Case Law Details
If income falls under exclusion clause of income deemed to accrue or arise in India, it cannot fall within ambit of income accrued and arisen in India
IN THE ITAT AHMEDABAD BENCH ‘A’
Additional Director of Income-tax (International Taxation)
versus
Adani Enterprises Ltd.
IT Appeal NO. 3072 (AHD.) OF 2009
CO. NO. 291 (AHD.) OF 2009
[ASSESSMENT YEAR 2009-10]
JANUARY 18, 2013
ORDER
A.K. Garodia, Accountant Member – This appeal is filed by the Revenue and the C.O. is filed by the assessee and these are directed against the order of ld. CITA(a), Gandhinagar dated 03.08.2009 for the A.Y. 2009-10.
2. First we take up the appeal of the Revenue. The grounds raised by the Revenue are as under:-
“1. The ld. CIT(A), Gandhinagar, Ahmedabad 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. 115AC on the interest payable on FCCBs.
2. The ld. CIT(A) erred in law and facts in not considering the issue that an Indian company (assessee) has taken 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 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 holding that both sections 5(2) and 9(1)(v) of the Act, are applicable to determine the situs of interest income in case of non-resident.
4. The ld. CIT(A) 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 consequently it falls outside the ambit of deemed income arising and accruing in India and as a result out of Section 5 also.
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 arisen 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 erred in law and facts in not considering the view of the Assessing Officer that the assessee-company 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 in itself and then traveling to another charging section of the Act for deciding the taxability of interest income.
8. On the facts and in circumstances of the case the ld. CIT(A), Gandhinagar, Ahmedabad ought to have upheld the order of the Assessing Officer.”
3. Brief facts, till the stage of passing of order by the A.O. u/s 201(1) and 201(1A) are noted by ld. CIT(A) in para No.2.1 to 2.1.2 of his order and the same are reproduced below:-
“2.1 Reading of the assessment order shows that the issue has arisen consequent to remittance by the appellant amounting to Rs.30,96,52,800/- in the month of July 2008 and Rs.36,03,03,600/- in the month of January 2009 to the Bank of New York, Mellon towards the interest payable on Foreign Currency Convertible Bonds (FCCBs), issued by the appellant i.e. Adani Enterprises Ltd. No tax has been deducted prior to this remittance. The Assessing Officer issued a show cause notice to the appellant as to why proceedings u/s.201(1) & u/s.201(lA) r.w.s. 196C be not initiated for the above default. Not agreeing with the explanation given by the appellant in response to this show cause notice, the Assessing Officer brought on record that the Bonds have been issued by an Indian company and the interest has been paid by an Indian company from India only and further the obligation to pay the interest rested with the appellant, only. Therefore, according to him the interest has accrued or arisen in the hands of non-resident bondholders in India as soon as the interest became due to the Bondholders. According to him, the interest on FCCBs is chargeable to tax u/s.5(2) itself and the appellant’s assertion that the same is covered by section 9 is incorrect. According to him, when the income is actually received or accrued in India, the provisions, contained in section 5(2) is sufficient to create a charge in respect of a non-resident’s income and resort to deeming provisions of section 9(l)(v) is not warranted. Commenting on the assessee’s reference to the words “Subject to provisions of this Act”, in section 5, the Assessing Officer has stated that this does not lead to the conclusion that the charging provisions of section 5(2) is controlled by another charging provision in section 9(1). The Assessing Officer has further quoted extensively from a number of decisions, namely the decision of Hon’ble Supreme Court in the case of Performing Rights Society v. CIT 106 ITR 11 and that of Hon’ble Allahabad High Court in the case of Hira Mills Ltd. Cawnpur v. ITO 14 ITR 417 as also from the commentary of Kanga, Palkhiwala & Vyas. On the strength of above, the Assessing Officer came to the conclusion that the income derived from the non-resident bondholders is chargeable u/s.5(2) as the income accrued in India and once it is covered u/s.5(2) as section 9(1)(v)(b) is not applicable.
2.1.1. The Assessing Officer, in para-4.8 to 4.11 of the assessment order, went further to establish that even if we take the provisions of section 9(1)(v)(b), the appellant’s case is not covered by the exclusions stated therein. It will be worthwhile to reproduce the reasons advanced by the Assessing Officer for the exclusions being not applicable:
“4.10 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 provision 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.
4.11 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, the assessee has raised the money to be used for making overseas direct investment in its Singapore subsidiaries which is capital in nature.
In view of the above it is hereby held the interest paid by the assessee on FCCB is not covered by the two exclusions provided by the section 9(1)(v)(b) and the same is chargeable to tax in India.”
2.1.2. Further, the Assessing Officer has also tried to analyse the issue in context of issue of FCCB which is governed by “ISSUE OF FOREIGN CURRENCY CONVERTIBLE BONDS AND ORNINARY SHARES (THROUGH DEPOSITARY 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 the purpose of section 115AC(l)(a), in respect of assessment year 2002-2003 and subsequent assessment years vide C.B.D.T. notification No. SO 987(E) dated 10/09/2002 along with the notification of Department of Economic Affairs vide G.S.R. 89(E) dated February 15, 2008, to stress the point that irrespective of the end use of the proceeds, once the scheme is part of the section 115AC of the IT. Act, deduction of tax at source @ 10% is mandated until such time the conversion option is exercised. He also referred to the fact that in earlier years, the appellant has deducted TDS on interest on these FCCBs. Therefore, according to him, considering all the facts, the appellant has to be treated as an assessee in default as per provisions of section 201(1), since the entire interest payable stands remitted without deduction of tax.”
