No TDS on Interest on FCCB issued to foreign investors and utilized for verseas business

By | November 11, 2015

Where assessee issued FCCB to foreign investors and remitted interest to them, since said money was utilized for overseas business of assessee, no income could be said to have accrued or arisen in India in hands of non-resident investors and, therefore, no TDS was deductible

IN THE ITAT AHMEDABAD BENCH ‘A’

Assistant Director of Income-tax (Intl. Taxn.), Ahmedabad

v.

Adani Enterprise Ltd.

SHAILENDRA KUMAR YADAV, JUDICIAL MEMBER
AND ANIL CHATURVEDI, ACCOUNTANT MEMBER

IT APPEAL NO. 2329 (AHD.) OF 2011
[ASSESSMENT YEAR 2010-11]

SEPTEMBER  2, 2015

Dinesh Singh, Sr. DR for the Appellant. P.M. Mehta for the Respondent.

ORDER

Shailendra Kumar Yadav, Judicial Member – This appeal has been filed by the Revenue against the order dated 6.6.2011 passed by the CIT(A) for assessment year 2010-11.

The Revenue has raised the following grounds in this appeal:—

1. The ld. CIT(A), Gandhinagar has erred in law and on facts in holding that the assessee was not liable to deduct tax at source u/s 196C r.w.s. 115AC on the interest payable on FCCBs.
2. Ld. CIT(A) has erred on facts and law in not considering the issue that an Indian Company (assessee) has taken liability of issuing FCCBs from India after taking approval of Reserve Bank of India (Indian Authority), as per rules and guidelines of RBI and has remitted interest from India as its liability duly recognized in his books of account prepared 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 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 Rs 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 was issued by the Assessing Officer to the assessee to show cause why it should not be deemed to be “assessee in default as per the provisions of section 201(1) of the Act for non-deduction of tax at source on the above referred interest payment and why interest should also not be charged as per section 201(1A) of the Act. In reply thereto, the assessee submitted that it has made detailed submissions in respect of the same issue for the A.Y, 2009-10 and relied upon the same and further placed reliance on the order of the CIT(A) for AY 2009-10. Further, assessee contended as under:

“The definition of total income in Section 5 is “subject to the provision of Income-tax Act” and therefore other section may operate to save that income from taxation which is within the purview of section 5(2).

The interest paid by the applicant is received by the Nonresident Bond Holders do not receive the interest income in India directly or indirectly.
Income of non res/dents is covered by the exclusion provided in section 9(l)(v)(b).
The provision of section 115AC is not applicable as the interest income is outside the ambit of section 5 of I. T. Act.”

2.1 The Assessing Officer has considered assessee’s submissions as under:

The FCCB have been issued by Adani Enterprises Ltd to Nofi- resident investors. It is not disputed that the Bonds are issued by the Indian company and the interest is paid by the Indian company from India. From the prospectus issued by the assessee, it is clear that the bonds are the obligation 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 Ltd. v. CIT [1977] 106 ITR 11 (SC).

Hira Mills Ltd. v. ITO [1946] 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. 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 Non- resident 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 preventing the accrual or income all together. Therefore, it was held that the income derived by the Non-resident bond holders is chargeable to tax u/s.5(2) of the Act as the income is accrued in India and clause (b) of section 9(l)(v) of the Act is not applicable once the income is covered u/s.5(2) of the Act.

2.5 As regarding assessee’s contention that income of non-resident is covered by exclusion provided in Section 9(l)(v)(b) of the Act it is mentioned by the Assessing Officer that a close reading of the sub-section 9(l)(v)(b) makes it clear that interest paid by a resident is chargeable to income tax except in the following two situations:

1. When the interest is payable in respect of any debt incurred for the purposes of a business or profession carried on by such person outside India or
2. When the interest is payable in respect of any debt incurred for the purposes of making or earning any income from any source outside India.

2.6 Assessing Officer held that the interest paid by the assessee on FCCB is not covered by the two exclusions provided by the Section 9(l)(v)(b) as under:—

First exclusion covers the cases where the interest is paid by the resident and money raised in used by such person for the business and profession carried on by such person outside India. In the present case, it is accepted position that assessee himself does not carry any business or profession outside India for which the debt in the form of FCCBs has been raised. In view of the above, first exception is not applicable in the 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 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 end use of the proceeds. It is also to be noted that,. FCCBs as well as FCCBs are notified by the CBDT for the purpose of sec. 115AC. Further, the AO mentions that assessee has placed reliance on the decision of the Ld. CIT(A) for AY 2009-10 on similar issue which was in favour of the assessee. The decision of the QT(A) is not acceptable as the matter is yet to be decided by the Hon’ble UAT. Accordingly, it was held by the AO that the interest on FCCBs is chargeable to tax under section 115AC and tax has to be deducted at source under section 196C. As the assessee has already remitted total under section 196C. As the assessee has already remitted total payment to non- resident, the TDS has to be arrived by grossing U/S.195A of the Act and levied interest as per Sec. 201(1A) of the Act for the delay.

