V. Ravi Narayanan v. Cit

(By Mr. A. Sinha) The facts of this case lie in a narrow compass. Shri V. Ravi Narayanan (the applicant), left India on 23 April, 2007 and is living in the Kingdom of Saudi Arabia. As he has spent more than 182 days outside India, he has claimed the status of a non-resident individual for the financial year 2007-08, corresponding to the assessment year 2008-09. He proposes to open a Non-resident Ordinary deposit (NRO account) with banks in India with the help of remittances from Saudi Arabia. He claims that the interest income arising from that account will be investment income under section 115C of the Income-tax Act, 1961 (the 1 Act). Accordingly, it will attract income-tax @ 20% under section 115(E) of the Act. However, banks in India do not regard this type of income as investment income. They treat it as other income and deduct tax @ 30%. The applicant had taken up the issue with the HDFC bank which finally took the stand that it will deduct tax @ 30%. In the light of the above facts, the applicant sought advance ruling of this Authority on the following questions:-

a) Can a Non Resident Ordinary (NRO) deposit acquired with convertible foreign exchange (remittances from overseas through Banking Channels) be treated as a foreign exchange asset or not under Sec 115 C of the Income Tax Act?

b) Should the interest on these NRO deposits created with overseas remittances be treated as investment income under Sec 115 C or treated as other income?

c) Am I right in assuming that the interest income on such deposits is taxable at 20% as per Sec 115E of the IT Act?

d) Are Banks right in deducting TDS at 30% on such deposits treating the interest as other income (Part II-1-b-1-k of the First Schedule of the Finance Bill 2007) and not as investment income (as per Part II-1-b-1-a of the First Schedule of the Finance Bill 2007)? This results in excess TDS by Banks.

e) Are Banks right in refusing to accept Form 15 G from Non Resident Indians?

2. The Commissioner of Income-tax, Chennai-V (the Commissioner) has submitted his comments on the issues raised in the application. He has stated that though NRO deposit is acquired with convertible foreign exchange, its maturity proceeds are not repatriable. 2 Hence such a deposit does not constitute a foreign exchange asset under section 115C of the Act. As such, interest earned on it does not qualify as investment income under section 115C of the Act, and it has to be treated as other income. As it is not an investment income, the banks are right in deducing tax @ 30%. He has, however, not disputed the residential status of the applicant. The comments of the Commissioner were forwarded to the applicant who has submitted his rejoinder.

3. We have reframed the questions for ruling as follows vide order dated 10th January, 2008:-

(i) Whether the non-resident ordinary (NRO) deposit acquired with convertible foreign exchange can be treated as a foreign exchange asset under section 115C of the Income-tax Act, 1961?

(ii) Whether the interest on such NRO deposits can be treated as investment income under sec. 115C of the Income-tax Act, 1961 and liable to be taxed at 20% only under sec. 115E?

(iii) At what rate tax is required to be deducted at source by the person responsible for paying such interest?

(iv) Whether form 15G can be accepted by the Banks? The applicant has not conveyed any objection to the reframed questions.

4. In response to the notice for hearing, the applicant has responded that he would not be able to make a personal appearance or to engage a representative to appear on his behalf. He has requested this Authority to 3 pass its ruling on the basis of pleadings submitted by him. On the date of hearing nobody from the department either made appearance.

5. We find that facts of the case are very brief and uncontroverted. A decision in the matter would depend on the proper construction of provisions of Sections 115C, 115D and 115E of the Act.

6. Provisions of Sections 115C, 115D and 115E under Chapter XIIA of the Act, which are relevant for the present consideration, are extracted below:- Special provisions relating to certain incomes of non-residents 115C Definitions . In this Chapter, unless the context otherwise requires, (a) convertible foreign exchange means foreign exchange which is for the time being treated by the Reserve Bank of India as convertible foreign exchange for the purposes of the Foreign Exchange Regulation Act, 1973 (46 of 1973), and any rules made thereunder; (b) foreign exchange asset means any specified asset which the assessee has acquired or purchased with, or subscribed to in, convertible foreign exchange; (c) investment income means any [income derived other than dividends referred to in section 115-O] from a foreign exchange asset; (d) long-term capital gains means income chargeable under the head Capital gains relating to a capital asset, being a foreign exchange asset which is not a short-term capital asset; (e) non-resident Indian means an individual, being a citizen of India or a person of Indian origin who is not a resident. Explanation.A person shall be deemed to be of Indian origin if he, or either of his parents or any of his grand-parents, was born in undivided India; (f) specified asset means any of the following assets, namely:- 4

(i) shares in an Indian company;

