IN THE HIGH COURT OF JUDICATURE AT BOMBAY
ORDINARY ORIGINAL CIVIL JURISDICTION
WRIT PETITION NO.2550 OF 2007
Vodafone International Holdings B.V.,
a company incorporated under the provisions
of the Companies Act of Netherlands,
having its office at Rivium Quadrant,
173, 15th Floor, 2909
LC Capelle aan den IJssel
The Netherlands ..Petitioner
Versus
1. Union of India, Ministry of Finance, New Delhi.
2. Asstt.Director of Income Tax (International Taxation),
Circle 2(2), Mumbai having office at
1st Floor, Room No.116, Scindia House,
Ballard Estate, N.M.Road, Mumbai - 400 038. ..Respondents
Mr.Iqbal Chagla, Senior Advocate with Mr.Dinesh Vyas, Senior Advocate,
Mr.Pardiwala, Mr.R.Chagla, Mr.L.Pareira, Mr.Ajit Shah, Mr.Daljeet Bhatia i/b.ALMT
Legal for the Petitioner.
Mr.M.Parasaran, Additional Solicitor General with Mr.G.Srivastava, Special Counsel
with Mr.B.M. Chatterjee Standing Counsel for Respondent Union of India.
CORAM: - DR.S.RADHAKRISHNAN & A.V.NIRGUDE, JJ.
JUDGMENT RESERVED ON: 9TH JULY,2008
JUDGMENT PRONOUNCED ON: 3RD DECEMBER, 2008
P.C.
1. Mr.Chagla, the learned Senior Counsel appearing on behalf of the Petitioner broadly
made the following four propositions:
I. Assuming the validity of the 2008 amendments and further assuming that the
transaction is chargeable to tax then nevertheless it is submitted that the Show Cause
Notice is without jurisdiction as both before and after 2008 amendment the Petitioner is
not deemed to be an assessee in default.
II. The provisions of Section 195 have no extra territorial application. In an offshore
transaction involving two non residents in respect of a capital asset (i.e. share capital) and
payment outside the country, even assuming that such transaction is chargeable to tax,
there is no obligation to withhold tax under Section 195.
III. The 2008 amendment to the extent that they purport to be retrospective are
unconstitutional. Under the unamended Sections 191 and 201 the Show Cause Notice is
clearly without jurisdiction. IV. In any view of the matter the transaction in question is
not chargeable to tax in India and the Petitioner accordingly was under no obligation to
withhold tax as required under Section 195. I. Non-applicability of Section 201
2. With regard to the first proposition, Mr. Chagla, the learned Senior Counsel, very
comprehensively submitted that the Income tax is a tax on the income payable by the
recipient. Income tax of the recipient is payable by the payer only in certain limited
circumstances, including when the legislature deems the payer to be an "assessee in
default" ("AID for short).
3. Mr.Chagla, further submitted that Section 201 is one such provision which deems a
person, not the person liable to pay the tax, to be an assessee in default (AID). In a fiscal
statute there is no room for any implication or intendment, necessary or otherwise. Since
it is a deeming provision and one contained in a fiscal statute, it must be construed
strictly. In that behalf, the learned Senior Counsel relied on a decision in the case of
A.V.Fernandez Vs. State of Kerala AIR 1957 SC 657, wherein the Hon’ble Supreme
Court had held that :
29. It is no doubt true that in construing fiscal statutes and in determining the
liability of a subject to tax one must have regard to the strict letter of the law and
not merely to the spirit of the statute or the substance of the law. If the Revenue
satisfies the Court that the case falls strictly within the provisions of the law, the
subject can be taxed. If, on the other hand, the case is not covered within the four
corners of the provisions of the taxing statute, no tax can be imposed by inference
or by analogy or by trying to probe into the intentions of the legislature and by
considering, what was the substance of the matter. We must of necessity,
therefore, have regard to the actual provisions of the Act and the rules made
thereunder before we can come to the conclusion Ta the appellant was liable to
assessment as contended by the Sales Tax Authorities."
4. The learned Senior Counsel further placed his reliance on the decision of the Hon’ble
Supreme Court in the case of Sales Tax Commissioner Vs. Mods Sugar Mills AIR 1961
SC 1047, wherein it is held, that;
"In interpreting a taxing statute, equitable considerations are entirely out of place.
Nor can taxing statutes be interpreted on any presumptions or assumptions. The
Court must look squarely at the words of the statute and interpret them. It must
interpret a taxing statute in the light of what is clearly expressed. It cannot imply
anything which is not expressed; it cannot import provisions in the statutes so as
to supply any assumed deficiency."
5. He further placed his reliance on the judgment of the Hon’ble Supreme Court in the
case of Smut.Tabulate Shyam Vs. Commissioner of Income Tax 108 ITR 345 (SC),
wherein, the Hon’ble Supreme Court had held that;
"There is no scope for importing into the statute words which are not there. Such
importation would be, not to construe, but to amend the statute. Even if there be a
casus omissus, the defect can be remedied only by legislation and not by judicial
interpretation. . To us, there appears no justification to depart from the normal
rule of construction according to which the intention of the legislature is primarily
to be gathered from the words used in the statute. It will be well to recall the
words of Rowlatt J.in Cape Brandy Syndicate Vs. Inland Revenue Commissioners
(1921) 1 KB 64 (KB) at page 71, that:
".....in a taxing Act one has to look merely at what is clearly said. There is no
room for any intendment. There is no equity about a tax. There is no presumption
as to a tax. Nothing is to be read in, nothing is to be implied. One can only look
fairly at the language used."
Once it is shown that the case of the assessee comes within the letter of the law, he must
be taxed, however great the hardship may appear to the judicial mind to be.
6. The learned Senior Counsel further relied on a Division Bench judgment of our High
Court in the case of Commissioner of Income Tax Vs. Khimji Nenshi 194 ITR 192
(Bom.), wherein our High Court had held that; Moreover, section 64(2)(b) contains a
deeming provision and hence requires to be construed strictly. An income which is
derived from the profits of the firm and not from the capital contribued as such cannot be
considered as income derived from the converted property.
7. He also relied on the decision in Mathuram Agrawal Vs. State of Madhya Pradesh AIR
2000 SC 109, wherein, the Hon’ble Supreme Court had held that; The statute should
clearly and unambiguously convey the three components of the tax law i.e. the subject of
the tax, the person who is liable to pay the tax and the rate at which the tax is to be paid.
If there is any ambiguity regarding any of these ingredients in a taxation statute then there
is no tax in law. Then it is for the legislature to do the needful in the matter.
The position pre-2008 amendment:
8. Mr.Chagla, the learned Senior Counsel for the Petitioner states, that Section 201 on its
plain language provides that a person is deemed an AID in only two specified cases viz.
where under Section 194 there is a failure to deduct tax on dividend; or when under
Section 200 there is a deduction of tax as required by any of the provisions but such tax is
not paid to the credit of the Central Govt. Where, therefore, a person withholds tax under
Section 195 but does not pay the same to the credit of the Central Govt., such person is
deemed to be an AID. Equally, where a person fails to deduct tax on dividend under
Section 194 then the very failure to make such deduction would render that person an
AID. He further submitted that failure to deduct or to withhold tax in any other case does
not render that person an AID.
9. The learned Senior Counsel further submitted that the above is clear not only from the
plain language of Section 201 but from the scheme of the Act.
i. The provision for deduction and withholding are under the Chapter
‘COLLECTION AND RECOVERY OF TAX’. That Chapter does not contain
charging provisions but only provides for a convenient machinery for the
recovery of tax.
ii. Section 191 provides that even where there is failure to deduct tax in
accordance with the provisions of that Chapter, "income-tax shall be payable by
the assessee direct". In other words, the liability to pay tax is that of the assessee
and not of any other person. The Explanation, however, is the counter-part of
Section 201: for the removal of doubts it declares that in the special cases of
Sections 194 and 200, the defaulting persons shall be deemed to be AID as
referred to in Section 201. (NB: Prior to its amendment in 2002 Section 201 did
not define "such person". The words "referred to in section 200" were inserted
after "such person". A consequent amendment was made in 2003 by the addition
of the Explanation to Section 191).
iii. Failure to deduct or to withhold tax is visited with the penal consequences as
provided in Section 271C, and by virtue of Section 273B no penalty shall be
imposed if it is proved that "there was reasonable cause for the said failure".
iv. Therefore, by reason of failure to deduct or withhold tax other than under
Section 194, the payer is liable to be penalized under Section 271C but he does
not become liable for the tax. That liability is and remains that of the payee who is
the assessee, a position that is clarified by Section 191.
v. A person who fails to deduct or withhold tax and who is not the assessee can be
made liable for the tax only by a legal fiction, a legal fiction that deems the payer
to be an assessee in default when he is not. Such a legal fiction must be construed
strictly and be applied to only such persons as are specifically mentioned and no
others.
vi. Section 201 creates the legal fiction that deems the person who has failed to
deduct tax under Section 194 and the person who has deducted tax but failed to
pay to the credit of the Central Government as required under Section 200 alone
to be AID. That these are the only cases in which the legal fiction is applicable is
clarified by the Explanation to Section 191.
vii. All other persons failing to deduct tax, including those mentioned in Section
195, may be liable to be penalized but are not AID.
POSITION POST 2008 AMENDMENT:
a. Even assuming the Petitioner was under an obligation to withhold tax under
Section 195, under Section 191 the primary liability to pay the tax remains that of
the payee.
b. The amended Section 191 provides for a cumulative test: to be an assessee in
default the person should have failed to deduct tax and that the assessee has failed
to pay the tax. In fact the amended provision reinforces and emphasizes that the
primary obligation is of the assessee and that his failure to pay the tax is a
condition precedent to the payer being deemed to be an assessee in default.
c. Both before and after the amendments, the provisions of Section 191 and
Section 201 are to be construed harmoniously so as to avoid any part of the
provisions being rendered redundant. The condition precedent, therefore, of
Section 191 to the imposition of liability on the payer must be read into Section
201. In other words, Section 201 can be invoked and a show cause notice issued
only when the payee fails to make payment. In this behalf, the learned Senior
Counsel for the Petitioner relied on a decision of the Hon’ble Supreme Court in
the case of Sultana Begum Vs. Premchand Jain (1997) 1 SCC 373, wherein it is
held, that;
d. Therefore, by reason of failure to deduct or withhold tax, the Petitioner is liable
to be penalized under Section 271C but his liability to pay the tax arises only
when the payee fails to pay the tax.
e. It is the admitted position in the present case that the payee has not been called
upon to pay the tax and the payee cannot be said to have failed to pay the tax, in
which case the condition precedent to the applicability of the deeming provision is
not fulfilled and the Petitioner cannot be deemed to be an assessee in default for
the tax liability of the payee.
f. The impugned Show Cause Notice, therefore, purporting to be under Section
201, asking the Petitioner why it should not be deemed to be an AID for failing to
withhold the tax allegedly due by the payee is ex-facie without jurisdiction.
II. Section 195 has no extra territorial operation:
10. With regard to second proposition that section 195 has no extra territorial operation,
Mr.Chagla, the learned Senior Counsel submitted as under:
11. Although the Indian Parliament is competent to enact legislation which may have
extra-territorial operation (Article 245 of the Constitution), such legislation, if it were to
operate extra territorially, must require clear and cogent language to that effect.
12. Where a non-resident has no presence in or nexus with India Parliament’s
competence to legislate in respect of such person has been doubted. In this behalf, the
learned Senior Counsel Mr.Chagla placed his reliance on the decision of the Hon’ble
Supreme Court in the case of Electronics Corporation of India Ltd. Vs. Commissioner of
Income Tax 183 ITR 43 (SC) 52, wherein it is held that; The general principle, flowing
from the sovereignty of States, is that laws made by one State can have no operation in
another State. The apparent opposition between the two positions is reconciled by the
statement found in British Columbia Electric Railway Co.Ltd. Vs. King (1946) AC 527
(PC).
"A Legislature which passes a law having extra-territorial operation may find that
what it has enacted cannot be directly enforced, but the Act is not invalid on that
account, and the courts of its country must enforce the law with the machinery
available to them."
In other words, while the enforcement of the law cannot be contemplated in a foreign
State, it can, none the less, be enforced by the courts of the enacting State to the degree
that is permissible with the machinery available to them. They will not be regarded by
such courts as invalid on the ground of such extra-territoriality. But the question is
whether a nexus with something in India is necessary. It seems to us that, unless such
nexus exists, Parliament will have no competence to make the law. It will be noted that
article 245(1) empowers Parliament to enact laws for the whole or any part of the
territory of India. The provocation for the law must be found within India itself. Such a
law may have extra-territorial operation in order to subserve the object and that object
must be related to something in India. It is inconceivable that a law should be made by
Parliament in India which has no relationship with anything in India. The only question
then is whether the ingredients, in terms of the impugned provision, indicate a nexus. The
question is one of substantial importance, specially as it concerns collaboration
agreements with foreign companies and other such arrangements for the better
development of industry and commerce in India. In view of the great public importance
of the question, we think it desirable to refer these cases to a Constitution Bench, and we
do so order.
13. Alternatively, if it is held that Parliament’s competence to legislate is plenary then,
unless the language of the provision permits only one construction giving such provision
extra territorial operation, there would be a presumption or a rule of construction that
Parliament did not intend to exceed its territorial jurisdiction or violate the rules of
international law. This presumption or rule of construction would apply more so in the
case of a provision in respect of which a default thereunder entails penal consequences.
To support this contention, Mr.Chagla, the learned Senior Counsel relied on a judgment
in the case of Clarke (Inspector of Taxes) Vs. Oceanic Contractors Inc - (1983) 1 ALL
ER 133,, wherein, it is held that; Put into the language of today, the general principle
being there stated is simply that, unless the contrary is expressly enacted or so plainly
implied that the courts must give effect to it, United Kingdom legislation is applicable
only to British subjects or to foreigners who by coming to the United Kingdom, whether
for a short or long time, have made themselves subject to British jurisdiction. Two points
would seem to be clear: first, that the principle is a rule of construction only and, second,
that it contemplates mere presence within the jurisdiction as sufficient to attract the
application of British legislation. Certainly there is no general principle that the
legislation of the United Kingdom is applicable only to British subjects or persons
resident here. Merely to state such a proposition is to manifest its absurdity. Presence, not
residence, is the test. But, of course, the Income Tax Acts impose their own territorial
limits. Parliament recognises the almost universally accepted principle that fiscal
legislation is not enforceable outside the limits of the territorial sovereignty of the
kingdom. Fiscal legislation is, no doubt, drafted in the knowledge that it is the practice of
nations not to enforce the fiscal legislation of other nations. But, in the absence of any
clear indications to the contrary, it does not necessarily follow that Parliament has in its
fiscal legislation intended any territorial limitation other than that imposed by such
unenforceability.
14. He further relied on a Governor General Vs. Raleigh Investment AIR 1944 FC 51 at
page 60, If the language of the Constitution Act clearly indicates that the legislative
power of the subordinate Legislature is subject to specified territorial limitations or if, on
the other hand, the language authorizes expressly or by necessary implication extraterritorial
legislation by the subordinate Legislature, the position is simple enough.
Where, however, the language of the Constitution Act does not contain a sufficiently
clear indication one way or the other, two views are possible : One is that the language of
that statute should be construed conformably to a general presumption against
authorizing extra-territorial legislation and the other view is that the statute should be
construed on the basis that there is no such presumption or limitation.
