TaxTMI 
TaxTMI 
2023 (11) TMI 495
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....er: - "The assessee Citcorp Trustee Company Ltd, has not filed return of income for the assessment year 2014-15. In this case information is received from DCIT(IT), Circle-1, Pune. The AO has passed an order u/s 201(1) r.w.s. 195 of the Act treating the assessee, Bharat Forge Ltd. as an assessee in default within the meaning of Sec. 201(1) of the Act. The Bharat Forge Ltd issued the FCCB, constituted by a Trust Deed dated 28.04.2006 between Bharat Forge Ltd. and Citicorp Trustee Company Ltd UK. The AO has taxed the interest on FCCB accrued in India as per the provisions of section 5(2)(b) of the Income Tax Ac, 1961. The amount of interest of Rs. 42,84,48,114/- held to be deemed to accrue or arise in India and the TDS liability has been worked out on such interest remitted at Rs. 4,46,54,333/- (USD 828812 x 54,31). 2. The assessee M/s Citycorp Trustee Company Ltd has not filed return of income for the assessment year 2014-15. However, the assessee has received funds amounting to Rs. 42,84,48,114/- being income during the year. The assessee has failed to file its return of income despite having taxable income as per the provision of IT Act. 3. In view of the above facts of the ....
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....n Currency Convertible Bond (FCCBs) amounting to Rs. 42,84,48,114/- of M/s. Bharat Forge Ltd [BFL], a company which was incorporated in India. The mechanism as per which the FCCBs are issued was brought to the notice of AO by submitting that in order to simplify the administration of large numbers of investors, the issue of FCCBs is usually co-ordinated with the involvement of a trustee (in this case the assessee), which is appointed on the terms of the Trust Deed with limited tasks such as receiving an annual certificate, agreeing to documentation amendments in certain situations and in case the issuer (in this case M/s. Bharat Forge Ltd.) defaults in its obligations under such FCCBs, the trustee shall assist in enforcing the rights of the ultimate investors/ultimate owners on the instructions and at the cost of the ultimate investors ultimate owners. Further, a paying agent is appointed by the Issuer to convey payments from the Issuer to clearing systems through which ultimate investors / ultimate owners hold their interest in the FCCBs and receive payment. Thus, the assessee explained to AO that payments as such do not pass through the hands of the Trustee (assessee in this case....
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.... came up for adjudication before the Tribunal (Pune) [DCIT Vs. Bharat Forge Ltd. (ITA. No.341 & 461/Pun/2021 for AY. 2014-15 dated 03.01.2023] and the Tribunal has held that M/s. Bharat Forge Ltd. was not an assessee in default and consequently need not have deducted the TDS on the said amount by holding as under: - "1. The Ld.CIT(A), has erred in law and on facts in holding that the appellant company was not liable to deduct tax at source u/s 196C r.w.s. 115 AC on the interest payable on FCCBs. 2. The Ld. CIT(A) has erred in law and facts in not considering the issue that the assessee has taken a liability of issuing FCCBs from India after taking approval of RBI (Indian authority), as per rules and guidelines of RBI and has remitted interest from India as its liability duly recognized in its books of account prepared for Indian regulatory authorities, resulting into income accruing and arising to the nonresident 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 holding that both sections 5(2) and 9(1)(v) of the Act, are applicable to determine the situs of interest income in case ....
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....a for the purpose of investment/loans to overseas subsidiaries, were parked outside India and those funds were not brought into in India. The respondent-assessee company also filed copies of ECB-2 filed with Reserve Bank of India in support of above contention. It is submitted that the premium paid on such redemption partakes the character of interest as defined u/s 2(28A) of the Act. It is submitted that the recipient of interest paid in respect of any debt incurred or money borrowed and utilized for purpose of business outside India or for the purpose of making or earning any income from any source outside India is not liable to tax in India as there is no income that had accrued or arisen in India to recipient within the meaning of section 9(1)(v) of the Act. Therefore, the question of deduction of tax at source does not arise. Reliance in this regard also placed on the decision of the Coordinate Bench of the Tribunal in the case of Adani Enterprises Ltd. (ITA No.3072/Ahd/2009 & Co.No.291/Ahd/2009). 7. However, the TDS Officer had rejected the above contention of the respondent-assessee by holding that the issue of FCCBs is governed by "issue of Foreign Currency Convertible Bo....
