Authority for Advance Rulings, New Delhi

V. Ravi Narayanan, In re

JUSTICE P.V. REDID, CHAIRMAN

A. SINHA AND RAO RANVIJAY SINGH, MEMBER

AAR NO. 762 OF 2007

March 3, 2008

Section 115C, read with section 115E, of the Income-tax Act, 1961 - Foreign exchange asset - Assessment year 2008-09 - Whether Non-Resident Ordinary (NRO) deposit acquired with convertible foreign exchange in a banking company which is not a private company as per Companies Act, 1956, shall be treated as a ‘foreign exchange asset’ under section 115C(b) - Held, yes - Whether interest on such NRO deposit shall be treated as investment income under section 115C(c) which is liable to be taxed at rate of 20 per cent under section 115E - Held, yes - Whether banks paying interest on such NRO deposit are required to deduct tax at source at rate of 20 per cent - Held, yes

FACTS

The appellant, a non-resident Indian, proposes to open an Non-Resident Ordinary (NRO) deposit account with Indian banks with the help of remittances from the foreign country where he resides. He claims that the interest income arising from that account will be investment income under section 115C and, accordingly, will attract income-tax at the rate of 20 per cent under section 115E. However, Indian banks do not regard this type of income as investment income and treat it as other income and deduct tax at the rate of 30 per cent. Therefore, the applicant sought advance ruling of the Authority on the following questions as to whether (1) the NRO deposit acquired with convertible foreign exchange can be treated as a foreign exchange asset under section 115C; (2) the interest on such NRO deposit can be treated as investment income under section 115C (3) the interest income on such deposits is taxable at 20 per cent as per section 115E and (4) the banks are right in deducting TDS at 30 per cent on such deposits treating the interest as ‘other income’. The Commissioner has submitted his comments and has stated that though NRO deposit is acquired with convertible foreign exchange, its maturity proceeds are not repatriable and, hence, such a deposit does not constitute a foreign exchange asset under section 115C; and that as such, interest earned on it does not qualify as investment income under section 115C and the same has to be treated as other income and, therefore, the banks are right in deducting tax at the rate of 30 per cent. The comments of the Commissioner were forwarded to the applicant who has submitted his rejoinder in which he has stated section 115C nowhere says that the asset acquired should be repatriable; the only condition attached is that the asset should have been acquired with the help of convertible foreign exchange.

HELD

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. According to section 115E, investment income of a non-resident Indian shall be charged at the rate of 20 per cent. 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. 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. The ‘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 exchange which is treated as convertible foreign exchange by the Reserve Bank of India for the purposes of the Foreign Exchange Regulation Act, 1973 (now Foreign Exchange Management Act, 1999) and rules made thereunder. [Para 7]

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 the specifie currency, it is not possible to ascertain whether the RBI treats it as convertible foreign exchange under the Foreign Exchange Management Act. 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. The Authority also proceeds 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). [Para 8]

The next question that arises is whether the said bank deposit will constitute a ‘specified asset’ within the meaning of section 115C(f). Under para (iii) of this provision, deposits with an Indian company which is not a private company as defined in the Companies Act, 1956 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, and the Companies Act. 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). Since the applicant has not specified the name of the bank in which he will be making deposit, it is not possible to ascertain whether the bank will be a private company or a public company. The Authority proceeds on the basis that the applicant will be opening the account in question in a bank, which would not be a private company as per the Companies Act. [Para 9]

Regarding the NRO account, Schedule 3 of the Foreign Exchange Management (Deposit) Regulation, 2000 made by the RBI under the Foreign Exchange Management Act 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 in the instant case is not whether such repatriation is permitted or not, but whether repatriation is a requirement of section 115C, 115D and 115E. In other words, can only a repatriable bank deposit be regarded a foreign exchange asset? The stand of the revenue is that since NRO deposit is not repatriable, it is not a ‘foreign exchange asset’. In fact, the revenue’s 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 repartriability 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. [Para 10]

So far as deduction of tax source is concerned, since the interest income in question will be in the nature of investment income, clause (b)(i)(A) of Part II of the First Schedule to the Finance Act, 2007 will be attracted. [Para 11]

Therefore, 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. The 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 20 per cent under section 115E. The banks paying interest on the NRO deposit of the applicant are required to deduct tax at source at the rate of 20 per cent. [Para 13]