15. He also relied on the State vs. Narayandas AIR 1958 Bom 68 (FB) at page 71.
16. The learned Counsel for the Petitioner further placed his reliance on the decision of
the Hon’ble Supreme Court in the case of Tolaram Vs. State of Bombay AIR 1954 SC
496.
17. The learned Senior Counsel submitted that Section 1(2) of the Income Tax Act
provides that the Act "extends to the whole of India" and does not purport to give the Act
extra-territorial operation unlike other statutes like FERA, FEMA, Foreign Contribution
Regulation Act, Official Secrets Act, Information Technology Act, Indian Passport Act,
etc.
18. In view of Section 1(2), provisions of the Income Tax Act must be assumed to
operate territorially except where such provision permits only one construction that it is
to operate beyond the boundaries of India or in respect of a person not resident within
India. The learned Counsel for the Petitioner referred to Section 9, which deems certain
income earned by a non-resident to be income earned within India.
19. The learned Senior Counsel submitted that the definition of "person" ex-facie
includes a foreign company. In this behalf he referred to Section 2(31) r/w.2(17) which
reads as under: 2[(17) "company" means –
(i) any Indian company, or
(ii) any body corporate incorporated by or under the laws of a country outside India, or
(iii) any institution, association or body which is or was assessable or was assessed as a
company for any assessment year under the Indian Income Tax Act,1922 (11 of 1922), or
which is or was assessable or was assessed under this Act as a company for any
assessment year commencing on or before the 1st day of April, 1970 or
(iv) any institution, association or body, whether incorporated or not and whether Indian
or non-Indian, which is declared by general or special order of the Board to be a
company: Provided that such institution, association or body shall be deemed to be a
company only for such assessment year or assessment years (whether commencing
before the 1st day of April, 1971, or on or after that date) as may be specified in the
declaration;]
2(31) "person" includes - (i) an individual, (ii) a Hindu undivided family, (iii) a company,
(iv) a firm, (v) an association of persons or a body of individuals, whether incorporated or
not, (vi) a local authority, and (vii) every artificial juridical person, not falling within any
of the preceding sub-clauses.
[Explanation - For the purposes of this clause, an association of persons or a body of
individuals or a local authority or an artificial juridical person shall be deemed to be a
person, whether or not such person or body or authority or juridical person was formed or
established or incorporated with the object of deriving income, profits or gains.]
20. The learned Senior Counsel also contended that the definition must be read
contextually.
21. Mr.Chagla pointed out that this is made clear by the opening words of section 2
"unless the context otherwise requires".
22. In this behalf the learned Senior Counsel relied on V.F. & G Insurance Co. Vs.
M/s.Fraser & Ross AIR 1960 SC 971 at para 6, wherein the Hon’ble Supreme Court had
held that; But this is not inflexible and there may be sections in the Act where the
meaning may have to be departed from on account of the subject or context in which the
word has been used and that will be giving effect to the opening sentence in the definition
section, namely, unless there is anything repugnant in the subject or context. In view of
this qualification, the court has not only to look at the words but also to look at the
context, the collocation and the object of such words relating to such matter and interpret
the meaning intended to be conveyed by the use of the words under the circumstances.
23. In that behalf, Mr.Chagla also relied on a decision of the Hon’ble Supreme Court in
the case of Indian Handicrafts Emporium Vs. Union of India (2003) 7 SCC 569
especially paragraphs;
105. The words which are used in declaring the meaning of other words may also
need interpretation and the legislature may use a word in the same statute in
several different senses. In that view of the matter, it would not be correct to
contend that the expression as defined in the interpretation clause would
necessarily carry the same meaning throughout the statute.
107. The question which arose for consideration was as to whether the State
Government would come within the purview of the said Act. This Court answered
the said question in the negative, holding that the expression "management" must
be read contextually in the following terms: (SCC P.599 Para 8) "We are
therefore, of the opinion that the defined meaning of the expression ‘management’
cannot be assigned or attributed to the word ‘management’ occurring in Section
64 of the Act. The word ‘management’ if read in the context of the provisions of
Section 64 of the Act, means anyone else excepting the State Government
applying to a State Government for permission to establish the proposed medical
college at proposed location to be decided by the State Government."
108. The doctrine of purposive construction, thus, must be applied in a situation
of this nature.
24. The Income Tax Act is replete with provisions where the word "person" cannot be
given its statutory definition to include every non-resident. At this stage, the learned
Senior Counsel for the Petition referred to a decision of the Hon’ble Supreme Court in
the case of Kapurchand vs. Tax Recovery Officer AIR 1969 SC 682, where the
contextual interpretation was preferred to the statutory definition of "person" in Section
2(31) of the Income Tax Act.
25. In Section 195 "person" must be read to mean a resident or a non resident having a
presence in India i.e. the obligation to without tax even where the payee is chargeable to
tax does not apply to a non resident who has no presence in India.
26. With regard to Section 195, Mr.Chagla referred to "The Law and Practice of Income
Tax" by Kanga, Palkhivala and Vyas [Eighth Edition at page 1391], it is stated as
follows:
3. Payments Abroad
27. This section does not apply to payments made outside India by one foreigner to
another even if the other has rendered services in India. A country does not recognise or
enforce the revenue laws of another country. Therefore, if a payer in a foreign country,
bound to make the payment under a contract governed by the laws for that land, were to
seek to deduct Indian income-tax, the payee would be entitled to object to the deduction
on the ground that no deduction can be made in that country, which is not authorised by
the laws of that country or by the terms of the agreement".
28. In "The Law of Income-Tax in India" by V.S.Sundaram [Fourth Edition (1936) at
page 506], with regard to Section 18 of the Indian Income-tax Act,1922 which provided
for deduction of tax at source, including in respect of payments made by the "person
responsible for paying" to a person residing outside :18: British India, while referring to
the Income-tax Manual it is stated as follows: "Where tax cannot be deducted at source-
29. The provisions of this section, obviously, cannot apply to cases where the payments
are made outside British India as, for example, the payment of ‘interest on securities’ in
Indian States or in foreign countries, or the payment of ‘salaries’ by foreign employers to
residents in British India. It is for this reason that section 19 of the Act specifies that in
any case where income-tax has not been deducted in accordance with the provisions of
section 18, the tax is payable by the assessee direct. This provision covers, not only cases
where the employer or the person paying ‘interest on securities’ does not reside in British
India but also cases where owing to an assessee’s salary being less than Rs.1000/-
income-tax has not been deducted (Income tax Manual, para 59).
30. Mr.Chagla submitted that if Section 195 is to apply to a non-resident having no
presence in India, the machinery of deduction and collection of tax as provided in Section
203A and Rules 30 and 31A would be unworkable. Provisions of law should be
interpreted in a manner to make them workable. Mr.Chagla, the learned Senior Counsel
referred to a judgment of the Hon’ble Supreme Court in the case of State of Bihar Vs.
Sm.Charusila Dasi AIR 1959 SC 1002 especially paragraph 14. This Court has applied
the doctrine of territorial connection or nexus to income-tax legislation, sales tax
legislation and also to legislation imposing a tax on gambling. In Tata Iron and Steel
Co.Ltd. Vs. State of Bihar, AIR 1958 SC 452 at P.461, the earlier cases were reviewed
and it was pointed out that sufficiency of the territorial connection involved a
consideration of two elements, namely, (a) the connection must be real and not illusory
and (b) the liability sought to be imposed must be pertinent to that connection. 31. He
further relied on Calcutta Gujarati Education Society Vs. Calcutta Municipal Corpn.
(2003) 10 SCC 533 paragraph 35.
35. The rule of "reading down" a provision of law is now well recognized. It is a rule of
harmonious construction in a different name. It is resorted to smoothen the crudities or
ironing out the creases found in a statute to make it workable. In the garb of "reading
down", however, it is not open to read words and expressions not found in it and thus
venture into a kind of judicial legislation. The rule of reading down is to be used for the
limited purpose of making a particular provision workable and to bring it in harmony
with other provisions of the statute. It is to be used keeping in view the scheme of the
statute and to fulfil its purposes. See the following observations of this Court in the case
of B.R.Enterprises Vs. State of U.P. (SCC pp.764-66 para 81)
"First attempt should be made by the Courts to uphold the charged provision and
not to invalidate it merely because one of the possible interpretations leads to such
a result, however, attractive it may be. Thus, where there are two possible
interpretations, one invalidating the law and the other upholding, the latter should
be adopted. For this, the courts have been endeavouring, sometimes to give
restrictive or expansive meaning keeping in view the nature of legislation, maybe
beneficial, penal or fiscal etc. Cumulatively it is to subserve the object of the
legislation. Old golden rule is of respecting the wisdom of legislature that they are
aware of the law and would never have intended for an invalid legislation. This
also keeps courts within their track and checks individual zeal of going wayward.
Yet in spite of this, if the impugned legislation cannot be saved the courts shall
not hesitate to strike it down. Similarly, for upholding any provision, if it could be
saved by reading it down, it should be done, unless plain words are so clear to be
in definace of the Constitution. These interpretations spring out because of
concern of the Courts to salvage a legislation to achieve its objective and not to let
it fall merely because of a possible ingenious interpretation. The words are not
static but dynamic. This infuses fertility in the field of interpretation. This equality
helps to save an Act but also the cause of attack on the Act. Here the courts have
to play a cautious role of weeding out the wild from the crop, of course, without
infringing the Constitution. For doing this, the Courts have taken help from the
preamble, Objects, the scheme of the Act, its historical background, the purpose
for enacting such a provision, the mischief, if any which existed, which is sought
to be eliminated...... This principle of reading down, however, will not be
available where the plain and literal meaning from a bare reading of any
impugned provisions clearly shows that it confers arbitrary, uncanalised or
unbridled power."
32. The learned Senior counsel contended that if Section 195 is construed to apply to
non-residents having no presence whatsoever in India, the same would amount to treating
unequals equally by imposing upon them the same onerous compliance obligations as
person resident or having a presence in India, thereby violating Article 14 of the
Constitution.
33. With regard to third proposition, Mr.Chagla, the learned Senior Counsel for the
Petitioner advanced his arguments as under: III. Invalidity of the 2008 amendment to the
extent of its retrospective operation:
34. A sovereign legislature, like the Indian Parliament has plenary power to legislate
prospectively as well as retrospectively, including in the field of taxation. Such
legislation may be assailed on the ground of want of legislative competence or may be
rendered invalid if the same offends Article 14, 20 or other provisions of the Constitution.
35. In considering the validity of retrospective legislation imposing a tax it may become
necessary to consider whether such retrospective legislation is reasonable or not.
Mr.Chagla, the learned Senior Counsel relied on a decision of the Hon’ble Supreme
Court in the case of Jawaharmal Vs. State of Rajasthan, AIR 1966 SC 764 paragraph 18.
18. It is well recognised that the power to legislate includes the power to legislate
prospectively as well as retrospectively, and in that behalf, tax legislation is no different
from any other legislation. If the Legislature decides to levy a tax, it may levy such tax
either prospectively or even retrospectively. When retrospective legislation is passed
imposing a tax, it may, in conceivable cases, become necessary to consider whether such
retrospective taxation is reasonable or not. But apart from this theoretical aspect of the
matter, the power to tax can be competently exercised by the legislature either
prospectively or retrospectively; and that is precisely what S.2 has done in the present
case. Therefore, there is no substance in the argument that S.2 of the Act is invalid.
36. It was submitted that legislation casts a new and substantial burden on the assessee
with retrospective effect such legislation would not satisfy the touchstone of Article 14.
He relied on Escorts Ltd. Vs. Union of India 199 ITR 43 (SC).
37. Mr.Chagla contended that the retrospective operation of legislation must be
reasonable and not excessive or harsh, otherwise it runs the risk of being struck down as
unconstitutional. In this behalf, Mr.Chagla relied on Ujagar Prints vs. Union of India 179
ITR 317 (SC) 347. There is really no substance in the grievance that the retroactivity
imparted to the amendments is violative of article 19(1)(g). A competent Legislature can
always validate a law which has been declared by courts to be invalid, provided the
infirmities and vitiating factors noticed in the declaratory-judgment are removed or cured.
Such a validating law can also be made retrospective. If, in the light of such validating
and curative exercise made by the Legislature - granting legislative competence - the
earlier judgment becomes irrelevant and unenforceable, that cannot be called an
impermissible legislative overruling of the judicial decision. All that the Legislature does
is to usher in a valid law with retrospective effect in the light of which the earlier
judgment becomes irrelevant. (See Shri Prithvi Cotton Mills Ltd. Vs. Broach Borough
Municipality (1971) 79 ITR 136 (SC); (1970) 1 SCR 388. Such legislative expedience of
validation of laws is of particular significance and utility and is quite often applied in
taxing statutes. It is necessary that the Legislature should be able to cure defects in
statutes. No individual can acquire a vested right from a defect in a statute and seek a
windfall from the Legislature’s mistakes. Validity of legislations retroactively curing
defects in taxing statutes is well-recognised and Courts, except under extraordinary
circumstances, would be reluctant to override the legislative judgment as to the need for,
and the wisdom of, the retrospective legislation. In Empire Industries Ltd. Vs. Union of
India (1986) 162 ITR 846 at 873; (1985) Suppl. 1 SCR 292, 327, this Court observed:
"..... not only because of the paramount governmental interest in obtaining
adequate revenues, but also because taxes are not in the nature of a penalty or a
contractual obligation but rather a means of apportioning, the costs of government
among those who benefit from it." In testing whether a retrospective imposition of
a tax operates so harshly as to violate fundamental right under article 19(1)(g), the
factors considered relevant include the context in which retroactivity was
contemplated such as whether the law is one of validation of a taxing statute
struck down by courts for certain defects : the period of such retroactivity, and the
defects and extent of any unforeseen or unforeseeable financial burden imposed
for the past period, etc. Having regard to all the circumstances of the present case,
this Court in Empire Industries’ case (1986) 162 ITR 846 held that the
retroactivity of the amending provisions was not such as to incur any infirmity
under article 19(1)(g). We are in respectful agreement with that law. . National
Agricultural Co-operative Marketing Federation vs. Union of India 260 ITR 548
(SC). The legislative power either to introduce enactments for the first time or to
amend the enacted law with retrospective effect, is not only subject to the
question of competence but is also subject to several judicially recognized
limitations with some of which we are at present concerned. The first is the
requirement that the words used must expressly provide or clearly imply
retrospective operation - S.S.Gadgil V. Lal and Co. (1964) 53 ITR 231 (SC); AIR
1965 SC 171, 177 ; :24: J.P.Jani, ITO V. Induprasad Devshanker Bhatt (1969) 72
ITR 595 (SC); AIR 1969 SC 778, 781. The second is that the retrospectivity must
be reasonable and not excessive or harsh, otherwise it runs the risk of being struck
down as unconstitutional Rai Ramkrishna V. State of Bihar (1963) 50 ITR 171
(SC); (1964) 1 SCR 897, 915 ; Jawaharmal Vs. State of Rajasthan, AIR 1966 SC
764; (1966) 1 SCR 890; Supreme Court Employees Welfare Association Vs.
