Deputy Commissioner of Income-tax, Circle 1(1), Pune V. Bharat Forge Ltd., Pune

ITA 341/PUN/2021

AI Insights

The case involves Bharat Forge Ltd., which issued Foreign Currency Convertible Bonds (FCCBs) and paid a redemption premium without deducting tax at source. The TDS Officer treated the company as 'an assessee in default' under section 201(1) of the Income Tax Act, 1961, leading to a demand for tax and interest. Bharat Forge contested this, arguing that the income did not accrue in India as the FCCBs were used for investments in overseas subsidiaries. The CIT(A) agreed with Bharat Forge, leading to the Revenue's appeal to the ITAT, which upheld the CIT(A)'s decision based on precedents and the interpretation of sections 5(2) and 9(1)(v) of the Act.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 137191 (ITAT-PUNE)
• Duration Of Justice: 1 year(s) 4 month(s) 8 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 02-01-2023
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 14-12-2022
• Assessment Year: 2014-2015
• Appeal Filed On: 24-08-2021
• Other Referred Cases: Adani Enterprises Ltd. vs. ITA No.3072/Ahd/2009 & Co.No.291/Ahd/2009, C.G. Krishnaswami Naidu vs. CIT, 62 ITR 686 (Mad.), GE India Technology Cen. (P.) Ltd. vs. CIT, 327 ITR 456 (SC), Karnataka Power Transmission Corporation Ltd. vs. DCIT, 383 ITR 59 (Karnataka)
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Residential status; Deemed to accrue or arise in india; Permanent establishment; Non-deduction of tax; TDS
• Section: 6; 5(2); 201(1); 9(1); 9(1); 9(1)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH “A”, PUNE BEFORE SHRI INTURI RAMA RAO, ACCOUNTANT MEMBER AND SHRI S. S. VISWANETHRA RAVI, JUDICIAL MEMBER आयकर अपील सं. / ITA Nos.341 & 461/PUN/2021 िनधाᭅरण वषᭅ / Assessment Year : 2014-15 DCIT, Circle-1(1), Pune. Vs. Bharat Forge Ltd., Mundhwa, Pune Cantonment, Pune- 411036. PAN : AAACB8519L Appellant Respondent आदेश / ORDER PER INTURI RAMA RAO, AM: These are the appeals filed by the Revenue directed against the separate orders of the ld. Commissioner of Income Tax-13, Pune [‘the CIT(A)’] for the assessment year 2014-15 respectively. 2. Since both these appeals of the Revenue were heard together, therefore, they are being disposed-off by this consolidated order for the sake of convenience. 3. First, we shall take the appeal of the Revenue in ITA No.341/PUN/2021 for adjudication. Revenue by : Shri Ramnath P. Murkunde Revenue by : Shri Nikhil S. Pathak Date of hearing : 15.12.2022 Date of pronouncement : 03.01.2023 ITA Nos.341 & 461/PUN/2021 2 ITA No.341/PUN/2021 : 4. The Revenue raised the following grounds of appeal :- “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 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) has erred in law to appreciate that the provisions of section 115AC of the Act, is a code in itself and then travelling to another charging section 5(2) of the Act for deciding the taxability of interest income. 6. On the facts and in circumstances of the case the Ld. CIT(A), ought to have upheld the order of the Assessing Officer. 7. Appellant craves leave to add, amend and alter any other grounds of appeal.” 5. Briefly, the facts of the case are as under :- The respondent-assessee is a company incorporated under the provisions of the Companies Act, 1956. It is engaged in the business of manufacturing and selling of automotive components. During the course of scrutiny of e-TDS returns filed by the respondent-assessee for the financial year 2013-14, the Dy. Commissioner of the Income Tax (International Taxation)-I, Pune (hereinafter called as ‘TDS Officer’) observed that the respondent- ITA Nos.341 & 461/PUN/2021 3 assessee had remitted USD 70,60,125 as Foreign Currency Convertible Bonds (‘FCCBs’) redemption premium without deduction of tax at source. Accordingly, the TDS Officer had called upon the respondent-assessee to show cause as to why it should not be treated as “an assessee in default” u/s 201(1) of the Income Tax Act, 1961 (‘the Act’) vide show-cause notice dated 24.06.2013. 6. In response to the said show-cause notice, the respondent- assessee had filed a detailed explanation stating that the respondent- assessee was liable to redeem Tranche B Bonds on 26.04.2013 at 56.481% of their principal amount, if these were not previously converted, redeemed or purchases and cancelled. The total redemption premium payable was USD 22.535 million. It is seen from the details filed that the respondent-assessee has duly deducted and paid tax on redemption premium of USD 15.48 million, whereas no tax is deducted from redemption premium of USD 7.06 million as above. It is submitted that no tax deduction is 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. 