(ii) debentures issued by an Indian company which is not a private company as defined in the Companies Act, 1956 (1 of 1956);

(iii) deposits with an Indian company which is not a private company as defined in the Companies Act, 1956 (1 of 1956);

(iv) any security of the Central Government as defined in clause (2) of section 2 of the Public Debt Act, 1944 (18 of 1944);

(v) such other assets as the Central Government may specify in this behalf by notification in the Official Gazette. 115D. Special provision for computation of total income of non- residents. (1) No deduction in respect of any expenditure or allowance shall be allowed under any provision of this Act in computing the investment income of a non-resident Indian. (2) Where in the case of an assessee, being a non-resident Indian, (a) the gross total income consists only of investment income or income by way of long-term capital gains or both, no deduction shall be allowed to the assessee under Chapter VIA and nothing contained in the provisions of the second proviso to section 48 shall apply to income chargeable under the head Capital gains; (b) the gross total income includes any income referred to in clause (a), the gross total income shall be reduced by the amount of such income and the deductions under Chapter VIA shall be allowed as if the gross total income as so reduced were the gross total income of the assessee. 115E. Tax on investment income and long-term capital gains. Where the total income of an assessee, being a non-resident Indian, includes (a) any income from investment or income from long-term capital gains of an asset other than a specified asset; (b) income by way of long-term capital gains, the tax payable by him shall be the aggregate of 5

(i) the amount of income-tax calculated on the income in respect of investment income referred to in clause (a), if any, included in the total income, at the rate of twenty per cent;

(ii) the amount of income-tax calculated on the income by way of long- term capital gains referred to in clause (b), if any, included in the total income, at the rate of ten per cent; and

(iii) the amount of income-tax with which he would have been chargeable had his total income been reduced by the amount of income referred to in clauses (a) and (b).

7. Chapter XIIA was inserted vide Finance Act, 1983 with effect from 1.6.1983. Its object is to provide certain concessions to non-resident Indians with a view to primarily encourage them to invest their foreign exchange earnings in assets and sources of income in India. This chapter contains special provisions for taxation of investment income and long term capital gains of non-residents. Section 115C is a definition section. Section 115D states that the provisions of this Act with regard to deduction of expenditure and allowances in calculating the total income of an assessee, shall not be applicable in computing the investment income of a non-resident Indian. Section 115E is the charging section. According to this section, investment income of a non-resident Indian shall be charged @ 20%. The expression non-resident Indian has been defined in section 115C to mean a citizen of India or a person of Indian origin who is not a resident. We find that the applicant is covered by this definition. He is a citizen of India who is a non-resident. As such, he is competent to claim the benefit under section 115E. Moving on, we find that investment income has been defined as income derived from a foreign exchange asset and foreign exchange asset means any specified asset acquired or purchased or subscribed to in convertible foreign exchange. Convertible foreign exchange means a foreign 6 exchange which is treated as convertible foreign exchange by the Reserve Bank of India for the purposes of Foreign Exchange Regulation Act, 1973 (now Foreign Exchange Management Act,1999) and rules made thereunder.

8. The applicant has stated that he will open a bank account with convertible foreign exchange. He has not mentioned the name of any currency, like Riyal or Dollar, in which the account shall be opened. In the absence of the name of he specific currency, it is not possible for us to ascertain whether the RBI treats it as convertible foreign exchange under the Foreign Exchange Management Act, 1999. The Commissioner has also, in his comments, not dwelt on this aspect. He has proceeded on the assumption that the currency in question will be convertible foreign exchange. We also proceed on the premise that the applicant will be opening a bank account with the help of convertible foreign exchange in terms of section 115C(a) of the Act.

9. The next question that arises is whether the said bank deposit will constitute a specified asset within the meaning of section 115C(f) of the Act. Under para (iii) of this provision, deposits with an Indian company which is not a private company as defined in the Companies Act, 1956 (Companies Act), constitute a specified asset. A banking company, though established by a special statue, namely, the Banking Regulation Act, 1949, is, nevertheless, a company within the meaning of the Companies Act. But because of certain peculiar features, such companies are regulated both under the Banking Regulation Act, 1949 and the Companies Act. Section 2 of the Banking Regulation Act, 1949 reads as under:- 7

2. Application of other laws not barred The provisions of this Act shall be in addition to, and not, save as hereinafter expressly provided, in derogation of the Companies Act, 1956 (1 of 1956), and any other law for the time being in force. Section 616 of the Companies Act refers to application of this Act to companies governed by special Acts such as banking company. It states-