4. Being aggrieved, the assessee carried the matter before ld. CIT(A), who has decided the issue in favour of the assessee and it was held by him that assessee company was not liable to deduct tax at source u/s 196C read with Section 115AC on the interest payable in July, 2008 and June, 2009 on FCCB issued in January, 2007 and now the Revenue is in appeal before us against this decision of ld. CIT(A).
5. It was submitted by ld. D.R. of the Revenue that interest payment on FCCB is chargeable to tax in the hands of non-resident investors u/s 5(2) itself and therefore, Section 9(1)(v)(b) has no applicability in the present case. He drawn our attention to para No.4.3 of the order passed by the A.O. u/s 201(1) and 201(1A) where it is noted by the A.O. He also submitted that funds are brought in India and interest is paid from India by an Indian company through an Indian bank and hence, the interest has accrued and arisen in India. Reliance was placed on the judgment of Hon’ble Apex Court rendered in the case of Performing Right Society Ltd. v. CIT reported in 106 ITR 11 and also on the judgment of Hon’ble Allahabad High Court rendered in the case of Hira Mills Ltd. Cawnpur v. ITO 14 ITR 417. He further drawn our attention to para No.2.3 of the order of ld. CIT(A) where it is observed by ld. CIT(A) that there cannot be a difference of opinion on the proposition that if an income falls within the scheme of total income as per provision of Section 5(2), one cannot travel further to the deeming provisions of Section 9. He further submitted that even after giving this clear finding in para No.2.3, ld. CIT(A) decided the issue in favour of the assessee and on the basis of the provision of Section-9(1) and hence, the order of ld. CIT(A) should be reversed and that of the A.O. should be restored. He also submitted that there is no nexus of investment outside India and FCCB and for this reason also, the order of ld. CIT(A) should be reversed and that of the A.O. should be restored. He further drawn our attention to page-7 of ld. CIT(A)’s order and particularly clause-C i.e. accounting and remittance procedure and it was submitted that this procedure of remittance also shows that income has accrued or arisen in India.
6. In reply it was submitted by ld. A.R. of the assessee that the funds never came to India and hence, the income has not accrued or arisen in India to the non-resident investors. Reliance was placed on the judgment of Hon’ble Apex Court rendered in the case of G.E. India Technology Centre Pvt. Ltd. v. CIT reported in 327 ITR 426 where it was held that there is no obligation of TDS if the income has not accrued or arisen in India. It was also submitted that Master Circular dated July, 1st, 2008 regarding External Commercial Borrowings (ECB) is available on pages 46 to 79 of the paper book and in particular our attention was drawn to pages 48 and 49 of the paper book where major terms and conditions of ECB including FCCB and its uses etc. are specified. He also drawn our attention to page No.90 of the paper book which contains a letter dated 06.02.2007 of R.B.I. regarding allotment of registration number to the assessee company in respect of FCCB of 20 crores U.S. dollars. Our attention was also drawn to page No.144 to 360 of the paper book which contain prospectus issued by sale Manager, Jefry International Ltd. including terms and conditions of bonds etc. In particular our attention was drawn to page No.160 to 161 of the paper book as per which principal bank to the conversion and transfer agent is the bank of New York and principle paying conversion and transfer agent is the bank of New York. Our attention is also drawn to page No.178 of the paper book which specifies that the use of proceeds of this FCCB issued including the proceeds from the exercise of the over allotment of fund wherein it is specified that the same should be used by the issuer for making overseas direct investment in its Singapur subsidiary such as Adani Shipping PTE Ltd., Adani Global PTE Ltd. etc. Our attention was also drawn to page No.240 of the paper book which specify the terms of payments and interest etc. and it was pointed out that the interest is required to be paid by way of transfer to the registered account of the bond holder or by US dollar cheque drawn on a bank of New York mailed to the registered addresses of the bond holder and all payments in respect of the bonds are subject in all cases to any applicable fiscal or other laws and regulations in New York city. Regarding governing law and jurisdiction, it is submitted that as per page No.254 of the paper book, these terms and conditions shall be governed by and considered in accordance with English law and the Courts of England and Walls have jurisdiction to settle any dispute which may arise regarding these terms and conditions. Our attention was drawn to page No.255 of the paper book as per which law Debenture Corporate Service Ltd. of London was irrevocably appointed its authorised agent for service of process in England. Reliance was placed on the following judgments:-
(a) 14 SOT 246 (Mumbai), Credit Agricole Indosuez v. JCIT.
(b) 147 ITR 361 (Raj), Mansinghka Brothers P. Ltd. v. CIT
(c) 125 ITR 525 (SC), CIT v. Toshoku Ltd.
Strong reliance was placed on the order of ld. CIT(A)
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 then 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 this 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 machinery 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 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 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 purposes 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 debt incurred, or moneys borrowed and used, for the purposes 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 nonresident, 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 nonresident 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 v. 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 accrues 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 al 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 assessee 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.
19. Now we take up the C.O. filed by the assessee.
20. The grounds raised by the assessee in the C.O. are as under:-
“1. On the facts and in circumstances of the case, ld. CIT(A), Gandhinagar, has erred in not giving any finding that provisions of section 195A are not applicable if at all tax is deductible on interest paid to non-resident bond holders under section 196C of the Income Tax Act, 1961.
2. The appellant wants to crave, alter, amend, and/or withdraw any cross objections either before or during the course of the hearing of the appeal.”
21. In the light of our decision in respect of Revenue’s appeal, the grounds raised by the assessee in the C.O. have become infructuous because when TDS is not deductible at all from interest paid to non-resident bond holders then there is no occasion to do the grossing up as per section 195A of the I.T. Act. Hence, the C.O. of the assessee is also dismissed.
22. In the combined result, the appeal of the Revenue as well as the C.O. of the assessee are dismissed.
