Treaty-based FCCB taxation and non-resident advance tax interest rules: lower rate applied, levy under sections 234B and 234C deleted.

Treaty relief and domestic rate provisions governed taxation of FCCB-related receipts: interest and consultancy fee payable to a Cyprus resident were taxable in India only at 10% under the India-Cyprus treaty, read with section 90(2), and FCCB interest also fell within the 10% rate under section 115AC. For a non-resident, interest under sections 234B and 234C was not leviable where tax was deductible at source by the payer. Receipts from FCCBs were also examined on accrual in India, with the interest treated as covered by the statutory exclusion and the incentive fee held not to accrue or arise in India on the stated facts. TDS credit on FCCB interest required verification of deposit, deductee identity, and absence of duplicate claim.

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Issues: (i) whether credit of tax deducted at source on interest from FCCBs was to be granted on verification; (ii) whether interest, consultancy fee and interest on FCCBs were taxable only at 10%; (iii) whether interest under sections 234B and 234C was leviable on a non-resident assessee; (iv) whether interest and incentive fee from FCCBs issued by Suzlon Energy Limited accrued or arose in India.

Issue (i): whether credit of tax deducted at source on interest from FCCBs was to be granted on verification.

Analysis: The FCCB mechanism meant the beneficial holder's identity was not always reflected in the deductor's records, so the tax deducted at source did not appear in Form 26AS. The assessee's claim therefore required factual verification to ensure that tax had been deposited in the Government treasury, that the assessee was the lawful deductee, and that no other person had claimed the same credit.

Conclusion: The matter was restored to the Assessing Officer for verification and the ground was allowed for statistical purposes.

Issue (ii): whether interest, consultancy fee and interest on FCCBs were taxable only at 10%.

Analysis: Under the India-Cyprus tax treaty, interest and fees for technical services payable to a Cyprus resident could be taxed in India only up to 10% of the gross amount, and section 90(2) made the treaty rate prevail where more beneficial. The FCCB interest was also covered by section 115AC(1)(a), which prescribed taxation at 10%. The treaty and domestic law therefore required application of the lower rate.

Conclusion: The assessee was held entitled to taxation at 10% on the interest income, consultancy fee and FCCB interest.

Issue (iii): whether interest under sections 234B and 234C was leviable on a non-resident assessee.

Analysis: As the assessee was a non-resident and tax was required to be deducted at source by the payer, no corresponding obligation to pay advance tax arose on the assessee. In such a situation, interest for default in advance tax payment was not chargeable.

Conclusion: The levy of interest under sections 234B and 234C was deleted.

Issue (iv): whether interest and incentive fee from FCCBs issued by Suzlon Energy Limited accrued or arose in India.

Analysis: The FCCB proceeds were used by the Indian issuer outside India for repayment of acquisition-related borrowing connected with overseas business activity. On that factual footing, the interest fell within the exclusion in section 9(1)(v)(b), and the incentive fee, being linked to monies raised and used outside India, was not deemed to accrue or arise in India under section 9(1)(i).

Conclusion: The revenue's challenge was rejected and the receipts were held not taxable in India on the basis adopted by the Dispute Resolution Panel.

Final Conclusion: The assessee succeeded on the substantive tax-rate and levy issues, obtained deletion of interest under sections 234B and 234C, and secured remand only on the limited TDS-credit verification issue, while the revenue's appeal failed in full.

Ratio Decidendi: Where a treaty provides a lower tax rate, section 90(2) requires application of the more beneficial treaty provision; interest on non-resident FCCB receipts can fall within statutory exclusion provisions if the borrowed funds were used outside India, and interest for non-payment of advance tax is not leviable on a non-resident where tax was deductible at source by the payer.

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