Union of India, AIR 1990 SC 334; (1989) 3 SCC 488, 517. The third is apposite
where the legislation is introduced to overcome a judicial decision. Here the
power cannot be used to subvert the decision without removing the statutory basis
of the decision Shri.Prithvi Cotton Mills Ltd. V. Broach Borough Municipality
(1971) 79 ITR 136 (SC), (1969) 2 SCC 283; Lalitaben V. Gordhanbhai
Bhaichandbai (1987) Supp. SCC 750; Janapada Sabha, Chhindwara V. Central
Provinces Syndicate Ltd. AIR 1971 SC 57; (1970) 1 SCC 509 and Indian
Aluminium Co. V. State of Kerala (1996) 7 SCC 637; AIR 1996 SC 1431. There
is no fixed formula for the expression of legislative intent to give retrospectivity
to an enactment. "Sometimes this is done by providing for jurisdiction where
jurisdiction had not been properly invested before. Some times this is done by reenacting
retrospectively a valid and legal taxing provision and then by fiction
making the tax already collected to stand under the re-enacted law. Sometimes the
Legislature gives its own meaning and interpretation of the law under which tax
was collected and by legislative fiat makes the new meaning binding upon courts.
The Legislature may follow any one method or all of them - Shri Prithvi Cotton
Mills Ltd. V. Broach Borough Municipality (1971) 79 ITR 136 (SC); (1969) 2
SCC 283."
38. The learned Senior Counsel further submitted that the decision of the National
Agricultural Cooperative Marketing Federation (Supra) has been followed in the case of
Virendra Singh Hooda Vs. State of Haryana (2004) 12 SCC 588; 65. Reliance was also
placed upon observations made in National Agricultural Coop. Marketing Federation of
India Ltd. Vs. Union of India (2003) 5 SCC 23 to the effect that the power to amend the
law with retrospective effect is subject to several judicially recognised limitations, one of
which being that the retrospectivity must be reasonable and not excessive or harsh,
otherwise it runs the risk of being struck down as unconstitutional and another being that
where the legislation is introduced to overcome a judicial decision, the power cannot be
used to subvert the decision without removing the statutory basis thereof. There can be no
quarrel with these propositions. If we had come to the conclusion that the retrospectivity
is unreasonable, harsh or excessive or the basis of Virendra S.Hooda vs. State of Haryana
(1999) 3 SCC 696 SCC (L&S) 824 has not been removed, in the present case, too, the
position would have been different.
39. It was pointed out further, the limitation on the power of Parliament to legislate
retrospectively is that such retrospectivity cannot impose "quasi punishment." In this
behalf, he relied on Star India Pvt.Ltd. Vs. Commissioner of Central Excise 280 ITR 321
(SC), wherein it is held that; In any event, it is clear from the language of the validation
clause, as quoted by us earlier, that the liability was extended not by way of clarification
but by way of a amendment to the Finance Act with retrospective effect. It is well
established that while it is permissible for the Legislature to retrospectively legislate,
such retrospectivity is normally not permissible to create an offence retrospectively.
There were clearly judgments, decrees or orders of courts and Tribunals or other
authorities, which required to be neutralised by the validation clause. We can only
assume that the judgments, decree or orders etc. had in fact, held that persons situate like
the appellants were not liable as service providers. This is also clear from the Explanation
to the valuation section which says that no act or acts on the part of any person shall be
punishable as an offence which would not have been so punishable if the section had not
come into force. The liability to pay interest would only arise on default and is really in
the nature of a quasi punishment. Such liability although created retrospectively could not
entail the punishment of payment of interest with retrospective effect.
40. He also relied on a decision of the Hon’ble Supreme Court in the case of C.I.T. Vs.
Hindustan Elector Graphites Ltd. (2000) 3 SCC 595, wherein it is observed that; The
decision of the Calcutta High Court in Modern Fibotex India Ltd (1992) 2 SCC 514:
(1992) 195 ITR 1 squarely covers the issue involved in the present appeal. Then we have
to see the law on the date of filing of the return. To attract penal provisions there has been
same (sic has to be some) element of lack of bona fides unless the law specifically
provides otherwise.
41. Mr.Chagla strongly contended that whereas in the present case the 2008 amendments
to Sections 191 and 201 (hereinafter referred to as the "2008 amendments")
retrospectively impose not taxation but a penalty upon the Petitioner by way of payment
of tax which is the liability of another. The tax liability which may be fastened on the
Petitioner by the said amendments cannot be sustained by the provisions of Chapter II of
the Act which provides the "Basis of Charge". Hence, the said liability is penal or quasipunishment
in nature. The three fold penalty/quasi-punishment imposed by the 2008
amendments are:
I. the tax liability of the payee;
II. a penalty under Section 221(1) which :27: may be up to the amount of such tax; and
III. interest under Section 201(1A) at 12% per annum on the amount of such tax from the
date on which such tax was deductible till the date of payment thereof.
42. Therefore, Mr.Chagla submitted, clearly a new and substantial burden is cast upon the
Petitioner which is unreasonable, excessive and harsh. The aforesaid three-fold
penalty/quasi punishment is in addition to the penalty equal to the amount of tax which
may have been imposed under Section 271 C under the Act as it stood prior to the 2008
amendments.
43. It was submitted that the 2008 amendments are unreasonable and arbitrary and create
a differential classification which has no rational basis for the same, and are, therefore,
violative of Article 14 of the Constitution. After the 2008 amendments, a person failing to
deduct tax at source prior to 1st June, 2002 under a provision other than Section 194
would not be deemed to be an assessee in default under Section 201, whereas a person
failing to deduct tax at source on or after 1st June,2002 under the very same provision
would be deemed to be an assessee in default under Section 201 and would be liable for
various penalties/quasi-punishments set out hereinabove. There is, and can be, no
rationale for creating such an arbitrary classification and no such rationale has even
purported to be supplied.
44. He also submitted that the retrospective imposition of tax must be justified on proper
and cogent grounds to avoid the charge of unreasonableness, arbitrariness and also being
discriminatory and, therefore, in violation of Article 14. Mr.Chagla, the learned Senior
Counsel relied on a decision in the case of Rai Ramkrishna Vs. State of Bihar 50 ITR 171
(SC), wherein it is held that, We do not think that such a mechanical test can be applied
in determining the validity of the retrospective operation of the Act. It is conceivable that
cases may arise in which the retrospective operation of a taxing or other statute may
introduce such an element of unresonableness that the restrictions imposed by it may be
open to serious challenge as unconstitutional; but the test of the length of time covered by
the retrospective operation cannot, by itself, necessarily be a decisive test.
45. He also relied on D.Cawasji & Co. Vs. State of Mysore 150 ITR 648 (SC) 661,
wherein it is observed by the Hon’ble Supreme Court, that; In our opinion, this is not a
proper ground for imposing the levy at a higher rate with retrospective effect. It may be
open to the Legislature to impose the levy at a higher rate with prospective operation but
the levy of taxation at higher rate which really amounts to imposition of tax with
retrospective operation has to be justified on proper and cogent grounds.
46. He further relied on a judgment in the case of Tata Motors Ltd. Vs. State of
Maharashtra (2004) 5 SCC 783 paragraph 15.
15. It is no doubt true that the legislature has the powers to make laws retrospectively
including tax laws. Levies can be imposed or withdrawn but if a particular levy is sought
to be imposed only for a particular period and not prior or subsequently it is open to
debate whether the statute passes the test of reasonableness at all. In the present case, the
High Court sustained the enactment by adverting to Rai Ramkrishna case AIR 1963 SC
1667 : (1964) 1 SCR 897 when the benefit of the rule had been withdrawn for a specific
period. The learned Counsel for the State contended that the amendments had been made
to overcome certain defects arising on account of the decision of the Tribunal in regard to
the modalities of working out the relief. But, the impugned amendment brought about by
Section 26 is not for that purpose. Assuming that it was the legislative policy not to grant
set-off in respect of waste or scrap material generated, it becomes difficult to appreciate
the stand of the State in the light of the fact that the original rule continued to be in
operation (with certain modifications) subsequent to 1-4-1988. The reason for withdrawal
of the benefit retrospectively for a limited period is not forthcoming. It is no doubt true
that the State has enormous powers in the matter of legislation and in enacting fiscal
laws. Great leverage is allowed in the matter of taxation laws because several fiscal
adjustments have to be made by the Government depending upon the needs of the
Revenue and the economic circumstances prevailing in the State. Even so an action taken
by the State cannot be so irrational and so arbitrary so as to introduce one set of rules for
one period and another set of rules for another period by amending the laws in such a
manner as to withdraw the benefit that had been given earlier resulting in higher burdens
so far as the assessee is concerned, without any reason. Retrospective withdrawal of the
benefit of set-off only for a particular period should be justified on some tangible and
rational ground, when challenged on the ground of unconstitutionality. Unfortunately, the
State could not succeed in doing so. The view of the High Court that the impugned
amendment of Rule 41-E was of clarificatory nature to remove the doubts in
interpretation cannot be upheld. In fact, the High Court did not elaborate as to how the
impugned legislation is merely clarificatory. In that view of the matter, although we
recognise the fact that the State has enormous powers in the matter of legislation, both
prospectively and retrospectively, and can evolve its own policy, we do not think that in
the present cases any material has been placed before the Court as to why the
amendments were confined only to a period of eight years and no either before or
subsequently and, therefore, we are of the view that the impugned provision, namely,
Section 26 deserves to be quashed by striking down the words "not being waste goods or
scrap goods or by-products" occurring in the said Section 26 of Maharashtra Act 9 of
1989 and the authorities concerned shall rework assessments as if that law had not been
passed and give appropriate benefits according to law to the parties concerned.
47. Mr.Chagla contended that in the present case no reasons whatsoever have been
supplied for the retrospective imposition of penalty. The facts disclose that only after the
present Petition was filed and admitted and it was contended on behalf of the Petitioner
that Section 195 and 201 did not apply to the Petitioner, and that the 2008 amendments
came to be passed. The only explanation offered in the Notes on Clauses regarding the
2008 amendments is that the pre-existing provision "leaves room for an interpretation
that a person required to deduct tax at source but not deducting the same will not be
deemed an assessee in default under section 201" and that this was "contrary to
legislative intent" and therefore a "clarification" became necessary. Mr.Chagla submitted
that the purported explanation is indefensible for the following reasons:-
(i) It is not the Government to speak of what is the legislative intent but the same can
only be a matter for judicial decision. Indeed in Sanjeev Coke Manufacturing Company
Vs. M/s.Bharat Coking Coal Ltd. and Anr. (1983) 1 SCC 147, the Constitution bench of
the Hon’ble Supreme Court has declared "No one may speak for Parliament and
Parliament is never before the Court. After Parliament has said what it intends to say,
only the Court may say what Parliament meant to say. None else. Once a statute leaves
Parliament House, the Court is the only authentic voice which may echo (interpret)
Parliament."
(ii) The 2008 amendments are ex facie not a "clarification" but a substantive reversal of
the position as it obtained prior to the amendments. They impose a penalty/quasipunishment
where none existed earlier. Further, if indeed it is a clarification then there
was no question of relating the same back only to 2002 and 2003. In support of the said
contention, Mr.Chagla also relied on Virtual Soft Systems Ltd. Vs. C.I.T. (2007) 9 SCC
665.
(iii) The legislative intent was already "clarified" by the 2002 amendment to Section 201
and the 2003 amendment inserting the Explanation to Section 191.
48. Mr.Chagla, the learned Senior Counsel submitted that even assuming the validity of
the 2008 amendments and further assuming that the transaction is chargeable to tax the
nevertheless it is submitted that the Show Cause Notice is without jurisdiction as both
before and after the 2008 amendment the Petitioner is not deemed to be an assessee in
default.
Note: This proposition is based on the assumptions that; (a) the sum paid by the
Petitioner is a sum chargeable to tax in the hands of the payee; (b) that Section 195 has no
territorial limitation and that the Petitioner was obliged to deduct tax before making
payment; and (c) that the 2008 amendments, including their retrospective operation, are
constitutionally valid and binding.
49. Mr.Chagla submitted that the provisions of Section 195 have no extra territorial
application. In an offshore transaction involving two non-residents in respect of property
and payment outside the country, even assuming that such transaction is chargeable to
tax, there is no obligation to withhold tax under Section 195. Note : This proposition is
based on the assumptions that;
(a) the sum paid by the Petitioner is a sum chargeable to tax in the hands of the payee;
(b) that a default in making a deduction of tax under Section 195 is within the scope of
Section 201;
(c) that there is no violation of the condition precedent that the payee must have failed to
pay the tax; and (d) that the 2008 amendments, including their retrospective operation,
are constitutionally valid and binding.
50. Mr.Chagla also contended that the 2008 amendment to the extent that they purport to
be retrospective are unconstitutional. Under the un-amended Sections 191 and 201 the
Show Cause Notice is clearly without jurisdiction.
Note: This proposition is based on the assumptions that;
(a) the sum paid by the Petitioner is a sum chargeable to tax in the hands of the payee;
(b) that Section 195 has no territorial limitation and that the Petitioner was obliged to
deduct tax before making payment; and
(c) that there is no violation of the condition precedent that the payee must have failed to
pay the tax.
51. The learned Senior Counsel submitted that in any view of the matter the transaction in
question is not chargeable to tax in India and the Petitioner accordingly was under no
obligation to withhold tax as required under Section 195.
Note: This proposition is based on the assumptions that; (a) that Section 195 has no
territorial limitation and that the Petitioner was obliged to deduct tax before making
payment; and (b) that a default in making a deduction of tax under Section 195 is within
the scope of Section 201; (c) that there is no violation of the condition precedent that the
payee must have failed to pay the tax. (d) that the 2008 amendments, including their
retrospective operation, are constitutionally valid and binding.
CHARGEABILITY:
52. Mr.Chagla made the following submissions with regard to chargeability to tax:
i. Under section 195 a person responsible for paying to a non-resident any sum
"chargeable under the provisions of this Act" is liable to deduct income tax thereon at the
rate in force.
ii. Whether the sum paid by the Petitioner to the non-resident payee was chargeable under
the provisions of the act is to be determined having regard to the scope of total income
contemplated in section 5(2) of the Act.
iii. As admittedly, the payee is a non-resident it is chargeable to tax in India only in
respect of income that accrues or arises or is deemed to accrue or arise in India or income
that is received or deemed to be received in India. It is an undisputed position that the
gain arising on the transfer of shares is chargeable to tax only if it is deemed to accrue or
arise in India within the meaning of section 9.
iv. Under Section 9 (which is a deeming provision) income accruing or arising "through
the transfer of a capital asset situate in India" is deemed to accrue or arise in India.
v. The transaction in the present case is the transfer of share capital of a non-resident
company and is not a transfer of a capital asset situate in India. In this behalf, the learned
Senior Counsel relied on a decision in the case of C.I.T. Vs. Qantas Airways Ltd. 256
ITR 84 (Del-DB).
vi. The share capital in question is the share capital of CGP Investments (Holdings) Ltd.