616. Application of Act to insurance, banking, electricity supply and other companies governed by special Acts.- The provisions of this Act shall apply- (a) x x x x x x (b) to banking companies, except insofar as the said provisions are inconsistent with the provisions of the Banking Companies Act, 1949 (10 of 1949); (c) x x x x x x (d) x x x x x x (e) x x x x x x Section 3 of the Companies Act defines a private company and public company. The main attributes of a private company are that there is restriction on the transfer of its shares; the number of members is limited to 50; and invitation to public for subscription is prohibited. A public company is a company, which is not a private company. Thus a deposit made in a banking company which is not a private company, would be regarded as specified asset within the meaning of section 115C(f) of the Act. Since the applicant has not specified the name of the bank in which he will be making deposit, it is not possible for us to ascertain whether that bank will be a private company or a public company. We proceed on the basis that the applicant will be opening the 8 account in question in a bank, which would not be a private company as per the Companies Act.

10. Now coming to the NRO account, Schedule 3 of the Foreign Exchange Management (Deposit) Regulation, 2000 made by the RBI under the Foreign Exchange Management Act, 1999 specifies the features of this account. This schedule says that the balance in NRO account is not eligible for remittance outside India without the approval of the RBI; funds received by way of remittances from outside India in foreign exchange which have not lost their identity as remittable funds will only be considered by the RBI for remittance outside India. Further, RBI press release No. 387 dated 18.9.2003 states that current income (i.e. interest) is freely repatriable from NRO account, but the principal amount is repatriable only upto USD 1 million per financial year. So it would not be correct to say that the moneys lying in the NRO account cannot be repatriated at all. Indeed, there are restrictions on their repatriation. But the question here is not whether such repatriation is permitted or not, but whether repatriation is a requirement of sections II5C, 115D and 115E of the Act. In other words, can only a repatriable bank deposit be regarded a foreign exchange asset? As we have seen, the stand of the Revenue is that since NRO deposit is not repatriable, it is not a foreign exchange asset. In fact, Revenues sole objection to the applicability of the above mentioned special provision to the applicant is on the ground of non-repatriability of NRO deposit. The applicant in his rejoinder has stated that section 115C nowhere says that asset acquired should be repatriable; the only condition attached is that the asset should have 9 been acquired with the help of convertible foreign exchange. We also find that repatriability of the balance in the bank deposit is not a requirement of the relevant provisions of law. There is no whisper at all about this either in section 115C or 115E. Thus the NRO deposit would be a foreign exchange asset and the interest income arising from it would be investment income.

11. So far as deduction of tax at source is concerned, the applicant has claimed that the applicable rate should be twenty per cent, whereas Revenue contends that the rate should be thirty per cent, as the income in question is not investment income. Since the interest income in question will be in the nature of investment income, in our view clause (b)(i)(A) of Part II of the First Schedule to the Finance Act, 2007 will be attracted.

12. One more question remains. This is regarding Form 15G. This form has been prescribed by Rule 29C of the Income-tax Rules, 1965 in pursuance of sub- section (1A) of section 197A of the Act. The applicant, in his rejoinder, has stated that if this Authority accepts the views of the applicant on other questions, acceptance/non-acceptance of Form 15G makes no difference to him. Hence, we record that this question is unnecessary and not pressed.

13. In the light of the above discussion, we hold that -

(i) the NRO deposit to be made by the applicant with convertible foreign exchange in a banking company which is not a private company, shall be treated as foreign exchange asset under clause (b) of Section 115C of the Act;

(ii) income by way of interest earned from the said NRO deposit shall be treated as investment income under clause (c) of Section 115C and shall be liable to be taxed at the rate of twenty per cent under section 115E; and 10

(iii) the banks paying interest on the NRO deposit of the applicant are required to deduct tax at source at the rate of twenty per cent. Accordingly, the ruling is given. Pronounced in the open Court of the Authority on this 3rd day of March, 2008. Sd/- Sd/- Sd/- (A. SINHA) (JUSTICE P.V. REDDI) (RAO RANVIJAY SINGH) MEMBER CHAIRMAN MEMBER F.No. AAR/762/2007/ Dated: 3.3.2008 This copy is certified to be a true copy of the advance ruling and is sent to:

1. The Applicant.

2. The CIT-V, Chennai

3. The Joint Secretary (FT &TR-I), M/o Finance, CBDT, Bhikaji Cama Place, New Delhi

4. The Joint Secretary (FT &TR-II), M/o Finance, CBDT, Bhikaji Cama Place, New Delhi

5. Guard File. Sd/- (Batsala Jha Yadav) Addl. Commissioner of Income-tax (AAR 11