The Income Tax Appellate Tribunal (ITAT) Mumbai bench held that income received on redemption of Foreign Convertible Currency Bond (FCCBs) issued by the resident company is chargeable to tax in hands of ultimate beneficiaries not the trustees of the bonds.Therefore the bench quashes the reassessment proceedings against non resident company.
Assessee, Citicorp Trustee Company is a non resident company incorporated in the United Kingdom. The assessee company and Bharat Forge Ltd entered into a trust deed for issuing FCCB.
The assessee company acted as a trustee for bond issuance in the capital markets M/s. Bharat Forge Ltd which had issued earlier US 39.9 millions Zero Coupon, Tranche B Convertible bonds; and redeemed the bonds and the total redemption payable was US $ 22.535 million. Though, M/s. Bharat Forge Ltd deducted tax on redemption premium of US$ 15.48 million no tax was deducted for redemption of US$ 7.06 million.
Accordingly, the AO of Bharat Forge Ltd. held it to be assessee in default under Section 201(1) r.w.s 195 of the Income Tax Act and taxed the interest on Foreign Currency Convertible Bonds (FCCB) as accrued in India as per the provisions of section 5(2)(b) of the Act and held held that the interest to the tune of Rs.42,84,48,114/- was deemed to accrue or arise in India.
AO of assessee taking note that the assessee having received funds amounting to Rs.42,84,48,114/- during the year, failed to file return of income despite having taxable income,
Therefore the AO initiated reassessment proceedings against assessee.
Against the reassessment proceedings, the assessee filed an appeal before the tribunal.
Counsel for the assessee before the bench submitted that the assessee company was appointed as a trustee for issuance of FCCBs amounting to Rs.42,84,48,114/- of M/s. Bharat Forge Ltd a company which was incorporated in India.
In order to simplify the administration of large numbers of investors, the issue of FCCBs is usually coordinated with the involvement of a trustee which is appointed on the terms of the Trust Deed with limited tasks such as receiving an annual certificate, agreeing to documentation amendments in certain situations.
Further the paying agent is appointed by the Issuer to convey payments from the Issuer to clearing systems through which ultimate investors / ultimate owners hold their interest in the FCCBs and receive payment.
Thus payments did not pass through the hands of the Trustee. Therefor, the income received on redemption of bonds issued by M/s. Bharat Forge Ltd even if chargeable to tax would be in the hands of the ultimate beneficiaries and not the Trustee/nominee of the bonds, he added.
Counsel for the revenue supported the decision of assessing officer.
It was observed by the tribunal that the AO of assessee has reopened the assessment. Based on this action of AO(TDS) of M/s Bharat Forge Ltd, the AO of assessee recorded his reason to believe that income chargeable to tax amounting to Rs.42,84,48,114/- has escaped assessment.
Subsequently The action of the AO (TDS) of M/s. Bharat Forge Ltd. was challenged by M/s. Bharat Forge Ltd before the CIT(A) who was pleased to delete the direction of AO (TDS) to deduct the tax at source on the redemption premium this action of the CIT(A) has been upheld by the Tribunal (Pune) by holding that the income had not arisen in India in the hands of the recipient/non resident.
After considering the facts submitted by both parties, the two member bench of S. Rifaur Rahman (Accountant Member) and Aby T. Varkey (Judicial Member) observed that income received on redemption of Foreign Convertible Currency Bond (FCCBs) issued by the resident company is chargeable to tax in hands of ultimate beneficiaries not the trustees of the bonds.Thus the bench quashed the reassessment proceedings against the assessee.
Amit Kumar Soni appeared for the revenue and Anish Thackar appeared for assessee.
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