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 ITA Nos.341 & 461/PUN/2021 4 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 Co- ordinate 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 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 is 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 10.09.2002 and no exclusion is provided in the scheme of taxation of FCCBs in respect of ends use of proceeds ITA Nos.341 & 461/PUN/2021 5 from the FCCBs. Accordingly, the TDS Officer held that the respondent-assessee is “an assessee in default” for non-deduction of tax at source on redemption premium of USD 70,60,125. Accordingly, the TDS Officer called upon the respondent-assessee to deduct tax at source of Rs.4,50,12,763/- along with interest u/s 201(1A) of Rs.99,02,807/-. 8. Being aggrieved by the above assessment order, an appeal was filed before the ld. CIT(A) who originally vide order dated 29.09.2017 had dismissed the appeal in limine without condoning of delay of 921 days. However, on appeal before the Income Tax Appellate Tribunal (ITAT), the matter was remanded to CIT(A) vide order dated 17.05.2019 to decide the issue in appeal on merits by condoning the delay. Pursuant to the order of remand by the Tribunal, the ld. CIT(A) vide order dated 30.03.2021 had allowed the appeal of the respondent-assessee by holding that no interest income had accrued to the non-recipient in terms of provisions of section 5(2) r.w.s. 9(1)(v) of the Act placing reliance on the decision of the Co-ordinate Bench of the Tribunal in the case of Adani Enterprises Ltd. (supra). 9. Being aggrieved, the Revenue is in appeal before us in the present appeal. 10. The ld. Sr. DR submits that the ld. CIT(A) ought not to have quashed the order passed by the TDS Officer u/s 201(1) of the Act. ITA Nos.341 & 461/PUN/2021 6 He further submitted that the income had arisen from issue of FCCBs should be held to have accrued in India within the meaning of section 5(2) of the Act. The interest that had accrued to non- recipient u/s 5(2) is taxable and the deeming provisions of section 9(1)(v) have no role to play. 11. On the other hand, ld. AR submitted that the accrual of income does not depend upon the Jurisdiction Court to decide the issues that had arisen after entering into the contract. The ld. AR placing reliance 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 ITA Nos.341 & 461/PUN/2021 7 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 provisions of section 5 classify the assessee probably in three categories, namely, resident, ordinarily resident or non-resident. The criteria for determination of Residential status of the assessee is laid down u/s 6 with which we are not concerned in the present appeal. The scope of the provisions of section 5 defines as to what type of income would constitute total income in the case, when the assessee belonging to each of the three categories. The provisions of section 5(2) defines total income of any previous year of a person who is non-resident to include income which is received or deemed to have received in India during such year or accrued or deemed to have accrued to him during the previous year. The provisions of section 9 indicate as to what type of income to have accrued, arisen in India. The provisions of section 9 spells out the instance of the income as non-resident would be liable to tax in India. The provisions of section 9(1)(v) spells out when the interest income is deemed to have accrued arisen in India, received or interest income received or deemed to have received in India which reads as under :- “9(1) ......... (v) income by way of interest payable by— ITA Nos.341 & 461/PUN/2021 8 (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. Explanation.—For the purposes of this clause,— (a) it is hereby declared that in the case of a non-resident, being a person engaged in the business of banking, any interest payable by the permanent establishment in India of such non- resident to the head office or any permanent establishment or any other part of such non-resident outside India shall be deemed to accrue or arise in India and shall be chargeable to tax in addition to any income attributable to the permanent establishment in India and the permanent establishment in India shall be deemed to be a person separate and independent of the non-resident person of which it is a permanent establishment 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 in India. It was judicially held that to satisfy the test of taxability, the lending of money abroad and the bringing of the same into India should be an integral part of a composite transaction and the bringing of money into India should be with the knowledge of the lender. Thus, interest on moneys borrowed ITA Nos.341 & 461/PUN/2021 9 abroad and brought without the knowledge of the lender was not chargeable to tax in India. 