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TMI Blog2015 (9) TMI 1184X X X X Extracts X X X X X X X X Extracts X X X X ..... ccrued 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 ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... need to travel from section 5(2) to section 9(1) of the Act. 6. The ld. CIT(A) has also erred in law and on facts in not considering the view of the Assessing Officer that the assessee had been deducting tax at source on same interest income as per law, in earlier years and stopped deducting such tax without any change in the facts and law. 7. The ld. CIT(A) has erred in law by contradicting his own observation that section 115AC is a code itself and then travelling to another changing section of the Act for deciding the taxability of interest income. 8. In view of the above facts and circumstances, it is prayed that the order of ld. CIT(A) Gandhinagar be cancelled and that of Assessing Officer may be restored to the above extent. 2. Briefly stated the facts are that in this case, the Assessing Officer noticed that the company has made payment on account of interest on FCCB s to non-resident bond holders amounting to ₹ 30,31,00,512 on 25.01.10 without deducting tax at source. These remittances in the nature of interest payable on Foreign Currency Convertible Bonds (FCCBs) were issued by Adani Enterprise Ltd. A show cause notice u/s.201 201(1A) dtd. 19/03/2010 w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 5(2) of the Act is controlled by another charging provision in section 9(1) of the Act. Section 5(2) 9(1) of the Act, should be read harmoniously so that the charge in both the provisions of Act is effectively enforced. Therefore, where the income is actually received or is accrued in India, the resort of deeming provision is not warranted. In such case, the provision contained in section 5(2) is sufficient to create a charge in respect of Non-resident s income. 2.4 The Assessing Officer held that in assessee s case there is no doubt that the bonds (FCCB) are unconditional, direct and unsecured obligation of the assessee and the interest is to be paid by the Indian company from India. The income is accrued or arisen when the right to receive the income becomes vested to the Bond holders. Thus, the interest income accrues or arises to the Nonresident Bond holders in India and when the interest becomes due to be paid by the assessee who is Indian resident. Therefore, when the income actually accrues or arises in India there is no scope for the argument that such accrual is nullified by clause (b) of section 9(l)(v) of the Act. The clause (b) does not have the effect of preve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sitory Receipt Mechanism) Scheme, 1993 notified by Department of Economic Affairs No. GSR 700(E) dated 12th November, 1993 and Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme is the notified scheme for purposes of section 115AC(l)(a), in respect of assessment year 2002-03 and subsequent assessment years vide CBDT notification in S.O. 987(E) dated 10/9/2002, which is reproduced in the order by the Assessing Officer and held that no exclusion is provided in the scheme of taxation of FCCB in respect of end use of proceeds from FCCBs. 2.8 The Assessing Officer has relied on Issue of Foreign Currency Exchangeable Bonds (FCEB) Scheme, 2008 notified by the Government of India, Ministry of Finance, Department of Economic Affairs dated 15/2/2008, stating it to be similar to FCCBs, the relevant part of which is reproduced in the assessment order. The Assessing Officer concluded that the provisions as above in the case of FCCBs that interest payments on the bonds, until the exchange option is exercised, shall be subject to deduction of tax at source as per the provisions of sub-section (1) of section 115AC of the Act, irrespective of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll be deemed to be accruing or arising in India. These are specific situations and wherever the exception had to be provided it has been done within the subsections or clauses. 2.3.9. Therefore, it is clear that if we face a situation where it can not be stated unambiguously that income has been received or has arisen in India, i.e. first portions of section 5(2)(b), we need to test the receipts as per provision of section 9(1) to see if then can be deemed to have arisen or accrued in India. Deeming provisions are creation of law. Therefore, to complete later part of section 5(2)(b), section 9(1) comes into operation. 2.3.10. In law, there is no concept of redundancy. If one looks at the provisions of section 9, some of the situations included appear so straight forward that one can wonder about the need of the Act for including it in the category of deemed to have arisen or accrued, e.g., Interest paid to non-resident by Government. The source of this payments is clearly in India and therefore as per straight logic, as applied by the Assessing Officer also, the income should have arisen in India only and stood covered by section 5(2). Therefore, the Act need not have stated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sis of legal and factual position, I think, it is fair to say that the interest paid by the appellant on its FCCBs is covered by exceptions to section 9(1)(v)(b) and consequently it shall fall outside the ambit of deemed income arising or accruing in India and as a result out of section 5 also. 2.3.15. Was the assessee-company still required to deduct tax at source before remitting it abroad, notwithstanding whether the interest income on FCCBs is not deemed to have arisen or accrued in India? As per the Assessing Officer, the appellant is covered by section 115AC and tax was required to be deducted u/s 196C. It must be noted that section 115AC refers to foreign currency bonds floated by Indian Company in accordance with a duly notified scheme of Central Government. Although there is no reference to such a notification in the copies of papers submitted