(hereinafter referred to as "CGP"). The share capital of the company would be at the
place of its registered office which is in the Cayman Islands. He relied on Pfizer
Corporation vs. C.I.T. 259 ITR 391 (Bom-DB).
vii. The controlling interest is not an asset separate and distinct from the shares but is an
incidence arising from the holding of a particular number of shares in a company. In the
instant case it is by virtue of the acquisition of the share capital of CGP that the Petitioner
has acquired control of CGP directly and of VEL (the Indian Company) indirectly. In
support of his contention, the learned Senior Counsel relied on a decision of the Hon’ble
Supreme Court in the case of I.T.Commissioner Vs. Jeewanlal Ltd. AIR 1953 SC 473;
When a shareholder holding the majority of shares authorises an agent to vote for him in
respect of the shares so held by him, the agent acquires no interest, legal or beneficial, in
the shares. The title in the shares remains vested in the shareholder. The shareholder may
revoke the authority of the agent at any time. In spite of the appointment of the agent the
shareholder may himself appear at the meeting and cast his votes personally. Therefore,
the shares being always subject to his will and ordering, the controlling interest which the
holder of the majority of shares has never passes to the agent.
53. Mr.Chagla, then relied upon Maharani Ushadevi vs. C.I.T. 131 ITR 445 (MP-DB),
wherein a Division Bench of the Madhyapradesh High Court observed that controlling
interest in a company is an incidence arising from holding particular number of shares in
the company. It cannot be separately acquired or transferred.
54. He further relied on Venkatesh Vs. C.I.T. 243 ITR 367 (Mad-DB), wherein it is
observed by the Madras High Court that; The argument for the assessees that the
controlling interest in the company is capable of being transferred separately, apart from
the transfer of shares is wholly untenable. The fact that the vendor has controlling interest
and is in a position to place the vendee in control of the company by transferring all his
shares or such part as would enable the vendee to exercise control over the company with
the aid of the shares so transferred would only enhance the value of the shares
transferred. The price paid by the vendee for acquisition of such shares remains the price
of those shares though the price so paid is higher than the market price. Controlling
interest is but an incidence of the shareholding and has no independent existence. Similar
view was taken by the Madhya Pradesh High Court in the case of Smt.Maharani
Ushadevi V. CIT (1981) 131 ITR 445, wherein also it was pointed out that the controlling
interest in a company is an incident arising from holding of a particular number of shares
in the company and that such controlling interest cannot be transferred without
transferring shares.
55. Mr.Chagla, the learned Senior Counsel submitted that there is an indirect acquisition
of the controlling interest in VEL the same has been achieved by acquiring control of
CGP by the acquisition of its share capital outside India. There is, therefore, no transfer
of a capital asset within India. In this behalf the learned Senior Counsel relied on Bacha
F.Guzdar V. C.I.T. AIR 1955 SC 74, wherein it is observed that; The company is a
juristic person and is distinct from the shareholders. It is the company which owns the
property and not the shareholders. The dividend is a share of the profits declared by the
company as liable to be distributed among the shareholders. There is nothing in the
Indian law to warrant the assumption that a shareholder who buys shares buys any
interest in the property of the company which is a juristic person entirely distinct from the
shareholders.
56. He also relied on A.P.State Road Transport Corporation Vs. I.T.O. 52 ITR 524 (SC),
The corporation, though statutory, has a personality of its own and this personality is
distinct from that of the State or other shareholders. It cannot be said that a shareholder
owns the property of the corporation or carries on the business with which the
corporation is concerned. The doctrine that a corporation has a separate legal entity of its
own is so firmly rooted in our notions derived from common law that it is hardly
necessary to deal with it elaborately; and so, prima facie, the income derived by the
Appellant from its trading activity cannot be claimed by the State which is one of the
shareholders of the corporation.
57. He further relied on a decision in the matter of Carrasco Investments Vs. Special
Director (1994) 79 Company Cases 631 (Del-DB).
58. Mr.Chagla pointed out that the expression "directly or indirectly" in section 9 relates
to income accruing or arising and not to the transfer of a capital asset. The language of
the aforesaid provision may be contrasted with the language in section 64(1) which
provides that "In computing the total income of any individual, there shall be included all
such income as arises directly or indirectly - ....... (iv) subject to the provisions of clause
(i) of section 27, to the spouse of such individual from asset transferred directly or
indirectly to the spouse by such individual otherwise than for adequate consideration or
in connection with an agreement to live apart." (emphasis supplied). To support his
contention, the learned Senior Counsel referred to a judgment in the case of C.I.T. Vs.
Framji H.Commissariat 64 ITR 588 (Bom-DB).
59. In other words, Mr.Chagla contended that the income may arise directly or indirectly
through the transfer of a capital asset but such capital asset must be situated in India. One
cannot bring to tax any gain that arises to a non resident on all alleged indirect transfer of
an asset in India. Where, therefore, there is no direct transfer of a capital asset situate in
India, hence section 9 can have no application whatsoever.
60. Mr.Chagla then submitted that it is well settled that a taxing statute must be construed
strictly and there is no room for intendment. (In this behalf the learned Senior Counsel
referred to the cases cited in Proposition-I).
61. Mr.Chagla contended that in the event it is contended that the gain from the present
transaction is chargeable to tax as amounting to income accruing or arising through or
from a business connection in India, such contention would be untenable and without any
basis.
62. The learned Senior Counsel also pointed out that there are 3 requirements for income
arising through or from a business connection in India to be chargeable to tax under
Section 9 (1)(i) they are; (i) The non-resident assessee must have a business connection in
India: (ii) The income must arise through or from the business connection; and (iii) The
non-resident assessee earning such income must have business operations in India. If no
business operations are carried out in India, any income accruing or arising abroad
through or from a business connection in India cannot be deemed to accrue or arise in
India. In other words even though requirements (i) & (ii) above may be satisfied, absence
business operations in India by the non-resident assessee, income is not chargeable to tax.
63 The learned Senior Counsel relied on the decision of the Hon’ble Supreme Court in
the case of I.T.Commissioner Vs. R.D.Aggarwal & Co. AIR 1965 SC 1526, wherein the
Hon’ble Supreme Court has observed, that; The expression "business connection"
postulates a real and intimate relation between trading activity carried on outside the
taxable territories and trading activity within the territories, the relation between the two
contributing to the earning of income by the non-resident in his trading activity. In this
case such a relation is absent.
64. He further relied on Carborandum & Co. Vs. C.I.T. (1977) 2 SCC 862, wherein it is
held that; It has rightly been pointed out by the Bombay High Court in C.I.T. Vs. Tata
Chemicals Ltd (1974) 94 ITR 85 (Bom HC) with reference to the similar or almost
identical provisions in Section 9(1) of the Income Tax Act, 1961 that in order to rope in
the income of a non-resident under the deeming provision it must be shown by the
Department that some of the operations were carried out in India in respect of which the
income is sought to be assessed.
65. Mr.Chagla then referred to C.I.T. Vs. Toshoku Ltd. 1980 (Supp) SCC 614, wherein it
is observed as under in paragraph 12;
12. The second aspect of the same question is whether the commission amounts credited
in the books of the statutory agent can be treated as incomes accrued, arisen, or deemed
to have accrued or arisen in India to the non-resident assessees during the relevant year.
This takes us to Section 9 of the Act. It is urged that the commission amounts should be
treated as incomes deemed to have accrued or arisen in India as they, according to the
Department, had either accrued or arisen through and from the business connection in
India that existed between the non-resident assessees and the statutory agent. This
contention overlooks the effect of clause (a) of the Explanation to clause (i) of subsection
(1) of Section 9 of the Act which provides that in the case of business of which all
the operations are not carried out in India, the income of the business deemed under that
clause to accrue or arise in India shall be only such part of the income as is reasonable
attributable to the operations carried out in India. If all such operations are carried out in
India, the entire income accruing therefrom shall be deemed to have accrued in India. If,
however, all the operations are not carried out in the taxable territories, the profits and
gains of business deemed to accrue in India through and from business connection in
India shall be only such profits and gains as are reasonably attributable to that part of the
operations carried out in the taxable territories. If no operations of business are carried
out in the taxable territories, it follows that the income accruing or arising abroad through
or from any business connection in India cannot be deemed to accrue or arise in India.
(See C.I.T. Vs. R.D.Aggarwal & Co. and M/s.Carborandum Co. V. C.I.T., which are
decided on the basis of Section 42 of the Indian Income Tax Act, 1922, which
corresponds to Section 9(1)(i) of the Act.
66. He also pointed out Ishikawajima-Harima Heavy Industries Ltd. Vs. Director of
Income Tax 288 ITR 408 (SC), wherein it is observed by the Hon’ble Supreme Court,
that; The distinction between the existence of a business connection and the income
accruing or arising out of such business connection is clear and explicit. In the present
case, the permanent establishment’s non-involvement in this transaction excludes it from
being a part of the cause of the income itself and thus there is no business connection.
67. Mr.Chagla then contended that in the instant case, it cannot be contended that HTIL
was carrying on any operations in India having regard to the provisions of the Indian
Telegraph Act,1885. In this behalf the learned Senior Counsel referred to the definition of
the term ‘telegraph’.
REPLY OF RESPONDENTS
68. In reply to the arguments advanced at length by the learned Senior Counsel
Mr.Chagla for the Petitioner, Mr.M.Parasaran, Additional Solicitor General of India
appearing for the Respondent Union of India submitted his propositions mainly in the
following manner:-
(a) The Writ Petition is not maintainable at the stage of show cause notice.
(b) The Writ Petition is premature inasmuch as no rights of the Petitioner, much less any
vested rights, are affected, by the aforesaid show cause notice.
(c) The Petitioner has an efficacious alternate remedy.
(d) Discretion under Article 226 of the Constitution of India should not be exercised in
favour of the Petitioner.
69. Mr.Mohan Parasaran, the learned Additional Solicitor General submitted that the
reliefs sought in the above Petition are two fold:
(i) Challenge to the legality and propriety of the show-cause notice alleging the Petitioner
for withholding tax under Section 195 of the Income Tax Act based on substantial
materials;
(ii) Challenge to the Constitutional validity of Amendment to Section 191 and Section
201 of the Income Tax Act made by the Finance Act,2008.
70. Mr.Parasaran submitted the above challenges should not be entertained owing to the
conduct of the Petitioner in having failed to produce the primary/original agreement dated
11th February,2007 and other prior and subsequent agreements/documents entered into
between the Petitioner and HTIL. The said agreements/documents alone can aid this
Court to find out the true nature of the transaction and appreciate the controversy
involved in the Writ Petition.
71. The learned Additional Solicitor General also submitted that the Constitutional
validity of the provisions of the I.T.Act cannot be determined in the absence of the said
agreement and merely on hypothetical considerations.
72. The learned Senior Counsel submitted that the matter involves complex questions
arising out of disputed facts, lot of which are still un-disclosed and the same cannot be
made the subject matter of a Writ Petition under Article 226 of the Constitution of India.
73. Mr.Parasaran submitted that the transaction in question is prima-facie chargeable to
tax in India since it amounts to transfer of a Capital Asset in India. The transaction
involved in the present case is prima facie liable to Capital Gains Tax and the Petitioner
is prima facie liable for withholding Tax and that there was sufficient justification
founded upon facts and law for the issuance of the impugned show cause notice. Both
Section 195 and the impugned show cause notice are not extra-territorial in its operation,
as the income is otherwise chargeable to tax in India under the provisions of the Indian
Income Tax Act. The Petitioners prima facie are assessee in Default in terms of Section
195 read with Section 201 and Section 2(7)(c). The Amendments made in 2008 are not
violative of Article 14 of the Constitution of India and they do not affect any rights of the
Petitioner, much less any vested right, either pre or post amendment. The amendments
must be read in the proper context and are only clarificatory. Re.Proposition 1(a) : Show
cause notice
74. Mr.Mohan Parasaran, emphatically submitted that it is well settled in the eyes of law
that unless the show cause notice can be demonstrated to be totally non-est in the eyes of
law for absolute want of jurisdiction of the authority to even investigate into the facts,
Writ Petitions against show cause notices should not be entertained. Whether the show
cause notice was founded on any legal premises raising a jurisdictional issue, which may
be urged by the recipient of the notice. Such issues also can be adjudicated by the
authority issuing the very notice initially, before the aggrieved could approach the Court.
In this behalf Mr.Parasaran, the learned Additional Solicitor General of India, placed his
reliance on the decision of the Hon’ble Supreme Court in the case of The Special
Director & Another Vs. Mohd. Ghulam Ghouse & Anr. (2004) 120 Comp.Cas.467(SC),
wherein the Hon’ble Supreme Court has held that; 5. This Court in a large number of
cases has deprecated the practice of the High Courts entertaining writ petitions
questioning legality of the show cause notices stalling enquiries as proposed and
retarding investigative process to find actual facts with the participation and in the
presence of the parties. Unless, the High Court is satisfied that the show cause notice was
totally non est in the eye of law for absolute want of jurisdiction of the authority to even
investigate into facts, writ petitions should not be entertained for the mere asking and as a
matter of routine and the writ petitioner should invariably be directed to respond to the
show cause notice and take all stands highlighted in the writ petition. Whether the show
cause notice was founded on any legal premises is a jurisdictional issue which can even
be urged by the recipient of the notice and such issues also can be adjudicated by the
authority issuing the very notice initially, before the aggrieved could approach the Court.
Further, when the Court passes an interim order it should be careful to see that the
statutory functionaries specially and specifically constituted for the purpose are not
denuded of powers and authority to initially decide the matter and ensure that ultimate
relief which may or may not be finally granted in the writ petition is accorded to the writ
petitioner even at the threshold by the interim protection, granted.
75. He also relied on Kunisetty Sathyanarayana AIR 2007 SC 906, wherein it is held that;
13. It is well settled by a series of decisions of this Court that ordinarily no writ
lies against a charge sheet or show-cause notice vide Executive Engineer, Bihar
State Housing Board Vs. Ramdesh Kumar Singh and others JT 1995 (8) SC 331,
Special Director and another Vs. Mohd. Ghulam Ghouse and another AIR 2004
SC 1467, Ulagappa and others Vs. Divisional Commissioner, Mysore and others
2001 (10) SCC 639, State of U.P. Vs. Brahm Datt Sharma and another AIR 1987
SC 943 etc.
14. The reason why ordinarily a writ petition should not be entertained against a
mere show-cause notice or charge-sheet is that at that stage the writ petition may
be held to be premature. A mere charge-sheet or show-cause notice does not give
rise to any cause of action, because it does not amount to an adverse order which
affects the rights of any party unless the same has been issued by a person having
no jurisdiction to do so. It is quite possible that after considering the reply to the
show-cause notice or after holding an enquiry the authority concerned may drop
the proceedings and/or hold that the charges are not established. It is well settled
that a writ lies when some right of any party is infringed. A mere show-cause
notice or charge-sheet does not infringe the right of any one. It is only when a
final order imposing some punishment or otherwise adversely affecting a party is
passed, that the said party can be said to have any grievance.
16. No doubt, in some very rare and exceptional cases the High Court can quash a
charge-sheet or show-cause notice if it is found to be wholly without jurisdiction
or for some other reason if it is wholly illegal, however, ordinarily the High Court
should not interfere in such a matter.
76. The learned Senior Counsel further relied on the decision of our High Court in the
case of Jayanthi Lal Thankar & Co. Vs. Union of India (2006) 195 ELT 9 (Bom.),
wherein this Court had held that;
9. It is true that in large number of cases, the Apex Court has deprecated the
practice of the High Courts entertaining writ petitions questioning legality of the
show cause notices stalling enquiries as proposed and retarding investigative
process to find actual facts with the participation and in the presence of the
parties. Unless, the High Court is satisfied that the show cause notice was totally
non est in the eye of law for absolute want of jurisdiction of the authority to even
investigate into facts, writ petitions should not be entertained for the mere asking
and as a matter of routine and the writ petitioner should invariably be directed to
respond to the show cause notice and take all stands highlighted in the writ
petition.
