CLEARWATER CAPITAL PARTNERS(CYPRUS) LTD,MUMBAI vs. DCIT (IT) 2(1)(1), MUMBAI

The facts of the case, briefly, are as under: - 2.1 The assessee, a non-resident company engaged in finance business, making investments in India under the FDI route, filed its return of income for A.Y. 2010-11 on 13.10.2010 declaring total income of `21,64,82,585/-. The case was taken up for scrutiny. A reference was made to the Transfer Pricing Officer (TPO) for computation of the arms length price (ALP) of international transactions reported in Form 3CEB, in respect of which no adjustment thereto was proposed by the TPO in his order under section Clearwater Capital Partners (Cyprus) Ltd. 92CA(3) of the Act dated 31.12.2013. The draft order of assessment was completed under section 143(3) r.w.s. 144C(1) of the Act vide order dated 28.02.2014, wherein the assessee’s income was determined at `31,04,66,470/- in view of the addition of `9,39,83,884/- on account of interest on Foreign Currency Convertible Bonds (FCCB’s) under the head ‘income from other sources”. 2.2 Aggrieved by the draft order of assessment dated 28.02.2014 for A.Y. 2010-11, the assessee filed its objections thereto before the DRP-III, Mumbai. The DRP issued its directions under section 144C(5) of the Act vide order dated 14.11.2014. In pursuance thereof, the Assessing Officer (AO) then passed the impugned order dated 30.12.2014 under section 143(3) r.w.s. 144C(13) of the Act determining the assessee’s total income at `30,99,25,696/-, by allowing the assessee relief of `5,40,777/- on account of interest on FCCBs received from Suzlon Energy Ltd. as per the directions of the DRP.

The Scheme provides for the issuance mechanism of FCCBs wherein non-residents subscribe to FCCBs issued in foreign currency which are convertible into shares of the issuing companies.

When an issuing company issues FCCBs under the Scheme, the issuing company delivers the bonds to a Domestic Custodian Bank who in turn instructs the Overseas Depository Bank to issue a certificate to non- resident investors against the bonds held by the Domestic Custodian Bank.

Clause 10(1) of the Scheme inter alia provides that during the period of fiduciary ownership of shares in the hands of the Overseas Depository Bank, the provisions of avoidance of double taxation agreement entered into by the Government of India with a country of residence of the Overseas Depository Bank will be applicable in the matter of taxation of interest on FCCBs. This provision is made to address the problems faced by the issuer in issuing a TDS certificate in the name of the subscriber in the aforesaid circumstances.

Given the above mechanism, as the identity of the FCCB holder may not be known to the Domestic Custodian Bank, the issuing company withholds taxes at the rate of 10% prior to remitting the interest payments and even though in fiduciary capacity, the Overseas Depository Bank's name is generally indicated as the deductee in the TDS certificate.

In light of the above and given the procedural requirement laid down in the Scheme, the credit of taxes withheld by issuing companies is not reflected in Form 26AS of the Appellant.

However, the Appellant after significant efforts has obtained the confirmation letter/copy of challans evidencing the deduction of tax at source on such interest on FCCBs (relevant page numbers of the paper book are referred to in the table in paragraph 1 above). No return filing obligation as per section 115AC of the Act 11. As stated above, section 115AC(1)(a) of the Act provides for taxability of interest received on FCCBs. Further, sub-section (4) to 115AC of the Act inter alia provides that it shall not be necessary for a non-resident to furnish return of income under section 139(1) if: • his total income during the previous year consisted only of income referred to in under the provisions of section 115AC(4) of the Act, where the income of a non-resident consists only of interest on FCCBs as referred to section 115AC(1)(a) and section 115AC(1)(a) and • the tax deductible at source under chapter XVII-B has been deducted from such income. It is submitted that the intention of the legislature behind introduction of sub-section (4) to section 115AC of the Act is to avoid undue hardship to a non-resident which arises on account of difficulties in reporting the FCCB income due to manner in which the Scheme works and since the tax due on the said income is already deducted at source by the issuer company and deposited in the Government treasury.

However, since the Appellant had earned certain other incomes during the year ended 31 March 2010, it was required to file its return of income. Therefore, the Appellant disclosed the interest received on FCCBs in notes to the return of income [as otherwise there was no requirement to file a return of income in respect of the FCCB interest by virtue of section 115AC(4) of the Act].