pertaining to RBI Scheme, correspondence with SBI or prospectus of Bond issue, yet the fact that the appellant has not objected to this basic fact, we proceed on the assumption that the bonds in question are covered by scheme mentioned u/s 115AC. 2.3.16. If one looks at section 115AC in totality, it will be observed that it is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from whatever source derived which- (a) is received or is deemed to be received in India in such year by or on behalf of such person ; or (b) accrues or arises or is deemed to accrue or arise to him in India during such year. Section 9(1)(v) income by way of interest payable by- (a) the Government ; or (b) a person who is a resident, except where the interest is payable in respect of any debt incurred, or moneys borrowed and used, for the purposes of a business or profession carried on by such person outside India or for the purpose of making or earning any income from any source outside India, or (c) a person who is a non-resident, where the interest is payable in respect of any debit incurred, or moneys borrowed and used, for the purpose of a business or profession carried on by such person in India. 9. When we go through the above provisions of Section 5(2) and 9(1)(v), we find that as per the provision of Section 5(2) in the case of non-resident, scope of total ncome 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stors. Hence, we have to examine and decide as to whether in the facts of the present case, interest income is accruing or arising to the non-resident investors in India? While deciding this aspect that income is accruing or arising in India, in the present case, the A.O. has taken help from two judgments, one of Hon ble Apex Court rendered in the case of Performing Rights Society vs. CIT (supra) and another of Hon ble Allahabad High Court rendered in the case of Hira Mills Ltd. Cawnpur (supra). Now we are considering the applicability of judgment rendered in the case of Performing Rights Society vs. CIT (supra). From the facts of that case, royalty were realized by the Indian agent on behalf of the society from Cinema houses and other sources where the music over which the society has copyright is applied. It is also noted by Hon ble Apex Court that there is no dispute with regard to receipts of such royalty by the society through the Indian agent. Hence, we find that in that case, the income was received in India by the agent of the non-resident society whereas in the present case, income was not received in India by the non-resident investors whether directly or through any agen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... :- 4.7 Now, applying the above legal position to the facts of the present case, there is no doubt that the bonds (FCCB) are unconditional, direct and unsecured obligation of the assessee and the interest is to be paid by the Indian Company from India. The income is accrued or arise when the right to receive the income becomes vested to the Bond holders. Thus, the interest income accrue or arise to the Non-resident Bond holders in India as and when the interest becomes due to be paid by the assessee who is Indian Resident. Therefore, when the income actually accrues or arise in India there is no scope for the argument that such accrual is nullified by Clause b of Section 9(1)(v). Clause b does not have the affect of preventing the accrual or income al together. Therefore, it is held that the income derived by the Non-resident bond holders is chargeable to tax u/s 5(2) of I.T. Act as the income is accrued in India and Clause (b) of section 9(1)(v) is not applicable once the income is covered u/s 5(2). 12. From the above finding of the A.O., it does not come out as to on what basis, it is stated by him that the income has accrued or arisen in India. It cannot be said that inte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... help to the Revenue whereas as per the judgment of Hon ble Madras High Court, it cannot be said that the interest income has accrued or arisen in India and there is no other basis of the A.O s order in holding that the interest income has accrued or arisen in India except this that interest payer is an Indian company i.e. assessee but there is no authority cited by him in support of this contention whereas as per the judgment of Hon ble Madras High Court, we have seen that the place of lending is important. 13. When we apply the provisions of Section 9(1)(v), we find that 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. 14. We now examine the whole things from a different angle which will conclude the matter. As per the provision ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ign branch of a bank in account of that person is actually received in India although it does not fall within the ambit of deemed to be received in India. Similarly in the present case, interest paid by the assessee company to non-resident investors is specifically excluded from the deeming provision as per Section 9(1)(v)(b) wherein it is specifically excluded that where the interest is payable in respect of any debt incurred outside India and used for the purpose of business or profession carried on by such person outside India or for the purpose of making any investment outside India such interest payment cannot be covered in the definition of income deemed to accrue or arise in India. If such an income cannot be covered within the ambit of income deemed to accrue or arise in India then how the same can be covered within the ambit of income accruing or arising in India, particularly when accruing or arising in India is not defined in the Income Tax Act and we have a judgment of Hon ble Madras High Court which says that the place of actual lending is important to determine the place where the interest income can be said to have accrued or arisen. 16. As per above discussion, w ..... X X X X Extracts X X X X X X X X Extracts X X X X
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