10. The position regarding the course to be adopted by the Courts when alternate
remedy is available is also fairly well-settled. If a show cause notice is issued by a
statutory authority relying upon some facts, the said notice can be challenged
before the Writ Court only on the ground that even if the facts are assumed to be
correct no case has been made out against the noticee. If a prima facie case has
been made out in the show cause notice, it is for the adjudicating authority to
finally decide all the questions including the questions of fact. It has also been
laid down in series of cases by the Supreme Court that the High Court should not
interfere at the stage of show cause notice to take over the fact finding
investigation which is to be resolved by fact finding authorities constituted under
the relevant statute. In a series of recent cases, the Supreme Court has taken the
aforesaid view. Some reported cases are: State of Goa Vs. Leukoplast (India) Ltd.
1997 (92) E.L.T. 19 (SC) = AIR 1997 SC 1875; Union of India Vs. Polar Marmo
Aglomerates Ltd. - 1997 (96) E.L.T. 21 (SC) and Union of India Vs. Bajaj Tempo
Ltd. - 1997 (94) E.L.T. 285 (S.C.). In State of U.P. Vs. Labh Chand - AIR 1994
SC 754, the Supreme Court befittingly illuminated the power as under:
"When a statutory Forum or Tribunal is specially created by a statute for redressal
of specified grievances of persons on certain matters, the High Court should not
normally permit such persons to ventilate their specified grievances before it by
entertaining petitions under Article 226 of the Constitution is a legal position
which is too well settled......"
In State of A.P. Vs. T.C. Lakshmaiah Setty & Sons AIR 1994 SC 2377, the above
decision was reiterated by the Supreme Court and it was observed that the orders of
assessment rendered under tax laws should be tested under the relevant Act and in no
other way. In Shyam Kishore Vs. Municipal Corporation of Delhi AIR 1992 SC 2279, it
was observed that recourse to writ petition is not proper, when more satisfactory solution
is available on the terms of the statute itself. The position is, therefore, clear that
extraordinary and discretionary power under writ jurisdiction should be exercised with
caution when statutory remedy is sought to be by-passed.
77. It is further submitted by Mr.Parasaran that in cases of this nature, where the question
involved is one of determination of taxability of a transaction or when the question
involved is whether an activity comes within the purview of the tax net, the same has to
be gone into only by the concerned authorities and cannot be determined on the basis of
affidavits and counter affidavits in a proceeding under Article 226 of the Constitution of
India. In support of the said contention he relied on AVM Studio Vs. UOI (Mad) 2008
(10) STR 353, We do not find any merits in this case as the learned single judge is very
categoric and the show cause notice is also very categoric in its terms and it only directed
the appellant to show cause as to why the sum of Rs.44,26,741 cannot be recovered as
service tax on consideration that the activity of the petitioner in leasing out the studio
would come within the definition of "video production agency" as defined in the Finance
Act. If the activity of the appellant does not come within the purview, it is well open to
the appellant to explain the activity carried on the appellant so as to have a finding to that
effect. It is well-settled and well established principle that a classification or whether an
activity comes within the purview of the tax net has to be done by the authorities only,
which cannot be determined on the basis of an affidavit and counter-affidavit in a
proceeding under article 226 of the Constitution of India. Useful reference can be had to
the judgment of the Supreme Court in the case of State of Goa Vs. Leukoplast (India)
Ltd. reported in (1997) 105 STC 318 (SC). hence, we are not able to take a view different
than the one taken by the learned single judge. :49: Re Proposition 1(b) : Writ Petition is
premature.
78. Mr.Parasaran submitted that the Petitioner has been asked to show cause as to why it
should not be treated as an assessee in default, for not withholding tax at the time of
payment made to HTIL. It is submitted that as per the scheme of Chapter XVII of the
I.T.Act, deductions are required to be made at the time of payment and all adjustments
are to be made finally at the time of regular assessment of the recipient of the income.
The ultimate assessment resulting in payment of any lesser or bigger amount as Income
Tax in accordance with law in force, would not affect the duty to deduct tax at the time of
payment in any manner. It has been categorically held by the Hon’ble Supreme Court in
the case of Aggarwal Chamber of Commerce Ltd. Vs. Ganpat Rai Hira Lal AIR 1958 SC
269, that those persons who are bound under the act to make deduction at the time of
payment of any income, profits or gains are not concerned with the ultimate result of the
assessment. (Emphasis supplied)
79. Mr.Parasaran pointed out the provisions of Section 195, under which the deduction of
income tax on the amount paid to a non-resident, is for a tentative deduction of income
tax thereon, subject to regular assessment and by the deduction of Income Tax, the rights
of the parties are not, in any manner, adversely affected. it is further submitted that the
deduction of tax at source is only provisional and is subject to final assessment and
hence, does not any right of the Petitioner, much less any vested right and therefore, the
writ Petition is premature. In support of his submission, Mr.Parasaran referred to the
Hon’ble Supreme Court judgment in the case of Transmission Corporation of A.P. Ltd.
Vs. CIT (1999) 239 ITR 587 (SC), wherein the Hon’ble Supreme Court has observed
that; The purpose of sub-section (1) of Section 195 is to see that the sum which is
chargeable under Section 4 of the Act for levy and collection of income-tax, the payer
should deduct income-tax thereon at the rates in force, if the amount is to be paid to a
non-resident. The said provision is for tentative deduction of income-tax thereon subject
to regular assessment and by the deduction of income-tax, the rights of the parties are not,
in any manner, adversely affected. Further, the rights of the payee or recipient are fully
safeguarded under sections 195(2), 195(3) and 197.
80. Mr.Parasaran also relied on the A.Sanyasi Rao & Anr. Vs. Govt. of A.P. (1989) 178
ITR 31 (AP); By way of illustration, we may refer to section 194C. Sub-section (1) of
section 194C, in so far as it is relevant, reads :
"any person responsible for paying any sum to any resident (hereafter in this
section referred to as the contractor) for carrying out any work .......in pursuance
of a contract...... shall, at the time of credit of such sum to the account of the
contractor or at the time of payment thereof in cash or by issue of a cheque or
draft or by any other mode, whichever is earlier, deduct an amount equal to 20%
of such sum as income tax on income comprised therein......"
It would be evident that at the time of making payment to the contractor, the person
paying the sum cannot say or visualise how much of the said sum constitutes income in
the hands of the contractor. It is indeed impossible for him to say so, it is thus clear that
the said words are merely descriptive in nature.
81. Mr.Parasaran further relied on the decision of the Gujarat High Court in the case of
CIT vs. Vijay Ship Breaking Corporation 261 ITR 113 (Guj.) The buyer, therefore, does
not get absolved from his contractual liabilities under the contract of sale or from his
statutory liabilities, such as, of making deduction of tax at source under section 195(1) of
the Act while making payment by the mode of a letter of credit.
Re. Proposition 1 (c): Petitioner has an efficacious alternate remedy.
82. Mr.Parasaran submitted that the Courts have refused to entertain the Writ Petitions
challenging the show cause notice seeking to by-pass the statutory mechanism provided
and in particular, notice issued alleging incomes taxable under Section 9 of the Income
Tax Act. The Income Tax Act itself is a self-contained code and in cases like this, the Act
provides sufficient safeguards to persons like the Petitioner, who have an effective and
efficacious alternative remedy. In fact the Petitioner itself has availed such efficacious
alternative remedies in the past. Under the Income Tax Act, the petitioner, apart from
responding to the show cause notice, can seek for a determination as to whether any
income is at all chargeable and as to whether it is under any obligation to deduct any tax.
In fact, the Department had reminded the petitioner, even before the conclusion of the
transaction, of the obligations prescribed under the Income Tax Act and the remedies that
are available to the Petitioner under the Income Tax Act, which it has failed to avail.
83. Mr.Parasaran pointed out that incidentally, the Hon’ble Supreme court has held that
the rights of a person like the Petitioner are fully safeguarded under Section 195(2),
195(3) and Section 197 of the Income Tax Act. Assuming that the Petitioner is found
liable to deduct tax or is construed to be an assessee in Default, the Petitioner has a right
to Appeal under Section 246 A (ha) of the Income Tax Act, with a further right of Appeal
to the Appellate Tribunal and then a reference to the High Court. In Transmission
Corporation, 239 ITR 587 (SC), the Hon’ble Supreme Court has affirmed that the rights
of parties are adequately safeguarded under Section 195(2), 195(3), 197 of the Act and
the only thing required to be done by them is to file an application before the Assessing
Officer under the section.
84. Mr.Parasaran also relied on the following decisions which would be relevant in
support of the proposition that Court would not interfere in these circumstances:-
a) Indo Asahi Glass Company Ltd. & Anr. Vs. ITO & Ors. 2002 (254) ITR 210
Equivalent to 2002 (10) SCC 444;
The aforesaid show-cause notice was issued on the allegation that salary had been paid to
four employees who were working with the appellants in India. These employees were
Japanese and the salary in question had been paid by a Japanese-company in Japan. In
addition thereto, the appellants had also paid salaries to these four employees but tax had
been deducted at source. The show-cause notice stated that what was paid to these four
employees in Yen currency was also taxable under Section 9 of the Income-tax Act and tax should have been deducted at source. Instead of filing a reply to the show-cause
notice, the appellants chose to file a writ petition. The singe judge dismissed the writ
petition on the ground that alternative remedy was available to the appellants. In appeal,
the Division Bench took the same view. Hence, this appeal by special leave. It is
contended by Dr.Pal, on behalf of the appellants, that during the pendency of this appeal,
taking advantage of the Voluntary Disclosure Scheme, Asahi Glass Co. Ltd. Japan, had
filed returns of income in respect of the four employees in question and had paid the
entire amount of income-tax payable in respect of what was paid to these four employees
in Yen currency. This and the other facts cannot be taken up for consideration by this
Court for the first time. In our opinion, the High Court was right in coming to the
conclusion that it is appropriate for the appellants to file a reply to the show cause notice
and take whatever defence is open to them. While affirming the decision of the High
Court, we, therefore, grant ten weeks’ time to the appellants to file a reply to the
aforesaid show-cause notice dated May 16, 1996. On the reply being so filed, the
Income-tax Officer will take a decision, after giving an opportunity of hearing to the
Appellants. The decision should be taken within four months of the reply being so filed.
It will be open to the appellants to place on record the subsequent facts the effect of
which will be for the Income Tax Officer to decide.
b) Titaghur Paper Mills Co.Ltd. & Anr. Vs. State of Orissa & Ors. 142 ITR 663 SC.
Under the scheme of the Act, there is a hierarchy of authorities before which the
petitioners can get adequate redress against the wrongful acts complained of. The
petitioners have the right to prefer an appeal before the prescribed authority under sub-s.
(1) of s.23 of the Act. If the petitioners are dissatisfied with the decision in the appeal,
they can prefer a further appeal to the Tribunal under sub-s.(3) of s. 23 of the Act, and
then ask for a case to be stated upon a question of law for the opinion of the High Court
under s.24 of the Act. The Act provides for a complete machinery to challenge an order
of assessment, and the impugned orders of assessment can only be challenged by the
mode prescribed by the Act and not by a petition under Article 226 of the Constitution. It
is now well recognised that where a right or liability is created by a statute which gives a
special remedy for enforcing it, the remedy provided by that statute only must be availed
of. This rule was stated with great clarity by Willes J., in Wolverhampton New Water
Works Co. V. Hawkesford (1859) 6 CB (NS) 336 at p.356 in the following passage;
"There are three classes of cases in which a liability may be established founded
upon statute...... But there is a third class, viz., where a liability not existing at
common law is created by a statute which at the same time gives a special and
particular remedy for enforcing it..... the remedy provided by the statute must be
followed, and it is not competent to the party to pursue the course applicable to
cases of the second class. The form given by the statute must be adopted and
adhered to."
The rule laid down in this passage was approved by the House of Lords in Neville Vs.
London "Express" Newspaper Ltd. (1919) AC 368 (HL) and has been reaffirmed by the
Privy Council in Attorney-General of Trinidad and Tobago Vs. Gordon Grant & Co.
(1935) AC 532 (PC) and Secretary of State Vs. Mask & Co., AIR 1940 PC 105. It has
also been held in to be equally applicable to enforcement of rights, and has been followed
by this Court throughout. The High Court was, therefore, justified in dismissing the writ
petitions in limine.
Re. Proposition 1(d):
Non disclosure of vital documents
85. Mr.Parasaran, the learned Additional Solicitor General pointed out that the present
case, the Petitioner has come forward with a writ petition challenging issuance of a show
cause notice dated 19th September, 2007, wherein the Petitioner has been requested to
only show cause as to why it should not be treated as an assessee in default. The
Petitioner was also requested to produce certain documents for adjudication in the matter.
One of the crucial documents required by the 2nd Respondent for determining the
question in dispute is the main/primary agreement dated 11th February,2007, entered into
between the Petitioner and HTIL. The said agreement has not been produced by the
Petitioner either before the department or before this Court. Mr.Parasaran strongly
contended that the said agreement alone can aid this Court in finding out the true nature
of the transaction and appreciate the controversy involved in the Writ Petition. Without
producing this agreement and other relevant documents, the Petitioner cannot expect this
Court to decide the merits of the matter.
86. Mr.Parasaran submitted that non-production/ non-disclosure of vital documents
should result in this Court drawing an adverse inference against the Petitioner since it
amounts to withholding of the best evidence, even assuming that the onus of proof does
not lie on the Petitioner. At this juncture, Mr.Parasaran relied on a Supreme Court
judgment in the case of Gopal Krishnaji Ketkar Vs. Mohamed Haji Latif & Ors. AIR
1968 SC 1413, wherein the Hon’ble Supreme Court has observed that; Even if the burden
of proof does not lie on a party the Court may draw an adverse inference if he withholds
important documents in his possession which can throw light on the facts at issue. It is
not, in our opinion, a sound practice for those desiring to rely upon a certain state of facts
to withhold from the Court the best evidence which is in their possession which could
throw light upon the issues in controversy and to rely upon the abstract doctrine of onus
of proof. In Murugesam Pillai Vs. Gnana Sambhanda Pandara Sannadhi, 44 Ind. App. 98
at P.103 = (AIR 1917 PC 6 at p.8) Lord Shaw observed as follows:
"A practice has grown up in Indian procedure of those in possession of important
documents or information lying by, trusting to the abstract doctrine of the onus of
proof, and failing, accordingly, to furnish to the Courts the best material for its
decision. With regard to third parties, this may be right enough - they have no
responsibility for the conduct of the suit, but with regard to the parties to the suit
it is, in their Lordships’s opinion, an inversion of sound practice for those desiring
to rely upon a certain state of facts to withhold from the Court the written
evidence in their possession which would throw light upon the proposition."
This passage was cited with approval by this Court in a recent decision - Biltu Ram V.
Jainandan Prasad, Civil Appeal No.941 of 1965, D/- 15-4-1968 (SC).
87. Mr.Parasaran submitted that the above conduct also warrants the dismissal of the Writ
Petition by refusing to exercise discretion. The Hon’ble Supreme Court and this Court
have refused to exercise discretion in several cases based on the conduct of the parties
and since issuance of a writ is in the discretion of the court Ex-Debito Justiciae and not as
a matter of course.
