TaxTMI 
TaxTMI 
2015 (9) TMI 1184
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....repared for Indian regulatory authorities, resulting into income accruing and arising to the non-resident under section 5(2) of the Act for which the deeming provisions of Section 9(1) are not applicable. 3. The ld. CIT(A) erred in law and on facts in bringing the deeming fiction in action to determine the situs of interest income in case of non-resident when the issue is squarely covered under section 5(2) of the Act. 4. The ld. CIT(A) also erred in law and on facts in holding that the interest paid by the appellant on its FCCBs is covered by exception to section 9(1)(v)(b) of the Act and not hit by first limb of section 5(2) of the Act and not deemed to accrue or arise in India. 5. The ld. CIT(A) erred in law and on facts in holding that there is ambiguity in determining whether income has been received or arising in India and thus there is a 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 fac....
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....on of Adani Enterprise Ltd and the obligation to pay the interest rests with Adani Enterprise Ltd only. The "Status of the Bond" reproduced from the prospectus, is at para.5.1 of the assessment order. 2.2 The Assessing Officer has held that in the present case the interest accrue or arise in the hands of Non-resident Bond holders in India as soon as the interest becomes due to the Bond holders and has relied on the following decisions: *Performing Rights Society Vs CIT 106 ITR 11 *Hira Mills Ltd, Cawnpur Vs ITO 14 ITR 417 (All.) 2.3 Accordingly, Assessing Officer was of view that if the income primarily falls u/s.5(2), the resort to section 9 is impermissible. It is also to be noted that "Subject to the provisions of this Act" occurring in section 5(2) of the Act does not lead to the conclusion that the charging provision of section 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....
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.... present case. Second exclusion covers the cases where the interest is paid by the resident for the purpose of making or earning any income from any source outside India. This clause covers the situation where the interest is related to earning income from source outside India and such interest is deductible from the earning of the income from source outside India. Since in present case, assessee do not have any income arising from source outside for which the debit has been specifically raised. 2.7 The A.O. mentioned that interest on FCCB is subject to tax at special rate provided u/s.115AC of the IT Act and the relevant section is reproduced in para.6 of the assessment order. Further, it is stated by the Assessing Officer that issue of FCCBs is governed by "Issue of Foreign Currency Convertible Bonds and Ordinary Shares (through Depository 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 asses....
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....nal in assessee's own case for AY 2009-10 and the Tribunal vide its order dated 18.01.2013 in ITA No.3072/Ahd/2009 has decided the issue against the Revenue and in favour of assessee by observing as under :- "7. We have considered the rival submissions and perused the material available on record and gone through the order of authorities below and the judgments cited by both the parties. First, we reproduce the relevant para of CIT(A), as per which, the issue was decided by him. The relevant paras of the order of ld. CIT(A) are para 2.3.8 to 2.3.20 which are reproduced below:- ''2.3.8. If both are read together, it would be clear that as per scheme of the Act, there is no question of choosing between the two. Section 9 in fact dovetails into section 5(2) in as much as it puts in very clear terms that in the listed situations income shall 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 por....
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....ing foreign funds through these types of bonds. As is well accepted, "business" is wide enough a term to include investment in subsidiaries or joint ventures which are further involved in business or commerce. Therefore, the Assessing Officer's observation that the appellant is not earning out of a business outside India is not correct. The appellant has invested the borrowed funds in a company which is not only incorporated outside but is also doing business outside. Similarly parking funds outside to earn interest would also be covered by the second limb of the except to section 9(1)(v)(b). The Assessing Officer's objection of investment being capital in nature is contradictory and of not much consequence, as only by incurring expenditure of capital nature, it could have run business or earned income. 2.3.14. Hence, therefore, on the basis 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 ....
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....s of the non-residents, no withholding tax or tax at source has to be deducted. 2.3.18. Therefore, considering all the facts and legal position, it is held that the appellant-company was not liable to deduct tax at source u/s 196C r.w.s. 115ac, on the interest payable in July 2008 and January 2009 on FCCBs issued in January 2007. 2.3.19. Since there is no liability to deduct tax at source, as a consequence, therefore, there was no failure u/s 201 and the appellant-company can not be treated as the assessee in default u/s 201(1). 2.3.20. As a result, appellant's grounds of appeal No.1 & 2 are allowed." 8. We also reproduce the provisions of Section 5(2) and Section 9(1)(v) of the Income Tax Act:-Section 5 (2) Subject to the provisions of this Act, the total income of any previous year of a person who is a non-resident includes all income 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 ....
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....llegation of the A.O. that interest income is accruing or arising to non-resident bond holder in India as and when the interest become due to be paid by the assessee who is Indian resident and hence, we find that out of four situations as per the provisions of section 5(2) of the Income Tax Act when an income can be included in the hands of non-resident, this is the allegation of the A.O. that in the present case, the income is to be included in the hands of non-resident investors on this basis that interest income is accruing or arising to the non-resident bond holders in India and this is not the allegation of the A.O. that any income is received by non-resident in India or that any income is deemed to be received in India in the hands of the nonresident or that any income is deemed to accrue or arise in India in the hands of the nonresident investors. 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 render....
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....taken place in India nor the payment of interest is in India. In the present case, the allegation is on this basis that the payer i.e. assessee company is an Indian company and the interest is to be paid by Indian company from India. In the present case, it is not even allegation of the A.O. that interest was paid in India. Hence, this judgment is also not applicable in the present case. 11. As per para 4.7 of the order of the A.O. it is stated by the A.O. that the income ccrues or arises when the right to receive the income becomes vested to the bond holders. Thereafter, he has stated that the interest income has accrued to the non-resident bond holder in India as and when the interest becomes due to be paid by the assessee who is Indian resident. For the sake of ready reference we reproduce this para No.4.7 of the order of A.O. which is as under:- "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 ....
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.... the money was actually lent by the non-resident investors in the foreign country and it was not lent in India. Hence, as per this judgment of Hon'ble Madras High Court, it cannot be said that the interest income has accrued or arisen to the non-resident investors in India. We find that the only basis adopted by the A.O. for holding that the interest income has accrued or arisen in India is this that the payer is an Indian company and he has totally ignored this aspect of the matter as to where the money lending transaction has taken place. This is admitted factual position that money lending transaction has taken place outside India and hence, it cannot be said that the interest has accrued or arisen in India as per this judgment of Hon'ble Madras High Court. We have also seen that none of the judgments, cited by ld. D.R. of the Revenue, is rendering any 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....
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....e in India can be excluded specifically from the scope of income deemed to accrue or arose in India. We can understand this with the help of an example also. Suppose an income if actually received by a person in cash in India is liable to tax. Only those incomes will fall within the ambit of this case if the income in question was actually received by the assessee in cash in India. Suppose there is a deeming provision also as per which if the income has been deposited in the bank account of that person, then also, it will be deemed to have been received by that person in cash in India. Now, there is an exclusion clause also in such deeming provision that if the bank account of that person is maintained in a foreign branch, then it cannot be said that such income has deemed to be received in India. Then how it can be said that the amount deposited in a foreign 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) wher....