fiogf49gjkf0d
Sections 5, 9, the Act – since funds raised by issue of FCCBs were utilised for investment in foreign subsidiary carrying on business outside India, interest paid to bond holders was covered under exclusion in section 9(1) (v)(b) of the Act
Facts
The taxpayer had raised funds from certain nonresident investors by issuing FCCBs to them. The funds were invested in a company which was incorporated outside and which was carrying on business outside India. The taxpayer remitted interest to the bond holders without withholding tax on the ground that interest was neither received by non-resident bond holders in India nor had it accrued in India. Even if it was deemed to have accrued in India, the same was eligible for source rule exclusion as the borrowed funds were utilised for the purpose of earning income from source outside India.
According to the AO, the interest accrued or arose to non-resident bond holders in India. Consequently, the income was primarily subject to section 5(2). Accordingly, resorting to section 9 was not permissible. Therefore, the AO held that the income was chargeable to tax under section 5(2) and exclusion u/s. 9(l)(v)(b) was not relevant.
Held
Identical issue was considered in case of the taxpayer in earlier year. The Tribunal had observed that funds raised by issue of FCCBs were invested in foreign subsidiary which was involved in financing of businesses abroad.
The term “business” is wide enough to include investment in subsidiaries or joint ventures which are further involved in business or commerce. Therefore, the AO’s observation that the taxpayer was not earning out of business carried on outside India was not correct. Exclusion clause will not have any purpose unless the income is covered within the provision to which exclusion clause applies. Hence, the presence of exclusion in section 9(1)(v)(b) proves that the income is falling within the ambit of deeming provision. Thus, it cannot be accepted that the same income can also fall within the ambit of income which has accrued and arisen in India.
Since nothing contrary was brought on record in the relevant tax year, following the order of the Tribunal in case of the taxpayer, interest earned by non-resident bond holders was not chargeable to tax in India.
