Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, “G”, BENCH MUMBAI
Before: SHRI R.C.SHARMA, AM & SHRI AMARJIT SINGH, JM
O R D E R PER R.C.SHARMA (A.M): This is an appeal filed by the assessee against the order of CIT(A)- Mumbai, for the assessment year 2011-12.
The grievance of the assessee relates to holding the assessee as assessee in default u/s.201(1) & 201(1A) of the Act.
Rival contentions have been heard and record perused. The facts of the case are that the assessee is engaged in the business of information Technology Enabled Transaction Processing Services and has two wholly owned subsidiaries in the USA namely “First Source solution Ind.”(“FS-US”) and First Ring Inc.(“FR-US”). On 03/12/2007, the assessee issued Zero Coupon "Foreign Currency Convertible Bonds"
2 ("FCCB") of USD 275 million (2,750 FCCBs of USD 1,00,000 each) with a tenure of 5 years redeemable on 04 December 2012. The FCCBs were to be redeemed at the rate of 139.37% of the principal amount. The terms of issue of FCCBs also provided for an option to the FCCB holders to get the bonds converted into equity shares with full voting rights with a par value of Rs. 10 each at a conversion price of Rs.92.2933 per share with a fixed rate of exchange on conversion of Rs. 39.27 to USD 1 or to redeem the same on or before 04 December 2012. The AO observed that in spite of the fact that the assessee had made provisions of TDS deduction in the ledger account of share premium account and in the balance sheet, the assessee has not deducted TDS. As per AO since, the FCCB carries premium/interest at an implicit rate of 6.86%, the assessee company is to provide interest/premium payable to bond holders and accordingly TDS as per applicable provision of Section 196C is to be deducted. But the assessee, in the relevant FY has not deducted TDS as per applicable provisions of section 196C. Further, the assessee in their books of accounts has treated the said premium/interest payable on redemption of FCCB by amortization on pro-rata basis of implicit rate of return over the period of bonds along with the TDS payable and charged to the Securities Premium Account periodically. Thus, as per AO the assessee committed default u/s 196C and liable to proceedings u/s 201(1) along with Section 201(1A) for the interest applicable thereon.
By the impugned order the CIT(A) confirmed the action of AO, against which assessee is in further appeal before us.
We have considered rival contentions and found from the record that the assessee had issued Foreign Currency Convertible Bonds (FCCB) of USD 275 million on 3 December 2007 to be redeemed on 4 December 2012 at 139.37% of the principal amount (implicit interest rate of 6.86% p.a.). The terms of issue of the FCCBs provides an option to the FCCB holder to get the bonds converted into equity shares or redeem the same. In case the same are not converted into equity shares during the period of FCCBs, they shall be redeemed on the date of maturity i.e. 04/12/2012.
The crucial question before us is as to whether the assessee can be treated as an „assessee in default‟ for not deducting tax at source u/s.196C of the IT Act in the assessment year 2011-2012 in respect of premium on the Zero percent Foreign Currency Convertible Bonds (“FCCB”) issued by it. As per the terms of FCCB, the FCCBs were issued on 3rd December, 2007 redeemable on 4th December, 2012. The FCCBs were Zero Coupon Bonds, i.e. no interest was payable during the tenure of the bonds. The FCCBs were convertible at the option of the bondholder into fully paid equity shares at any time between 14th January, 2008 and 23rd November, 2012. The FCCBs could be bought back by the assessee prior to their maturity. This buy back option was, in fact, exercised as is evident from the order dated 5th March, 2014 passed u/s.143(3) r.w.s.144C(3) of the Act for the assessment year 2010-2011. The FCCB‟s were redeemable at a premium of 39.37% payable on maturity in the event of the bond not being earlier bought back or converted into shares.
The provisions of Section 196C of the Act, reads as under :- “Where any income by way of interest or dividends in respect of bonds or Global Depository Receipts referred to in Section 115AC or by way of long-term capital gains arising from the transfer of such bonds or Global Depository Receipts is payable to a non- resident, the person responsible for making the payment shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rate of ten per cent : Provided that no such deduction shall be made in respect of any dividends referred to in Section 115-O.
It is evident from the above that the following cumulative conditions precedent (ALL of which are required to be satisfied) are required to be fulfilled before an assessee can be regarded as obliged to deduct tax u/s. 196C of the Act. The Section is analyzed below: IF: A. Any income by way of interest in respect of bonds B. Is payable C. To a non-resident D. TDS thereon has to be deducted: I. At the time of credit to the account of the payee; or II. At the time of payment thereof If ANY ONE of these conditions is not fulfilled, the assessee has no obligation to deduct tax. It is to be noted that section 196C does not have any Explanation on the lines of Sections 193, 194A, 194C, 194G, 194H, 1941, 194J, 194K, 195, and 196A of the Act which provide that credit to any account, whether called a "Suspense Account" or any other account also triggers the tax deduction provisions.
We found that none of the above conditions are attracted in the case of the assessee. We also found that during the financial year ended on 31st March 2011, there was no question of there being any income by 5 way of interest, as the FCCB' s were zero percent bonds carrying no interest and only giving the bondholder a right to get a premium of 39.37% on maturity. We also found that no interest whatsoever was payable during the financial year ended 31 March 2011. The word "payable" requires that a liability must accrue against the assessee during the year ended 31 March 2011 for the payment of the alleged interest and that a corresponding right / debt has to accrue to the bondholder. In this connection reliance is placed on the decision of the Supreme Court in the case of E. D. Sassoon & Company Ltd. and Others v/s. CIT (1954) 26 ITR 27 (SC).
Furthermore, as per the terms of the issue it was not possible to identify the person to whom the premium on maturity (allegedly treated as interest by the Department) will be paid. This is because, prior to the maturity date: • The bondholder may transfer the bonds by trading them on the Singapore Stock Exchange; • The bonds may be bought back by the Appellant Company prior to the maturity date; • The bonds may be convel1ed into equity shares prior to the maturity date; Our above proposition is fully supported by two decisions of the Mumbai Bench of the ITAT viz., Industrial Development Bank of India v/s. ITO (2007) 107 ITD 45 (Mum.); and Pfizer Ltd. v/s. ITO (TDS) (ITA No. 1667/M/10). The decision in the case of Pfizer Ltd. is of relevance because in that case the ITAT has held that there was no question of treating the assessee as an "assessee in default" in respect of non- deduction of TDS, even though the assessee had made a provision for