Tribunal: Appellant not liable to deduct tax on FCCB interest income

The Tribunal upheld the decision that the appellant company was not liable to deduct tax at source on interest payable on FCCBs. It was determined that the interest income did not accrue or arise in India, as per section 9(1)(v)(b), rendering sections 115AC and 196C inapplicable. The Revenue's appeal was dismissed, and the assessee's cross-objection became infructuous.

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Issues Involved:
1. Liability of the appellant company to deduct tax at source under section 196C read with section 115AC on interest payable on Foreign Currency Convertible Bonds (FCCBs).
2. Applicability of section 5(2) and section 9(1)(v) in determining the situs of interest income for non-residents.
3. Consideration of the appellant's historical practice of deducting tax at source on similar interest income in previous years.
4. Interpretation of section 115AC as a complete code and its interaction with other charging sections of the Income Tax Act.

Detailed Analysis:

1. Liability to Deduct Tax at Source:
The primary issue was whether the appellant company was liable to deduct tax at source under section 196C read with section 115AC on interest payable on FCCBs. The Assessing Officer (A.O.) contended that the interest paid by the Indian company to non-resident bondholders accrued or arose in India, thus making it taxable under section 5(2). The A.O. argued that the provisions of section 9(1)(v) were not applicable as the income had already accrued in India.

2. Applicability of Section 5(2) and Section 9(1)(v):
The CIT(A) and the Tribunal both examined the interplay between section 5(2) and section 9(1)(v). The CIT(A) concluded that section 9(1) dovetails into section 5(2) and is applicable to determine the situs of interest income. The Tribunal upheld this view, stating that section 9(1)(v) provides specific conditions under which interest income is deemed to accrue or arise in India. The Tribunal noted that the interest income in question was covered by the exceptions in section 9(1)(v)(b), as the funds were used for business activities outside India. Therefore, the interest did not accrue or arise in India.

3. Historical Practice of Deducting Tax:
The A.O. highlighted that the appellant had been deducting tax at source on similar interest income in previous years and had stopped doing so without any change in facts or law. However, the Tribunal found that the appellant's current practice was consistent with the correct legal interpretation of the relevant sections, as the interest income did not accrue or arise in India under the specific circumstances of this case.

4. Interpretation of Section 115AC:
The A.O. argued that section 115AC, being a complete code, mandated the deduction of tax at source on interest payments on FCCBs. The CIT(A) and the Tribunal disagreed, holding that section 115AC applies only when the interest income is taxable in India. Since the interest income was not deemed to accrue or arise in India, section 115AC and consequently section 196C did not apply.

Conclusion:
The Tribunal upheld the CIT(A)'s decision, concluding that the appellant company was not liable to deduct tax at source on the interest payable on FCCBs. The Tribunal emphasized that the interest income did not accrue or arise in India and was not deemed to do so under section 9(1)(v)(b). Consequently, the provisions of section 115AC and section 196C were not applicable. The appeal of the Revenue was dismissed, and the cross-objection filed by the assessee became infructuous.

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