88. Mr.Parasaran strongly also relied on Prestige Lights Ltd. Vs. State Bank of India
(2007) 139 Comp.Cases.169 (SC), wherein in paragraphs 32 to 34, the Hon’ble Supreme
Court held as under:
"32. It is thus clear that though the Appellant-Company had approached the High
Court under Article 226 of the Constitution; it had not candidly stated all the facts
to the Court. The High Court is exercising discretionary and extraordinary
jurisdiction under Article 226 of the Constitution. Over and above, a Court of
Law is also a Court of Equity. It is, therefore, or utmost necessity that when a
party approaches High Court, he must place all the facts before the Court without
any reservation. If there is suppression of material facts on the part of the
Applicant or twisted facts have been placed before the Court, the Writ Court may
refuse to entertain the Petition and dismiss it without entering into merits of the
matter."
"33. The object underlying the above principle has been succinctly stated by
Scrutton, LJ in R.V.Kinsington Income Tax Commissioners (1917) 1 KB 486:
86b LJ KB 257: 116 LT 136, in the following words:
"It has been for many years the rule of the Court, and one which it is of the
greatest importance to maintain, that when an applicant comes to the Court to
obtain relief on an ex parte statement he should make a full and fair disclosure of
all the material facts - facts, not law. He must not misstate the law if he can help it
- the Court is supposed to know the law. But it knows nothing about the facts, and
the applicant must sate fully and fairly the facts, and the penalty by which the
Court enforces that obligation is that if it finds out that the facts have not been
fully and fairly stated to it, the Court will aside, any action which it has taken on
the faith of the imperfect statement".
34. It is well settled that a prerogative remedy is not a matter of course. In
exercising extraordinary power, therefore, a Writ Court will indeed bear in mind
the conduct of the party who is invoking such jurisdiction. If the Applicant does
not disclose full facts or suppresses relevant materials or is otherwise guilty of
misleading the Court, the Court may dismiss the action without adjudicating the
matter. The rules has been evolved in larger public interest to deter unscrupulous
litigants from abusing the process of Court by deceiving it. The very basis of the
writ jurisdiction rests in disclosure of true, complete and correct facts. If the
material facts are not candidly stated or are suppressed or are distorted, the very
functioning of the writ courts would become impossible.
89. Mr.Parasaran pointed out that it has been held by the Hon’ble Supreme Court in the
case of Bharat Singh & Ors. Vs. State of Haryana AIR 1988 SC 2181 = (1988) 4 SCC
534, that when a point, which is ostensibly a point of law, is required to be substantiated
by facts, the party raising the point, if he is the writ petitioner, must plead and prove such
facts by producing evidence in support of such facts and if such evidence in support of
such facts is not annexed, the Court will not entertain the point. Until facts are discovered
establishing that the Petitioner has the rights that it claims if cannot assert those rights for
the very purpose of preventing the discovery of facts by this Petition. The Hon’ble
Supreme Court further held that there is a clear distinction between a writ petition and a
pleading under the C.P.C. and that while evidence need not be pleaded in pleadings under
the C.P.C., in a writ petition, not only facts but also evidence in proof of such facts have
to be pleaded and annexed to it. Further, it is submitted that when the Petition has
challenged the constitutional validity of the Amendment to sections 191 and 201 of the
I.T. Act by the Finance Act, 2008, the same must certainly be in the context of certain
facts pleaded and proved by evidence in the form of documents on record and not in
vacuum or in the abstract. The writ Petitioner is conveniently lacking in particulars as to
the nature of the agreement dated 11th February, 2007 and all other agreements preceding
or following the same entered into by HTIL and/or the Petitioner. The essential facts
supported by the necessary documents as proof of such facts, have been conveniently
kept away from this Hon’ble Court. In this behalf Mr.Parasaran also referred to Sant Lal
Bharti Vs. State of Punjab AIR 1988 SC 485 = (1988) 1 SCC 366. It must, however, be
mentioned that the petition is lacking in particulars as to what premises the appellant
owned and in respect of which premises the appellant is making the grievances. On this
ground it is not possible to decide the question of vires canvassed before the High Court
and repeated before us. A petition challenging the constitutional validity of certain
provisions must be in the context of certain facts and not in abstract or vacuum. The
essential facts necessary to examine the validity of the Act are lacking in this appeal. On
this ground the petition was rightly rejected and we are not inclined to interfere with the
order of the High Court on :60: this ground alone.
Re. Proposition 1(e) Disputed facts:
90. Mr.Parasaran pointed out that the very reading of the show cause notice issued as also
the chronological list of dates and events filed herewith, would reveal that the present
case involves investigation into voluminous facts and perusal of numerous lengthy and
complicated agreements, to determine the question of chargeability of the transaction to
tax and also the question of duty to deduct tax at source. The present is not also a case
where it could be alleged that the prima facie view in the show cause notice is extraneous
or irrelevant or erroneous on its face or not based on any material at all. Mr.Parasaran
also relied on Assam Consolidated Tea Estates Ltd. vs. ITO ‘A’ Wards & Ors. 1981 ITR
699 (Cal), especially paragraph Nos.15 and 19 which read as under:
"15. Section 9(1) of the Act is a complicated provision applying to all income
accruing or arising whether directly or indirectly, through or from (a) a business
connection in India; (b) and money lent at interest and brought into India in cash
or in kind; (e) a transfer of a capital asset situated in India. This being a deeming
provision, it is not enough merely to say that the income does not arise directly
through or from any of the sources mentioned in the section. The words of the
Section are of the widest amplitude, namely accruing directly, accruing indirectly,
arising directly or arising indirectly. The Petitioner has tried to sever the two
transaction, namely, the transaction of the loan and the transaction of the transfer.
Mr.Gupta contended that the interest arising from the unsecured loan stock may
be held to arise from either a business connection in India or from the transfer of a
capital asset in India. In this case the loan was part of the consideration for the
transfer and the interest accruing on such a loan can be assessed under either of
the above three heads. As a result of this transaction certain rights have been
exchanged between the Petitioner and the Indian company. The loan was granted
to enable the Indian company to pay for the assets which were in India and it may
very well be argued that as a result of the transaction assets in India have been
transferred. Serious questions as to the scope and effect of Section 9(1) are
involved which it is neither convenient nor desirable to decide in an application
under Article 226.
16......................... 17......................... 18.........................
19. Could it be said that the reasons given by the Income Tax Officer for his
belief that the interest income is assessable under Section 9(1) and has escaped
assessment due to the failure of the assessee to file its return are extraneous or
irrelevant? I agree with Mr. Gupta that the question whether the interest due on
the unsecured loan stock is assessable under Section 9(1) of the Act or not is not
within the scope of this application. This Court has only to be satisfied that the
impugned notices are on their face erroneous and/or that the issuing Income Tax
Officer had no material for his belief that any income has escaped assessment due
to any omission or failure on the part of the assessee either to file its returns or to
disclose the primary material facts necessary for such assessment. In this case
there is no dispute that apart from the assessment year 1958-59 no returns were
filed by the assessee. Whether the Income Tax Officer should have made
enquiries on the basis of the information received in connection with the
assessments of the Indian company is not germane to the present question. It is for
the assessee to file returns and furnish the necessary particulars. Very difficult
questions of the interpretation and application of the provisions of Section 9(1) of
the Act have been raised and issues have been joined in respect thereof. These are
matters for decision by competent tribunals and courts cannot conveniently be
decided by this Court in its writ jurisdiction. However, the case of the impugned
notice for the assessment year 1958-89 is quite different. The point is covered by
the decision of the Supreme Court in Ranchhoddas’s case and it must be held that
the Income Tax Officer exceeded his jurisdiction in issuing that notice. The rule
would, therefore, be made absolute only in the case of the notice for the
assessment year 1958-59 while it would be discharged in respect of the notices for
the other years. The interim orders, if any, except for those applicable to the
assessment year 1958-59, are vacated. There will be no order as to costs of this
application. Operation of this order is stayed till a week after the long vacation.”
It has further been held by the Hon’ble Supreme Court of India that where the question
involved is as to the nature of the transaction depending on construction of documents,
the same is a mixed question of fact and law and it is for the fact finding authorities to go
into the same, particularly when the law prescribes a particular procedure for ascertaining
those facts and the same cannot be subject matter of a writ petition. To support the
contentions of Mr. Parasaran, he placed his reliance on the decision of the Hon’ble
Supreme Court in the case of M/s.Sri Tirumala Venkateswara Timber and Bamboo Firm
vs. Commercial Tax Officer AIR 1965 SC 784, wherein it is observed that;
5. It is manifest that the question as to whether the transactions in the present case
are sales or contracts of agency is a mixed question of fact and law and must be
investigated with reference to the material which the appellant might be able to
place before the appropriate authority. The question is not one which can properly
be determined in an application for a writ under Art.226 of the Constitution.
91. He also relied on Commissioner of Sales Tax vs. Sugan Chant Shyam Lal 27 STC
161 wherein also the above principle has been reiterated.
34 -
92. With regard to second proposition submitted by the learned Counsel for the Petitioner
i.e. Chargeability to Income Tax, Mr.Parasaran, the learned Additional Solicitor General
of India submitted as under:
a. Like most other taxing jurisdictions, the Indian Income Tax Act follows the twin basis
for taxation,
(i) based on residence or domicile and
(ii) based on source of income. While Indian residents are taxed on global income under
Section 5(1), non-residents are taxed only on the income, which has its source in India
under Section 5(2). The non-residents should have either received or deemed to have
received the income in India or the income should have arisen or accrued in India or
should be deemed to have accrued or deemed to have arisen in India. The deeming
provision is enumerated in section 9 of the Income Tax Act. It is the submission of the
Revenue that the income or capital gains of HTIL is deemed to have accrued or arisen in
India and therefore, it squarely falls within the ambit of Section 9 and is hence chargeable
to Income Tax.
b. It was submitted that the transaction is prima facie, liable to Income Tax in India.
HTIL, by reason of this transaction, has earned income liable for Capital Gains Tax in
India as the income was earned towards sole consideration of transfer of its
business/economic interests as a group, in favour of the Petitioner.
c. For this purpose, certain vital points of the case have necessarily to be examined and
before examining the same, the Revenue would place reliance upon the definition of the
‘Capital Asset’ in Section 2(14), the definition of ‘Transfer’ in section 2(47) and the
definition of ‘Assessee’ in Section 2(7).
d. Under Section 9(1)(i), income is deemed to accrue or arise in India whether directly or
indirectly, through or from (a) business connection in India (b) property in India (c) any
asset (d) any source of income in India, and (e) through the transfer of a capital asset
situated in India.
e. The question that arises for consideration in the present case is;
i) What was the subject matter of the transaction.
ii) whether the subject matter can be said to be capital asset.
iii) Whether the transaction involved transfer of a capital asset situate in India.
f. The subject matter of the present transaction between the Petitioner and HTIL is
nothing but transfer of interests, tangible and intangible, in Indian companies of the
Hutch Group in favour of the Petitioner and not an innocuous acquisition of shares of
some Cayman Islands Company, M/s. CGP Investments (Holdings) Ltd.
g. From the chronological sequence of events which have been furnished by the Revenue
and from the pleadings on record, it is evident that;
HTIL owned 67% interests in HEL (India) directly and indirectly;
HEL was a joint venture company of the Hutch group (foreign investor) with the Essar
group (Indian partner) and obtained telecom license to provide cellular service in
different circles in India from November 1994. The existence of joint venture structure
between Hutchinson group and the Essar Group in mobile telephony services is clearly
stated, recognized and affirmed if one looks at the restated term sheet of dated 24th
August, 2007. Term sheet dated 5th July, 2003 and agreement dated 2nd May, 2000.
The Hutch group was controlling 8 companies in India and operating in joint venture with
Essar and others providing cellular service in India. 22nd December, 2006:
HTIL discloses that it had been approached by potential interested parties regarding a
possible sale of the Company’s interests in HEL group.
. January/February, 2007 :
. It is reliably learnt that among several interested buyers two Groups, namely Reliance
and Hinduja also offered their bids and these interested buyers were asked to determine
the price of its’ interests by reference to the enterprise value of Hutch Essar.
. 11th February,2007:
. Agreement between Petitioner and HTIL for acquisition of Indian interests of HTIL by
the Petitioner. . 12th February,2007:
. Petitioner’s disclosure to SEC, USA for acquisition of 67% stock of HTIL in HEL, for a
consideration of US$ 11.1 billion, which confirms the total enterprises value of US# 18.8
billion. . 20th February,2007:
. Circular of HTIL to its share holders that the Company was selling its 67% stock in
India for US$ 11.1 billion, based on an enterprise value of HEL of US/$ 18.8 billion and
was expected to realize an estimated ‘before tax gain’ of approximately US$ 9.6 billion
from the transaction.
. 20th February, 2007:
. Petitioner’s application to the FIPB for approval of direct acquisition of 51.96% stock in
HEL.
. 15th March, 2007:
36 -
. Settlement agreement between HTIL and Essar Group disclosing HTIL’s agreement to
dispose off its "HTIL interests" to the Petitioner. "HTIL’s interests" has been defined as
HTIL’s direct and indirect equity, loan and other interests and rights in and related to
HEL, which HTIL has agreed to sell to the Petitioner.
. 27th March, 2007.
. Petitioner files certain details with FIPB in reply to FIPB’s letter dated 22nd March,
2007.
. 7th May, 2007
.Conditional approval by the FIPB stipulating that there should be compliance and
observance of applicable laws and regulations of India, which would naturally include tax
obligations under Income Tax Act.
. 8th May, 2007:
. Petitioner enters into an agreement with HTIL to provide for the retention of US$ 352
million out of total consideration payable by it to HTIL to meet certain specific liabilities
which the Petitioner may incur for a period of up to 10 years.
. June/July, 2007
. The names of 8 operating companies undergo change.
. 13th June, 2007
. HTIL announces a special dividend of HK $ 6.75 per share or approximately US $
12.94 per ADS out of the proceeds from sale of its interests in HEL.
. 24th August, 2007
. Restated term sheet entered in India between Petitioner and essar group, confirming
substitution of joint venture by the Petitioner in India and conferment of valuable rights
and interests on the Petitioner, including Tag along rights and the right of first refusal and
appointments of majority Directors.
93. Mr.Parasaran pointed out that from the facts and material available as of now, it is
demonstrable that a strong prima facie case has been made out to show that the
transaction entered by the Petitioner amounts to transfer of capital asset situated in India.
In the submission of Revenue, the above transfer is a transfer of a capital asset and not
merely a transfer simplicitor of controlling interest ipso facto in a corporate entity.
It is;
a. A transfer of a bundle of interests in various entities viz. Interest in Telecom License
Jointly held with the Essar Group; use of Brand & Goodwill; non-compete rights given
by HTIL; Right to enter into Telecom Business in India; Control Premium et-all. It would
be too simplistic to answer away all this merely by a submission that what was
transferred was a only share of an unknown Cayman Island Company, which is a shell
company and which was not even considered in the Enterprise value of HEL. The courts
have been very liberal in interpreting the words ‘goods’ & ‘transfer’, especially viz. a viz
tax laws.
. In this behalf, Mr.M.Parasaran, the learned Additional Solicitor General of India relied
on the following judgments:
. CIT Vs. B.C.Srinivas Setty (1981) 128 ITR 294 (SC).
