Income Tax Act, 1961

--Income deemed to accrue or arise in India under section 9(1)(v)Interest Paid to non-resident investors--During the course of assessment, it was noted by assessing officer that assessee-company (Indian Company) remitted interest on Foreign Currency Convertible Bonds (FCCBs) to non-resident investors banks without deduction of tax at source. Assessing officer came to conclusion that income derived by non-resident bondholders was chargeable under section 5(2) as income had accrued in India and once it was covered under section 5(2), section 9(1)(v)(b) was not applicable. As such, interest paid on FCCBs was not covered by two exclusions provided by section 9(1)(v)(b) and same was chargeable to tax in India. Held : Not justified. Assessee was not liable to deduct tax at source under section 194C r/w section 115 assessing officer on interest payable to non-resident investors.

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. It cannot be said that the interest income has accrued or arisen in India and there is no other basis of the assessing officer'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. [Para 12] 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 overseas 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. [Para 13] There is 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. [Para 17]