The lower authorities have, however, added FCCB income to the Appellant's total income and also denied TDS credit in the present case ignoring the aforesaid difficulties faced by the Appellant and also ignoring the details submitted by the Appellant, such as confirmations, evidences of the issuer companies depositing the requisite taxes, TDS certificates issued by some of the issuer companies, etc.” 4.1.2 The learned A.R. prayed that in view of the above mentioned facts and circumstances of the case, this issue be restored to the file of the AO who may be directed to call for information under section 133(6) of the Act from the issuers of FCCBs about details of TDS on the interest paid on FCCBs and/or get the requisite information from the concerned Assessing Officers of issuer companies and to grant TDS credit to assessee if it is found that the issuers have appropriately deducted tax at source and deposited the same with the Central Government treasury. 4.2 The learned D.R. for Revenue submitted that the fact is that the 26AS statement of the assessee does not reflect credit of taxes deducted by Indian companies on interest paid to the assessee which means the assessee is not a deductee as per records of the deductor, whereas it has been contended by the assessee that the overseas depository bank has been shown as the deductee by the deductors. It is contended by the learned D.R. that unless it is established by the assessee that the actual deductee in respect of the amounts of interest income shown by the assessee is the assessee itself and that no other entity has already claimed credit for such taxes deducted at source at any point of time in future, the AO may not be able to allow the assessee’s claim. It is further submitted that, as requested by the assessee, the matter may be restored to the file of the AO to verify the assessee’s claim as per law, as per the submissions/ arguments put forth herein above. 4.3 We have heard the rival contentions and perused and carefully considered the material on record. Both parties to this issue are in agreement that this issue of the assessee’s claim of grant of credit for taxes deducted at source on interest received on FCCBs requires to be restored to the file of the AO for verification thereof in accordance with law, with which proposition we too are in agreement. We, therefore, restore this Clearwater Capital Partners (Cyprus) Ltd. issue to the file of the AO with the direction to verify the assessee’s claim in accordance with law and before granting credit for the impugned TDS to the assessee, fully satisfying himself that the amount of TDS has been deposited into the Government’s account; that the assessee is the lawful deductee, that the gross amount of interest has been considered as the assessee’s income and that no other person has or will claim credit of the very same taxes. We hold and direct accordingly. This ground is accordingly treated as allowed for statistical purposes.

Ground No. 1(b) – Non grant of TDS credit on interest earned on fully convertible debentures and fees for technical services 5.1 In respect of this issue the learned A.R. of the assessee put forth the following facts and arguments: - “14. During the year the Appellant received interest on fully convertible debentures amounting to `18,89,82,589/- and fees for technical services amounting to `2,75,00,000/- on which taxes were appropriately deducted at source and TDS certificates for the entire amount of `2,16,48,259/- (being `1,88,98,259/- towards TDS on interest on fully convertible debentures and `27,50,000/- towards TDS on fees for technical services) were furnished before the learned AO during the course of assessment proceedings 15. The credit for the said amount has not been given even though it reflects in Form No. 26AS and/or TDS certificates have been issued by the payer.” 5.1.2 The learned A.R. prayed that in view of the above, the AO be directed to grant TDS credit as reflected in 26AS and/or based on TDS certificates furnished. 5.2 The learned D.R. submitted that this issue be restored to the file of the AO for verification in accordance with law, reiterating the same arguments and requirements put forth by him herein above at para 4.2 of this order (supra). 5.3 We have heard the rival contentions and perused and carefully considered the material on record. Both parties are in agreement that this issue of the assessee’s claim for grant of TDS credit on interest earned on fully convertible debenture and fees for technical services requires to be restored to the file of the AO for verification thereof in accordance with law; Clearwater Capital Partners (Cyprus) Ltd. with which suggestion we are also in agreement. We, therefore, restore this issue to the file of the AO with the direction to verify the assessee’s claim in accordance with law and before granting credit for the impugned TDS to the assessee, fully satisfy himself that the amount of TDS has been deposited into the Government’s account; that the assessee is the lawful deductee; that the gross amount of interest has been considered as the assessee’s income and that no other person has or will claim credit of the very same taxes. We hold and direct accordingly. This ground is accordingly treated as allowed for statistical purposes.

Ground No. 2 – Interest earned in respect of investments made in FCCBs issued by Dolphin Offshore Enterprises (India) Ltd. 6.1.1 In written submission, the learned A.R. of the assessee put forth the following facts and arguments: - “16. During the course of assessment proceedings, after significant efforts by the Appellant, a confirmation letter evidencing deduction of taxes in respect of interest on FCCBs was received from Dolphin Offshore Enterprises (India) Limited (Dolphin) and was filed with the learned AO. However, the confirmation letter issued by Dolphin inadvertently stated that the entire withholding tax on interest on FCCBs amounting to `20,97,704/- (USD 39,005) is attributed to the appellant although a part of the interest belonged to group entity of the Appellant. The confirmation letter was issued by Dolphin with the intent that the taxes have been appropriately withheld on the interest paid on the total outstanding FCCBs.

The appellant wishes to submit that, out of the total interest amounting to `20,97,704/- (USD 39,005) only interest to the extent of `1,056,603/- (USD 21,943) pertains to the appellant and balance pertains to other group entity of the appellant. However, the entire amount has been added as the appellant's income.” 6.1.2 The learned A.R. of the assessee prayed that the AO be directed to verify the evidence/documents and after verification to consider interest on FCCBs received from M/s. Dolphin Offshore Enterprises (India) Ltd. only to the extent of `10,56,603/- (USD 21,943) and delete the balance if it is found that the same does not pertain to the assessee. 6.2 The learned D.R. for Revenue submitted that as requested by the assessee, this issue may also be set aside to the file of the AO for verification in order to consider in the assessee’s hands only the actual