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.... on the decision of the Madras High court in the case of C.G. Krishnaswami Naidu vs. CIT, 62 ITR 686 (Mad.) submitted that money was lent in the foreign country and money had been borrowed from outside India and utilized for the purpose of making investments in foreign subsidiaries and, therefore, any interest accrued on such FCCBs is not taxable in India. 12. We heard the rival submissions and perused the material on record. The issue in the present appeal relates to the chargeability of redemption premium on FCCBs borrowed from outside India and utilized for the purpose of making investments or loans to overseas subsidiaries in the hands of the recipient of such premium. It is not the case of the respondent-assessee that the redemption premium does not partake the character of interest. The provisions of section 2(45) defines the total income as total amount referred to in section 5 computed in the manner laid down in that section of the Act. The provisions of section 4 provide that the total income of the previous year subject to the charge of income tax. The provisions of section 5 define the scope of total income referred to the provisions of section 4 of the Act. The provis....
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....t and the provisions of the Act relating to computation of total income, determination of tax and collection and recovery shall apply accordingly; (b) "permanent establishment" shall have the meaning assigned to it in clause (iiia) of section 92F;" 13. The scope of the provisions of section 9(1)(v) explained by the CBDT Circular dated 05.07.1976 which is reproduced as follows :- "Scope and sweep of s. 9(1)(v).- The effect of the omission of the fourth lime of section 9(1)(i), and the scope and effect of the new inserted section 9(1)(v), have been elaborated in the following portion of the departmental circular no. 202, 5-7-1976:- Source rule for "interest" - Section 9(1)(i) and (v).- 14.1 A non-resident taxpayer is chargeable to tax in India in respect of income from whatever source derived which is received or is deemed to be received in India or which accrues or arises or is deemed to accrue or arise in India. Under section 9(1)(i) of the Income-tax Act, as it stood prior to its amendment by the Finance Act, 1976 (66 of 1976), any income accruing or arising "through or from any money lent at interest and brought into India in cash or in kind" was deemed to accrue or arise....
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....e same to an Indian concern, interest paid by the lead bank to the members of the consortium will not attract liability towards income-tax in India. 14.3 The aforesaid amendment has come into force with effect from 1-6-1976 and is, accordingly, applicable for the deduction of income tax at source from income by way of interest paid on or after that date and for assessment of such income for the assessment year 1977-78 and subsequent years." 14. On carefully perusal of the above CBDT Circular, it would be cleared that the interest paid by the resident in respect of loan that was incurred or money borrowed utilized for the purpose of making or earning any income from outside India is not taxable in India. In the present case, it is not disputed that FCCBs to the extent of Rs. 12.5 millions USD were utilized for the purpose of making investments in share of overseas subsidiaries or on the loans given to overseas subsidiaries. No doubt, the redemption premium partakes interest as defined u/s 2(28A) of the Act, however, by virtue of exclusive clause of the provisions of section 9(1)(v), the interest income in the hands of recipient cannot be said to have accrued or arisen in India. ....
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....Bharat Forge Ltd. to deduct tax at source of Rs. 4,50,12,763/- along with interest u/s 201(1A) of the Act to the tune of Rs. 99,02,807/-], has been found to be erroneous and legally unsustainable in the light of the Hon'ble Supreme Court decision GE India Technology Cen. (P.) Ltd. (supra), and thus Tribunal upheld the action of the Ld. CIT(A) in the case of M/s. Bharat Forge Ltd. deleting the decision of the AO/TDS directing M/s. Bharat Forge Ltd to deduct tax at source of Rs. 4,50,12,763/- along with interest u/s 201(1A) of the Act of Rs. 99,02,807/-. Therefore, according to the Ld. AR, when the foundational facts on which the AO of the assessee (Citicorp Trustee Ltd.) who was recipient of the interest from M/s. Bharat Forge Ltd was legally un-sustainable, the same cannot be the material on which the AO could have formed "reason to believe escapement of income". And therefore, the Ld. AR contended that the foundation on the basis of which AO of assessee have resorted to reopening of the assessment having being removed by the order of the Tribunal in the case of payer/M/s. Bharat Forge Ltd (supra), the impugned action of the assessee's AO to have reopened the assessment on the stre....