14.2 Section 9(1) has now been amended to replace the aforesaid provision by a simple and comprehensive source rule. Under the amended provision, interest income of the following types will be deemed to accrue or arise in India : (a) Interest payable by the Central Government or any State Government. (b) Interest payable by a resident except in the following cases:- (i) interest payable by a resident in respect of any debt incurred, or any moneys borrowed and used, for the purposes of a business or profession carried on by him outside India ; and (ii ) interest payable by a resident in respect of any debt incurred, or any moneys borrowed and used, for the purposes of making or earning any income from any source outside India. It may be noted that where moneys borrowed by a resident for the purposes of a business or profession carried on by him outside India are actually used for any other purpose, interest payable thereon will be deemed to accrue or arise in India. Similarly, interest payable on moneys borrowed by a resident for the purposes of making or earning any income from any source outside India will be deemed to accrue or arise in India if the moneys are actually used for any purpose in India. (c) Interest payable by a non-resident in respect of any debt incurred, or money borrowed and used, for purposes of a business or profession carried on by him in India. It may be noted that interest payable by a non-resident in respect of any debt incurred, or moneys borrowed and used, for the purposes of making or earning any income from any source, other than a business or profession carried on by him in India, will not be deemed to accrue or arise in India. Thus, if a non- resident “A” borrows moneys from a non-resident “B” and invests the same in share of an Indian company, interest payable by “A” to “B” will not be deemed to accrue or arise in India. Similarly, if a lead bank obtains loans outside India from a consortium of foreign banks and lends the 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.” ITA Nos.341 & 461/PUN/2021 10 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. When the income has not arisen in India in the hands of recipient/non-resident, there is no obligation on the part of the respondent-assessee to deduct tax at source on payment of interest as held by the Hon’ble Supreme Court in the case of GE India Technology Cen. (P.) Ltd. vs. CIT, 327 ITR 456 (SC) followed by the Hon’ble Karnataka High Court in the case of Karnataka Power Transmission Corporation Ltd. vs. DCIT, 383 ITR 59 (Karnataka). We find that the order of the ld. CIT(A) is in consonance with the legal position discussed above. Therefore, the order of the ld. CIT(A) is just, proper and reasoned order. Thus, we do not find any reason to interfere with order of the ld. CIT(A). ITA Nos.341 & 461/PUN/2021 11 15. In the result, the appeal filed by the Revenue in ITA No.341/PUN/2021 for A.Y. 2014-15 stands dismissed. ITA No.461/PUN/20121 : 16. This is an appeal filed by the Revenue directed against the order of the ld. CIT(A)-13, Pune dated 20.07.2021 levying the penalty of Rs.4,50,12,760/- u/s 271C of the Act for failure on the part of the assessee to deduct tax at source on the redemption premium. 17. The Brief facts of the issue in the present appeal is as under : The penalty u/s 271C was levied by the Joint Commissioner of Income Tax (International Taxation), Pune vide order dated 30.09.2015 on the basis of order passed by the TDS Officer on 24.02.2015 u/s 201(1) & 201(1A) of the Act. This order was quashed by the ld. CIT(A) and on further appeal before the Tribunal, the Tribunal also sustained the findings of the ld. CIT(A) in quashing of the order u/s 201(1) of the Act. Since the basis on which the penalty was levied, no longer survive, therefore, the penalty order cannot be sustained in the eyes of law. Therefore, the ld. CIT(A) rightly deleted the penalty levied u/s 271C of the Act. 18. In the result, the appeal filed by the Revenue in ITA 461/PUN/2021 for A.Y. 2014-15 stands dismissed. ITA Nos.341 & 461/PUN/2021 12 19. To sum up, both the above captioned appeals filed by the Revenue stands dismissed. Order pronounced on this 03 rd day of January, 2023. Sd/- Sd/- (S. S. VISWANETHRA RAVI) (INTURI RAMA RAO) JUDICIAL MEMBER ACCOUNTANT MEMBER पुणे / Pune; ᳰदनांक / Dated : 03 rd January, 2023. Sujeet आदेश कᳱ ᮧितिलिप अᮕेिषत / Copy of the Order forwarded to : 1. अपीलाथᱮ / The Appellant. 2. ᮧ᭜यथᱮ / The Respondent. 3. The CIT(A)-13, Pune. 4. The Pr. CIT-1, Pune. 5. िवभागीय ᮧितिनिध, आयकर अपीलीय अिधकरण, “A” बᱶच, पुणे / DR, ITAT, “A” Bench, Pune. 6. गाडᭅ फ़ाइल / Guard File. आदेशानुसार / BY ORDER, // True Copy // Senior Private Secretary आयकर अपीलीय अिधकरण, पुणे / ITAT, Pune.