium payable to bondholders.

3. The CIT(A) confirmed the AO's action, leading to the appeal before ITAT Mumbai. The crucial question was whether the assessee was obligated to deduct tax at source u/s.196C for the FCCBs issued.

4. ITAT Mumbai examined the conditions precedent under Section 196C and found that none were attracted in the case of the assessee. During the financial year, no interest was payable as the FCCBs were zero percent bonds with a premium on maturity, not interest.

5. The terms of the FCCBs made it impossible to identify the recipient of the premium on maturity, as the bonds could be traded, bought back, or converted into equity shares before maturity. Previous decisions supported the assessee's position that TDS deduction was not required.

6. The lower authorities' argument that the assessee's entry in the books of accounts made it liable for TDS deduction was refuted, citing Supreme Court decisions that entries alone are not determinative. The assessee had reversed the TDS entry in the subsequent financial year.

7. Ultimately, ITAT Mumbai found no merit in the AO's action to hold the assessee as an "assessee in default" for non-deduction of tax at source, allowing the appeal.

8. The judgment was pronounced on 27/05/2016, in favor of the assessee.