. Blue Bay Fisheries Pvt. Ltd. Vs. CIT (1987) 166 ITR 1 (Ker).
.Associated Cement companies Ltd. Vs. Commissioner of Customs AIR 2001 SC 862.
. Tata Consultancy Services Vs. St. of A.P. air 2005 SC 371
. CIT Vs. D.P.Sandu Bros (2005) 273 ITR 1 (SC).
. Bharat Sanchar Nigam Ltd. Vs. Union of India AIR 2006 SC 1383.
. Century Finance Corporation vs. State of Maharashtra AIR 2006 SC 2436. .
Mr.Parasaran, also referred to the definition of term ‘Transfer" given in Blacks Law
Dictionary.
b. Substitution of the Petitioner as a successor in interest to HTIL in a joint venture under
a license agreement with Department of Telecommunications:- .
The expression joint venture had come up for consideration before the Hon’ble Supreme
Court in New Horizons Ltd. vs. Union of India & Ors. 1995(1) SCC 478. The Hon’ble
Supreme Court held that a joint venture is essentially in the nature of a quasi partnership
where different companies, foreign and Indian come together to share risks in
management and profits jointly. The Hon’ble Supreme Court had pierced the corporate
veil in that case to look at the real entities or economic realities behind the joint venture.
Hon’ble Supreme Court in the case cited supra observed that the company is in the
‘nature of partnership’ (between Indian group of companies and Singapore based
company) that have jointly undertaken this commercial enterprise wherein they will
contribute to the assets and share the risks. in respect of such a joint venture, experience
of the company can only mean the experience of the constituents of the joint venture i.e.
Indian group of companies and the Singapore based company. Accounting Standard 27
issued by the Institute of Chartered Accountants of India also recognizes the existence of
a corporation as a joint venture entity. In the submission of the revenue, the acquisition of
interest in a Quasi-Partnership/Joint Venture, itself amounts to acquisition of a Capital
Asset. Therefore, the Petitioner, once having become a joint venture partner, virtually
acquires a new dimension. The Indian entity and the petitioner cannot be divorced or
disassociated while examining the nature of wholesomeness of the transaction in the
present case. The Petitioner cannot contend that they merely acquired share holding
rights in a foreign company since the acquisition of a bundle of interests as demonstrated
above would certainly tantamount to acquisition of property in India. The arrangements
agreed upon by the joint ventures in their respective term sheet agreements before and
after the transfer amply prove this. The present transaction is not as simplistic as put forth
by the Petitioner and involves a deeper scrutiny of substantive facts, a number of which
have not yet been disclosed by the Petitioner.
c. Transfer of interest held by one group (Hutch Group) in HEL (India) to the Vodafone
Group. This Group Concept, as discernible from one of the conditions of the License, is
typical of the way the Cellular Mobile Business is conducted in the Country and can be
found to have been pleaded before Hon’ble Courts in the Country. Assuming without
admitting that the contention of the Petitioner is correct, then what has happened in effect
in the present case is that the shares and all other interest of the 8 Indian Companies
controlled by HTIL, stood stapled with shares of CGP, at the time of transfer.
Mr.Parasaran referred to the decision of the Company law Board in the case of Air Touch
International (Mauritius) Ltd. Vs. RPG Cellular Investments and Holdings P.Ltd.
2004(121) Comp Cas-0647-CLB a) Samayanallur Power Investment Private Ltd. Vs.
Coventa Energy India (Balaji) Ltd. (b) 1976 (3) All E.R. 462 DHN Food Distributors Ltd.
Vs. London Borough of Tower Hamlets.) d) Transfer of Controlling Interest in Indian
Companies:
d. The Petitioner themselves have not disputed that the transaction involves transfer of
controlling interest. If any transaction involves a transfer of controlling interest in a
company or a group of companies, such a transfer has to be viewed both from the point of
view of transferor and transferee. It is inconceivable as to how HTIL can transfer its
controlling interest in HEL without extinguishing its rights in the shares of the Indian
group and without which, a transferee cannot acquire a controlling interest. A divestment
or extinguishment of right, title or interest must necessarily precede the divestment of the
controlling interest and it would be impossible to dissociate one from the other and any
divestment by one of any interest of enormous value in shares of such high intensity
would certainly amount to acquisition of enduring benefit to the other, resulting in
acquisition of a capital asset in India. The transaction also results not only in
extinguishment of HTIL’s rights in HEL but relinquishment of its asset viz., its interest in
the Hutchinson - Essar Group, so as to fall within the ambit of transfer as defined in
Section 2(47) of the Income Tax Act (qua the transferor). At this stage, Mr.Parasaran,
referred to the decision of our High Court in the case of CIT Vs. Ram Narain Kapur &
Co. Pvt.Ltd. (1968) 69 ITR 719 (Bom.). It is submitted that by virtue of the transaction
entered into between the Petitioner and HTIL, followed by number of other agreements,
HTIL has earned income/profit from a property/asset in India and also from its business
connection in India, which now stands transferred to the Petitioner.
e) Transfer of Management Rights:
. It is clear from the various declarations made supra by HTIL, that the purpose of
transfer of its Interest in HEL was to enable the Petitioner to acquire controlling interest
in HEL by acquiring 67% direct and indirect equity and loan interest, held by HTIL
through its subsidiaries, in HEL and thus acquire the right to manage HEL by appointing
its own directors on the board. The object of the transaction in the present case was also
to enable the Petitioner to successfully pierce the Indian mobile market to enlarge its
global presence. In this behalf the learned Additional Solicitor General of India, placed
his reliance on Ram Narain & Sons Pvt. Ltd. Vs. CIT (1961) 41 ITR 534 (SC),
. CIT Vs. National Insurance Co.Ltd. (1978) 113 ITR 37 (Cal),
. CIT Vs. National Finance Ltd. (1962) 44 ITR 788 (SC)
. The Lakshmi Insurance Co. Vs. CIT (1971) 80 ITR 575 (Del)
. CIT Vs. New India Assurance Co.Ltd. (1980) 122 ITR 633
94. Mode of transfer of an asset, is not determinative of the nature of the asset;
. Shares in themselves may be an asset but in some cases like the present one, shares may
be merely a mode or a vehicle to transfer some other asset(s). In the instant case, the
subject matter of transfer as contracted between the parties is not actually the shares of a
Cayman Island Company, but the assets (as stated supra) situated in India. The choice of
the Petitioner in selecting a particular mode of transfer of these right enumerated above
will not alter or determine the nature or character of the asset. Mr.Parasaran, the learned
Additional Solicitor General of India relied on the decision of Gujarat High Court in the
case of Mul Shankar Kunverji Gor Vs. Juvansinhji Shivubha Jadeja AIR 1980 Guj.62.
95. He also relied on the decision of our High Court in the case of Hanuman Vitamins
Foods Pvt.Ltd. Vs. State of Maharashtra AIR 1980 Bom 204.
96. It was further submitted, that apart from the acquisition of controlling interest, the
Petitioner has acquired other interests and intangibles rights. The Petitioner accordingly
became a successor in interest in the joint venture between HTIL and the Essar group and
became a co-licensee with the Essar group to operate mobile telephony in India. It is
submitted that the joint venture by itself confers an enduring benefit to the Petitioner.
Alternatively, the Respondent states that the interest which the Petitioner has acquired in
India should nevertheless be construed as a capital asset inasmuch as the Petitioner has
not only become the successor in interest in that Joint Venture to HTIL, but also has
acquired a beneficial interest in the license granted by the Department of
Telecommunications in India to its group companies, now known as Vodafone Essar
Limited.
97. It is an admitted fact that VEL (earlier HEL), a subsidiary of the Petitioner in which
the Petitioner has acquired 67% interest, was a group company of HTIL and now a group
company of the Petitioner. Any profit or gain which arose from the transfer of a group
company in India has to be regarded as a profit and gains of the entity or the company
which actually controls its, particularly when on facts, the flow of income or gain can be
established to such controlling company (HTIL). In the present case, by reason of the
transfer, the income accrued not to CGP, but to HTIL and was treated as profits of HTIL
and accordingly was distributed to the share holders of HTIL in Hong Kong at the rate of
Hong Kong $ 6.15 per share. Therefore, the recipient of the sale consideration was none
other than HTIL and this was a consequence of divestment of its Indian interests in
Hutchinson Essar Group, liable for capital gains. The learned Additional Solicitor
General of India placed his reliance on the decision of the Hon’ble Supreme Court in the
case of CIT Vs. Sri.Meenakshi Mills Ltd. 63 ITR 609 (SC). He further relied on the
decision in the case of McDowell & Co. Ltd. Vs. CTO 154 ITR 148 (SC). He also
referred to the judgment in the case of State of U.P. Vs. Renusagar Power Co. AIR 1988
SC 1737. He further relied on CDS Financial Services (Mauritius) Ltd. Vs. BPL
Communications Ltd. and Ors. (2004) 121 COMP CAS -0374 (Bom.).
98. Mr.M.Parasaran, Additional Solicitor General of India, further submitted that the
present is a case where the real entities involved in the transaction are apparent and it is
clear that what was transferred by HTIL to the Petitioner was its entire interest in the 8
companies in India. This is a case where there is no even a need or necessity for this
Court to lift or pierce the corporate veil to find out the real nature of the asset transferred
or the real economic entities sought to be transferred. The Petitioner themselves, by their
various declarations supra, made it apparent and clear that the purpose of their acquiring
shares in CGP was to acquire the controlling interest of 67% in HEL. The Petitioner itself
has disregarded the maze of subsidiaries in the matter of ownership, receipt of sale
consideration and signing and execution of agreement for transfer (See Pg.4 of the List of
dates).
99. Mr.Parasaran submitted in relation to a foreigner, jurisdiction can be exercised by the
executive, legislature and judiciary in India, if either the foreigner is actually present in
the Indian Territory or if any interest in any of his property is within the Indian Territory.
A foreigner cannot enter into a transaction which has an effect on Indian properties and
still contend that the executive, legislature or judiciary in India cannot exercise extra
territorial jurisdiction. Moreover, in the present case, it is fallacious to contend that extra
territorial jurisdiction is being exercised as it would be begging the question.
100. Mr.Parasaran referred to the American principle of ‘Effects Doctrine’ is as follows:
"Any state may impose liabilities, even upon persons not within its allegiance, for
conduct outside its borders that has consequences within its borders which the
state represents." In this behalf Mr.Parasaran referred to the discussion in
International Law 4th Edition by Malcolm N.Shaw at pages 483 to 490 and also
Page 456, which reads as follows:
"International law accepts that a state may levy taxes against persons nor within
the territory of that state, so long as there is some kind of real link between the
state and the proposed taxpayer, whether it be, for example, nationality or
domicile."
101. Mr.Parasarn pointed out that the principle of ‘Effects Doctrine’ has been upheld and
followed by the Hon’ble Supreme Court in (2002) 6 SCC 600. The Hon’ble Supreme
Court has held that even if an agreement is executed outside India or the parties to the
agreement are not in India and the agreement may not be registerable under Section 33 of
the MRTP Act, being an outside agreement, nevertheless, if any restrictive trade practice,
as a consequence of outside agreement is carried out in India, then the Commission shall
have jurisdiction under Section 37(1), the Hon’ble Supreme Court has upheld the ‘Effects
Doctrine’. It has been followed in (2004) 7 SCC 447. In the present case, there may be no
doubt that the transaction has effect on a property in India and involves transfer of
controlling interest in an Indian company. The principle has been very well enunciated by
Viscount Siminds in Collco Dealings Ltd. Vs. Inland Revenue Commissioners 1961 (1)
LL ER 762, especially page Nos.763 and 765. Page 763 reads as under:
"These transactions, which might seem strange to those unversed in the devious
ways of tax avoidance, had their natural sequel in a claim for repayment of the tax
that had been deducted. It was this claim and its rejection that led to these
proceedings."
The Learned House of Lords point out that such evasion transaction might seem strange
only to unversed in devious ways of tax avoidance. In the present is a case of tax evasion
and not tax avoidance. It may be noted that the House of Lords rules in favour of the
Revenue and against the tax payer.
. Page 765 reads as under:
"I am not sure on which of these high-sounding phrases the Appellant company
chiefly reliefs. But I would answer that neither comity nor rule of international
law can be invoked to prevent a sovereign state from taking what steps it thinks fit
to protect its own revenue laws from gross abuse or to save its on citizens from
unjust discrimination in favour of foreigners. To demand that the plain words of
the stature should be disregarded in order to do that very thing is an extravagance
to which this House will, I hope, give ear."
102. Mr.Parasaran pointed out that the very purpose of entering into agreements between
the two foreigners is to acquire the controlling interest which one foreign company held
in the Indian company, by other foreign company. This being the dominant purpose of
the transaction, the transaction would certainly be subject to municipal laws of India,
including the Indian Income Tax Act. The Petitioner has admitted that HTIL has
transferred their 67% interests in HEL qua their shareholders, qua the regulatory
authorities in India (FIPB), qua the statutory authorities in USA and Hong Kong and the
Petitioner has also admitted acquiring 67% held by HTIL in HEL. This being the case, a
different stand cannot be taken before the tax authorities in India and a different stand
cannot be put forth by either HTIL or the Petitioner.
103. With regard to third proposition, Mr. M. Parasaran, the Additional Solicitor General
of India, states that Section 195 and the impugned show cause notice are not extra
territorial in their operations and he also made following submissions;
a. The Indian Constitution vests plenary powers on the Union to enact legislations having
both territorial and extra territorial operation (See Article 245(2) and the municipal courts
cannot strike down legislation as unconstitutional on the ground that they are extra
territorial in operation. In this case, he referred to the case of Electronics Corporation of
India vs. Commissioner of Income Tax (1990) 183 ITR 43.
b. Section 1(2) of the Income Tax Act provides that the Act extends to the "whole of
India". The "whole of India" is used in contradiction to ‘a part of India’ and not to outside
India. Several other enactments which are made applicable to only certain territories in
India are specifically not made applicable to some States like Jammu & Kashmir. It is not
the case of the Revenue that the Income Tax Act applied to territories outside India.
However, that does not mean that non-residents cannot be taxed under the Income Tax
Act in India, if some source of income arises or accrues or is deemed to arise or accrue to
them in India or if they acquire a capital asset situate in India, directly or indirectly.