3. Aggrieved by this order of Assessing Officer, assessee carried the matter in appeal before CIT(A). The CIT(A) gave relief to the assessee. Now the Revenue being aggrieved, is in appeal before us. Before us the ld. Departmental Representative supported the order of Assessing Officer whereas the ld. Aauthorised Representative supported the order of CIT(A) and submitted that the issue is now covered by the decision of the Tribunal in assessee’s own case for Assessment Year 2009-10 in ITA No.3072/Ahd/2009 vide order dated 18.01.2013 in Addl. DIT (International Taxation) v. Adani Enterprises Ltd. 141 ITD 206 (Ahd.). He placed a copy of the Tribunal’s order on record.

4. We have considered the rival submissions and gone through the material on record. We find that identical issue came up before the Tribunal 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 portions of section 5(2)(b), we need to test the receipts as per provision of section 9(1) to see if they 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 these 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 it, having been taken care of by the first portion of section 5(2)(b). But clearly the legislature thought it appropriate to clarify and specifically bring such situation on record about which there should not be any dispute about the accrual. As stated in the preceding paragraph, as the international law has evolved, this kind of situation must have been envisaged by the legislature and hence the need to put a section to clarify the situation. The circular dated 01/06/1976 referred to above vindicates looking at the issue from this angle.

2.3.11 Therefore considering all aspects, in my view, both the sections 5(2) and 9(1)(v) are applicable to determine the situs of the interest income in case of non-resident.

2.3.12 As per the facts of the present case, as discussed earlier, the monies of the debts raised in foreign currencies by the assessee are primarily invested in the foreign subsidiary, which in turn is involved in financing further business abroad. Part of those funds which have not been invested in the subsidiary has been placed in banks abroad. It was further stated that the interest income received from the Time Deposits placed outside India was offered for taxation.

2.3.13 Therefore, if we were to test the deployment of foreign borrowing though the bonds in question, it is clear that almost all of them have been deployed outside India for assessee’s business activities. Investing in Joint Ventures or wholly owned subsidiaries is one of two categories of end-use conditions imposed by R.B.I. for raising 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 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 a chinery section and is almost a code in itself wherein rate of tax, deduction to be allowed a non- necessity of filing the return is mentioned. Therefore, the appellant’s arguments stand to reasoning that if a non-resident’s interest income is not taxable, section 115AC shall not apply. The various provisions come into operation once it is known that the concerned interest income is taxable in India.

2.3.17 Section 196C is the corresponding section of TDS for incomes referred to in section 115AC. While section 195, the other section dealing with TDS on interest, has a subsection i.e. 195(2) wherein if the person responsible for making payment considers that whole or part of the same under reference are not chargeable to tax, he can approach the Assessing Officer, no such specific provision has been made u/s 196C. Since there cannot be such patent inequity in dealing with income of same nature, say interest, from two sources, namely conventional borrowing vis-à-vis foreign currency bonds, the argument that section 115AC and section 196C deal with only chargeable income gets further strengthened. This is further vindicated by the fact that while section 195 talks of ‘such sum’, section 196C talks of only ‘income’. Similarly, some of the case laws cited like Transmission Corporation of A.P. (supra) of Supreme Court, and the decision of ITAT Gauhati in George Williamson (Assam) Ltd. (supra) and the Circular of C.B.D.T. No.786 dated 07/02/2000 point to the fact that once the income is held to non-taxable in the hands 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 cannot 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 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 income 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 provisions of Section 9(1)(v) are regarding the conditions under which income can be deemed to accrue or arise in India in respect of interest payable by a person who is resident in India as per clause (b) of Section 9(1)(v). Hence, there is no contradiction in the provisions of these two sections and there is no overriding effect of anyone provisions over the other provisions. Section 9(1)(v) only defines the conditions under which interest payment by a resident of India to the non-resident is deemed to accrue or arise in India. Hence, for the purpose of examining as to whether any income is deemed to accrue or arise in India or not, we have to examine the applicability of the provisions of Section 9(1)(v)(b) and for the purpose of examining the scope of total income of a non-resident, we have to examine to applicability of the provisions of Section 5(2) which includes income received in India, income deemed to be received in India, income accruing or arising in India and incomes deemed to accrue or arise in India. Hence, it is seen that for the purpose of holding that any income is taxable in the hands of non-resident, it has to be shown that either any income is received by him in India or such income is deemed to be received in India or any income is accruing or arising to him in India or any income is deemed to accrue or arise in India. Now, we have to see as to what is the allegation of the A.O. regarding applicability of the provisions of Section 5(2). As per para 4.7 of the order of the A.O., this is the allegation 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 non- resident or that any income is deemed to accrue or arise in India in the hands of the non- resident 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 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 v. 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 agent in India and hence, in our considered opinion, this judgment of Hon’ble Apex Court is not applicable in the present case because the facts are different.

