S/s. 5(2), 9(1)(v) – Interest on FCCBs issued outside India neither accrues or arises in India nor is deemed to accrue or arise in India; Where an interest income falls within the ambit of the source rule exclusion specifically dealing with deemed accrual of interest, it cannot be taxed by evaluation within the ambit of “income accrued and arisen in India.

S/s. 5(2), 9(1)(v) – Interest on FCCBs issued outside India neither accrues or arises in India nor is deemed to accrue or arise in India; Where an interest income falls within the ambit of the source rule exclusion specifically dealing with deemed accrual of interest, it cannot be taxed by evaluation within the ambit of “income accrued and arisen in India”.

An Indian Company (Taxpayer) made interest payments to a US Bank on Foreign Currency Convertible Bonds (FCCBs), issued by the Taxpayer. The funds were deployed by the Taxpayer outside India, primarily invested in the foreign subsidiary, which in turn is involved in financing further business abroad. Taxes were not withheld on interest payments made by the Taxpayer. The tax authority held that the interest on FCCBs accrued in India in the hands of non resident investors, as FCCBs were issued by an Indian company and the interest was paid by an Indian company from India and the obligation to pay the interest rested with the Taxpayer. However, CIT(A) ruled otherwise and held that the interest income was not taxable in India. Aggrieved, tax authority appealed before the Tribunal.

Held

Tribunal referred to the Madras HC’s ruling in case of C.G. Krishnaswami Naidu [(1966) 62 ITR 686 (Mad)], and held that the decisive factor in order to determine the place of accrual would be the place where the money is actually lent, irrespective of where it came from. In the present case, the money was actually lent by the non-resident investors in the foreign country and it was not lent in India and therefore, it cannot be said that the interest income has accrued or arisen to the non-resident investors in India. Further payment of interest by an Indian Company is not a decisive factor to determine whether income accrues in India.

Section 9(1)(v) of the Act is applicable for the purpose of determining whether interest income is deemed to accrue or arise in India. As per clause (b) of section 9(1)(v) of the Act interest payment to non-resident investors by an Indian resident, if such interest payment is in respect of amount borrowed outside India and used outside India for investment or for business carried out outside India is excluded from the ambit of taxation in India. In the facts of the case, the above exclusion would squarely apply as the money has been utilised for the business outside India. The Tribunal also pointed out that if an income is said to accrue or arise in India whether the same can be excluded specifically from scope of income deemed to accrue or arise in India, which according to the Tribunal was not correct. 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.

Tribunal ruling in favour of the Taxpayer concluded that, as the interest income in the present case is falling within the ambit of the exclusion clause of “income deemed to accrue or arise in India”, it cannot fall within the ambit of “income accrued and arisen in India” and hence the same was not taxable in India.