INCOME TAX ACT, 1961

Section 201(1) Section 9(1)(v) Section 2(28A)

Tax deduction at source - Assessee-in-default - Assessee remitted USD 70,60,125 as Foreign Currency Convertible Bonds ('FCCBs') redemption premium without deduction of tax at source -

Assessee-company remitted USD 70,60,125 as Foreign Currency Convertible Bonds ('FCCBs') redemption premium without deduction of tax at source. It was submitted that no tax deduction was required to be made in respect of redemption of premium of USD 70,60,125 as the bonds in respect of which premium was redeemed were utilized outside India for the purpose of investment/loans to overseas subsidiaries, were parked outside India and those funds were not brought into in India. Assessee also filed copies of ECB-2 filed with Reserve Bank of India in support of above contention. However, AO held that issue of FCCBs was 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 12-11-1993 and Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme was the notified scheme for purposes of section 115CA(1)(a), in respect of assessment year 2002-03 and subsequent assessment years vide CBDT Notification No. SO987(E), dated 10-9-2002 and no exclusion was provided in the scheme of taxation of FCCBs in respect of ends use of proceeds from the FCCBs. Accordingly, AO held the assessee as “an assessee in default” for non-deduction of tax at source from redemption premium. Held : On carefully perusal of the CBDT Circular dated 5-7-1976 it would be clear that interest paid by 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 instant case, it was 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, redemption premium partook character of interest as defined under section 2(28A), however, by virtue of exclusive clause of the provisions of section 9(1)(v), interest income in the hands of recipient could not be said to have accrued or arisen in India. When income had not arisen in India in the hands of recipient/non-resident, there was no obligation on part of assessee to deduct tax at source from payment of interest, and therefore, assessee could not be treated as one-in-default.

Followed :GE India Technology Cen. (P.) Ltd. v. CIT (2010) 327 ITR 456 (SC) : 2010 TaxPub(DT) 2241 (SC), Karnataka Power Transmission Corporation Ltd. v. DCIT (2016) 383 ITR 59 (Karn) : 2016 TaxPub(DT) 1106 (Karn-HC).

REFERRED :

FAVOUR : In assessee's favour.

A.Y. : 2014-15

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