10. Now we consider the applicability of the judgment of Hon’ble Allahabad High Court rendered in the case of Hira Mills Ltd. Cawnpur (supra). In that case, the issue in dispute was whether profits and gains on sales were assessable to income tax on the ground that they were received in India by or on behalf of assessee within the meaning of section 4(1)(a) and also Section 4(1)(b) of 1922 Act and also on the ground that income have accrued or arose to the assessee in British India within the meaning of Section 4(1)(c) of 1922 Act. Under these facts, it was held in the facts of that case that the income was received in British India on behalf of assessee and it has also accrued or arisen to the assessee in British India and hence, taxable in British India. In the present case, this is not the allegation of the A.O. that the income was received in India by or on behalf of the assessee and hence, this part of this judgment is not applicable at all in the present case. Regarding second part i.e. regarding accruing or arising of income in India, as has been alleged by the A.O. in the present case, we find that this judgment is not applicable in the present case because the facts are different. In that case, the goods were sold in British India and therefore, income was clearly accruing or arising in British India, but in the present case, neither the lending has 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 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 all 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 interest income has accrued or arisen in India in all cases where the payer is an Indian resident because if that be so, then the provisions of clause (b) of Section 9(1)(v) becomes redundant. In that clause (b) of Section 9(1)(v), an exception has been carved out in respect of interest payable by a person who is resident and the exception is this that where the interest is payable in respect of his debt incurred and the money borrowed outside India and was used for the purposes of business carried on by such person outside India or for the purposes of making investment outside India. This goes to show that in a case where the interest is payable in respect of any debt incurred or money borrowed and used for the purposes of a business or investment outside India, then such interest income cannot be said as even deemed to accrue or arise in India. Hence, this is not the deciding factor regarding place of accrual or arising that who is payer of the interest. There are several judgments on this aspect as to where the income has accrued or arisen. These judgments are taken note of by the Tribunal in para No.15 of its order rendered in the case of Credit Agricole Indosuzz (supra). One judgement so noted is of Hon’ble Madras High Court rendered in the case of C.G. Krishnaswami Naidu v. CIT 62 ITR 686 and it was held in that case that in money lending transaction, the decisive factor would be the place where the money is actually lent irrespective of where it came from. In the present case, this is not in dispute that 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 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 of section 5(2), total income will include those incomes which are received in India or which has accrued or arisen in India. In addition to this, this is also to be included in the total income of non-resident if income is deemed to be received in India or income is deemed to accrue or arise to non-resident in India. In our considered opinion, deemed to be received in India and deemed to accrue or arise in India increases the scope of taxability in India in addition to income received in India and income accrued or arisen in India. If an income is not received in India, it can be deemed to be received in India in some specific situations and similarly, even if any income has not accrued or arisen in India, it can be deemed to arise or accrue in India under some given situations but if an income has actually been received in India or has actually accrued or arisen in India, it cannot be part of deemed to be received in India or deemed to accrue or arise in India because what has actually been received in India or what has actually accrued or arisen in India cannot be said to be within the purview of deemed to be received in India or deemed to accrue or arise in India.

15. In the present case, the allegation of the A.O. is that interest paid by the ssessee to non-resident investors has actually accrued or arisen in India although that is falling in exclusion clause of deemed to accrue or arise in India as per Section 9(1)(v)(b). We fail to understand as to how any income which has actually accrued or arise 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) 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, we find that deeming of income accruing or arising in India are those situations where income has not actually accrued or arisen in India but still it will be deemed to accrue or arise in India. Hence, both the situations are mutually exclusive. If one case is falling within the ambit of income accrued and arisen in India, it cannot fall within the ambit of income deemed to accrue or arise in India and vice versa. In the present case, a specific exclusion is provided in clause (b) of Section 9(1)(v) to exclude interest payment to non-resident investors by an Indian resident if such interest payment is in respect of amount borrowed outside Indian and is used outside India for investment or for business carried out outside India. It could not be established or shown by the revenue that the facts of the present case are not falling within this exclusion clause of Section 9(1)(v)(b) of the Act and the only argument of the revenue is this that as per the A.O., it is falling within the ambit of income accrued and arisen in India and, therefore, it is not required to examine the provisions of Section 9(1)(v)(b). We find no merit in this contention because for the purpose of deciding as to whether any income is falling within the ambit of income accrued 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).

17. 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 cannot be said to have accrued or arisen in India and it also cannot be said that this interest income can be deemed to have accrued or arisen in India. Therefore, no TDS is to be deducted by the assessee from this payment in question. It has neither accrued nor arisen in India nor is deemed to accrue or arises in India in the hands of non-resident investors and therefore, no TDS is deductible. We, therefore, decide this issue in favour of the assessee and decline to interfere with the order of the CIT(A).

18. In the result, the appeal of the Revenue is dismissed.”

5. Nothing contrary was brought to our knowledge. Therefore, following the above order of the Tribunal in assessee’s own case, we are of the considered view that the CIT(A) is justified in giving relief to the assessee and there is no infirmity in the order of CIT(A). We uphold the same.

6. In the result, the appeal filed by the Revenue is dismissed.

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