Therefore, the principle of extra territorially would ex facie be inapplicable on inapposite.
c. As mentioned earlier, the Income Tax is levied on a twin basis (a) On a
resident/domicile basis and (b) on the source of income which accrues or arises in India
or is deemed to arise or accrue in India. If any person, by virtue of his residence or source
of income falls within the wide net cast by the Income Tax Act through the "whole of
India" and if there is a nexus, then all the provisions of the Income Tax Act would apply.
d. Section 1(2) cannot be read in isolation and has necessarily to be read with other
provisions of the Act and in particular sections 4(1), 42), 5,9, and a host of other relevant
provisions including the machinery provisions like those contained in section 173, 195
and other provisions. The reference to other enactments such as FERA, FEMA, Indian
Official Secrets Act, which specifically provide for the applicability of those Acts to
persons or entities who are Indian citizens cannot be compared with the provisions of the
Income Tax Act. Those Acts deal with the various acts of omissions and commissions i.e.
conduct of persons or entities in India as well as outside India. The Indian Income Tax
Act on the other hand is concerned with either residence of the person in India or the
source of income or the economic activity which has to be carried out in India. Further,
the meaning of words used in one section of the IT Act itself, cannot be used to interpret
the meaning of words used in another section of the same Act, since the words used
derive their meaning from the context in which they are used. (1997) 237 ITR 17 (SC).
e. Merely because non-residents are subject to Indian Income Tax act for transactions
entered into outside India if the transaction has a clear nexus to income or property or
asset in India, the provisions cannot be said to be extra territorial. In this behalf he relied
on Pannalal Nandlal Bhandari vs. CIT (1961) 41 ITR 76 (SC).
f. Mr.Parasaran also referred to a speech of the United States Attorney General Griffen
Bell to the Law Council of Australia on 17th July,1978 in the book titled ‘Extra
Territorial Jurisdiction by A.V.Lowe as well as the ‘Effects Doctrine’, which is already
referred in proposition No.2.
g. Section 195 applies to all payments, which wholly or partly represent sum chargeable
to tax. Once the income is chargeable, the nexus will exist both with regard to the payee
and the payer. The expression any ‘person’ used in Section 195 is only to be given a plain
or literal meaning as defined in the Income Tax Act. Section 2(37) read with sections
2(17) and 2(23A) defines a ‘person’ to include a foreign company. Secondly, Section 195
being a machinery provision cannot be strictly construed like a charging section and the
literal construction of a machinery provision is a rule as opposed to strict construction of
a charging section in tax jurisprudence. Mr.Parasaran relied on the following judgments
of the Hon’ble Supreme Court in the case of:
i. Gursahai Vs. Commissioner of Income Tax AIR 1963 SC 1062
ii. Commissioner of Income Tax Vs. National Taj Traders AIR 1980 SC 485
iii. Mahim Patram Pvt. Ltd. Vs. Union of India 2007 (3) SCC 668
h. While deciding the chargeability or construing Section 195 of the Income Tax Act, in
the respectful submission of the Revenue, neither the payment nor the residential status of
the payer or the payee are relevant. The only consideration is whether the transaction in
question is chargeable to tax in India in the light of the principles aforementioned.
Whenever a restrictive meaning has been sought to be given to the expression ‘person’
under the Income Tax Act, the legislature has so provided it clearly and unambiguously
in various other parts of the Income Tax Act (Sections 194,194C,194-I, 196A, 196B, 19C
refer to Annexure A).
Mr.Parasaran submitted that a charging provision cannot be defeated or rendered futile by
reading down the machinery provision so as to ineffectuate the charging section. Such a
submission is impermissible and misconceived. The lack of machinery for enforcement
cannot be a valid ground for holding that law itself is not valid or alterantively that the
law is unworkable or that the provisions should be read down. It is further submitted that
even the Petitioner had a nexus with India by reason of factors already set out its equity
held in Bharti Airtel.
i. The moment the Petitioner signed the agreement to acquire interests in India on 11th
February, 2007, it automatically acquired nexus to a source of income in India and
significantly, the said agreement was conditional upon the approval of the Indian
regulatory authorities, only after the grant of which, the payment was made for acquiring
Indian interest. Therefore, the nexus was clearly established even before the payment was
made on 8th May,2007.
j. It is not as though the FIPB approval was not required as stated by the Petitioner. The
FIPB approval is mandatory even as per Petitioner’s own case, whereby they have
reserved the right to cancel the agreement in case the FIPB does not grant approval (page
272) and the said terms have been acted upon and is a binding document. In terms of the
FIPB approval, the Petitioner is bound to comply with all Indian laws including Indian
Income Tax Act. It is respectfully submitted that the principle of reading down a statute
would be ‘inapplicable in the context of Section 195 and the expression any ‘person’
shall include a ‘non resident’. There is no ambiguity or conflict between the said
expressions with any other provision. Further the virus of Section 195 is also not under
challenge and therefore there is no occasion for reading down Section 195.
k. It is submitted that the concept of chargeability and enforceability are different
concepts and mere difficulty in compliance with the statute would not be a ground to
avoid the compliance of the statute by any person. Mr.Parasaran relied on the decision in
the case of 1997 228 ITR 487 (AAR) In Re Advance Ruling P.No.13 of 1995 Vs.
Respondent (ruling of question No.12). The Deductor of Tax at Source is only a tentative
deduction and it does not cause any prejudice to the person who is responsible to deduct
tax within the moneys payable to deductor. No prejudice is caused either to the deductor
or to the deductee at that stage.
i. Aggarwal Chamber of Commerce Ltd. Vs. Ganpat Rai Hira Lal (SC) (1958) 33 IR 245;
ii. Commissioner of Income Tax Vs. Vijay Ship Breaking Corporation (2003) 261 ITR
113 (Guj.)
iii. Transmission Corporation of A.P.Ltd. & Anr. Vs. Commissioner of Income Tax
(1999) 239 ITR 587 (SC).
104. Mr.Parasaran submitted that the liability under section 195 does not depend upon the
outcome of the assessment proceedings and there cannot be one set of rules for a non
resident and another set of rules for residents, on the ground of any administrative
inconvenience. In any event to expand the horizons of international trade and commerce,
the concept of national boundaries are becoming redundant and nations are coming
together in assisting each other in collection of taxes for their mutual benefit. The
argument that the scheme qua non resident is impracticable cannot be accepted.
105. With regard to fourth proposition, Mr.Parasaran submitted that the Petitioners are
Assessees in default under Section 201 read with Section 195 of the Act and made his
submissions as under;
i) Section 4(1) creates a charge of tax on the total income of an assessee. Section 4(2)
provides of recovery of such tax by way of tax deduction at source or payment of
advance tax in accordance with the provisions contained in the Act. if there is no
provision for tax deduction in respect of certain sources of income there will be no TDS
on such income and recovery will have to be made through other modes of collection.
ii) Section 190(2) falls in Chapter XVII (dealing with TDS) and sub-section (2) thereof
provides that the provisions of the said Chapter shall not prejudice the charge of tax on
income under section 4(1) thereby ensuring that the assessee who is charged with the
liability of tax on his total income does not get away by taking defence of the provisions
contained in Chapter XVII, thus while section 4(2) empowers the enforcement of
machinery provisions for TDS, section 190(2) protects the charge created on the assessee
(deductee under section 4(1).
iii. In this backdrop, section 191 has always been a more express safety valve provided
by law to protect the right of collection of taxes from the assessee (deductee). The
provision never provided any slippery ground in the scheme of collection/recovery of
taxes to suggest that the deductor has the liberty of not deducting the tax and getting
away with his obligation by seeking recourse to stipulation of direct payment by the
assessee (deductee) under section 191. Once the assessee has made payment of tax
directly, the recovery of such tax again from the deductor cannot be made.
iv) Any explanation added to section can only explain only what is stated in the main
provision. The main provision of section 191 deals with only two situations (i) where
there is no provision for deduction of tax and (ii) where the tax has not been deducted. It
was beyond the scope of the Explanation to explain the third situation viz. where the tax
was deducted but not paid to the Central Government. Thus, the interpretation sought to
be placed by the Petitioner could not emanate from the Explanation to section 191.
v) The provisions of Sections 201 (and section 191) clearly apply to the Petitioners for
default of non deduction of tax under Section 195. The position is the same both prior to
and after the amendment of 2008. The income of HTIL paid by the Petitioner to HTIL
(without tax deduction) was income chargeable to tax in India and the Petitioner was
obliged to deduct tax under Section 4(2) read with Section 195.
vi) Having failed to deduct tax and having taken the risk of facing the consequences of
non deduction, the Petitioners cannot escape from such consequences.
vii) It is a submission of the Revenue that there has been no change in the substantive law
either by the amendments made by the Finance Act of 2002 or of 2003 or of 2008. A
comparative chart showing how these provisions (section 191, 200 and 201) stood at
different points of time is given as Annexure.
viii) However, the submission of the Petitioner was that in any event, even going by the
law as it stood pre or post 2008 Amendment, they could not be construed to be an
assessee in default by reason of the Explanation to section 191. The petitioner has argued
that the condition precedent before construing the Petitioner as an assessee n default is
that not only the deductor should have failed to deduct the tax but that the assessee
(deductee) should have also failed to pay the tax on the income arising to it. According to
the Petitioner, Section 191 provides a cumulative test and so long as the second condition
viz. the failure of the assessee (deductee) to pay the tax has not arisen, it cannot be
construed to be an assessee in default. This submission is unacceptable as the liability of
the deductor and deductee are not linked and inter dependent, as held in judicial
pronouncements. Even assuming without admitting that the petitioner’s submissions are
correct, even then condition stands fulfilled as the deductee has failed to pay taxes due
within the time prescribed under the Income Tax Act and has failed to make payments by
way of advance tax or by any other prescribe mode till date. The conditions of non
payment of the tax by the payee cannot be read in a manner to render it uncertain in point
of time so as to put the tax authorities in an unending wait. The situation cannot be
uncertain and the law cannot be interpreted in such a fashion.
ix) Further, on the date of the issuance of the show cause notice in the present case, "the
deductor’ admittedly had not paid its taxes and in any event the second condition which
the Petitioner says should be fulfilled, has nevertheless been fulfilled on the facts and in
circumstances of the present case.
x) It may also be of relevance to highlight that the provisions of Section 191 have been
held to be of no relevance for considering the applicability of the provisions of Section
201, which is independent in itself. The liability of the deductor is independent and
ambulatory in character.
At this Mr.Parasaran relied on Mittal Steels Ltd. Vs. ACIT 240 ITR 707 (Kant). . He also
relied on Traco Cables Co. Ltd. Vs. CIT 166 ITR 278 (Ker.)
xi) It is further submitted that one other significant aspect which requires notice is that
the Petitioner, on 08/05/2007, had withheld to itself, a sum of US $ 352 million under an
agreement with the deductee, HTIL, in stipulation of future consideration of certain
"potential claims". Normally, in an agreement of this type, which are essentially cross
border agreements, such liabilities are predetermined under the due diligence
determination test and possibly that could been the reason why certain material
agreements have been withheld from this Hon’ble Court. Non applicability of Section
201:
xii) the submission of the Petitioner that it is not an ‘assessee in default’ under Section
201, is incorrect. The submission of the Petitioner that Section 201, being a deeming
provision in a fiscal statue, should be construed strictly, with great respect, is also
fallacious. As already submitted above, Section 201 is only a machinery provision for
collection and the charging Section is Section 4(2). The charging Section has already
provided and created a duty and imposed an obligation on the Petitioner to deduct the tax
at the time of payment. Chapter XVII contains only the machinery provision for giving
effect to the charging provision. it is well settled by a catena of decisions of the Hon’ble
Supreme Court that while a provision in a tax statute containing a charging section should
be construed strictly the same principle would not apply to a machinery provision which
has to be construed liberally in order to effectuate the machinery provision. The
machinery provision should not be so construed to frustrate the operation of the charging
provision. The petitioner by its interpretation of Section 195 is only seeking to frustrate
the operation of the charging provision, which is impermissible in the eyes of law. The
judgments cited by the Petitioner with regard to the interpretation of Section 201 are
therefore, inapplicable and distinguishable in the light of the principles of case cited
above.
xiii) According to the Petitioner, the position pre 2008 was that Section 201 could be
applied only in two case viz., in respect of persons falling under Section 194 where there
was a failure to deduct tax on payment of deductor and (ii) under Section 200 where there
is a deduction of tax as required under any of the provisions in Chapter XVII but such tax
after such deduction, was not paid to the Central Government. Therefore, accordingly to
the Petitioner, where a person, who on the threshold, is guilty of a gross failure to deduct
or to withhold tax at the time of payment, could not be considered as an assessee in
default. In other words, according to the Petitioner, an interpretation should be placed so
as to consider the expression ‘assessee in default’, to apply to only persons falling under
Section 194 and to persons who deduct taxes but who do not remit it to the Government,
but not to apply to cases where the person fails to deduct tax. The Petitioner wants to
place a premium upon persons committing gross default in deducting tax at the time of
payment, in defiance of the charging provision and that can never be the intention of the
legislature.
xiv) The power of the Parliament to enact law retrospectively is not under challenge. The
law as amended by the Finance Act of 2008 holds the Petitioner as ‘assessee in default’
u/s. 201. It is respectfully submitted that under the amended provisions of section 201
(and explanation to section 191), the Petitioner is an ‘assessee in default’, for failing to
comply with the provisions of section 195 of the Act.
xv) The Petitioner, with respect, is seeking to put a fallacious interpretation to the words
employed in section 201 viz. "any such person referred to in section 200". The legislative
history of Chapter XVII would put at rest the speculative argument of the Petitioner.
xvi) Prior to the amendment made to the provision in 2002, the language read "if any
such person....... fails to deduct tax or after deduction fail to pay........". The word "such
person" referred necessarily to the person occurring in the immediately preceding section
viz. section 200. These words remained on the statute since the beginning of the
enactment in 1961 and there was no occasion to interpret the words differently. The
settled position was that the liability under Section 201 arose as soon as the person
committed the default on non-deduction of tax. At this juncture, Mr.Parasaran, the
learned Additional Solicitor General of India relied on the following judgments;
i. Yashpal Sahni Vs. Rekha Hajarnavis ACIT 293 ITR 539 (Bom)
ii. ACIT Vs. Om Prakash Gattani (Gau) 242 ITR 638
iii. Aggarwal Chamber of Commerce Ltd. Vs. Ganpat Rai Hiralal 22 ITR 245 (SC)
iv. CIT Vs. Meat Products of India Ltd. 244 ITR 1 (Ker)
v. Traco Cables Ltd. Vs. CIT (Ker) 166 ITR 278
xvii) If one were to substitute the words of section 200 after the word ‘person’ used in
section 201, the reading goes, "if any such person deducting the tax fails to deduct
tax........." and it would not alter the effect. The "person" deducting the tax would
necessarily encompass the person obliged to deduct tax. Any other interpretation would
lead to absurd consequences and has to be avoided.
xviii) Thus, both under the pre-amended provisions of sections 201 and 199 and post the
amendment made in 2002 or 2003, the Petitioner is liable to be treated as assessee in
default under Section 201.
xix) The provisions of Section 191 and 201 continue on the statute from the 1922 Act.
The settled position of law has all along been that where the payer (of income) fails to
deduct or after deduction fails to pay such tax to the Central Government, he shall be
treated as an assessee in default in respect of such tax. This was despite the fact that
Section 191 remained on the statute but its scope was limited to protect the interest of
revenue and ensure the collection from the assessee directly as well without even diluting
the rigour of section 201. In this behalf Mr.Parasaran relied on the judgment of our High
Court in the case of Yashpal Sahni Vs. Rekha Hajarnavis ACIT 293 ITR 539 (Bom).
xx) In the year 2002, Section 192 (1A) was inserted in the Income Tax Act. Certain nonmonetary
payments in the form of perquisites by employers became taxable in the hands
of employees and it was not possible to deduct tax from such income. The option was
therefore, given to the employers to make payment of tax on their own without any
deduction of tax. The Revenue wishes to place specific emphasis on the expression ‘make
direct payment of tax without deduction’, as that introduced a third category of payment
of tax. This led to insertion of new Section (1A) in Section 192 w.e.f. 01/06/2002, to
ensure that employers make such payments within the stipulated time and sub Section (2)
was added to Section 200. As a direct consequence, Section 201 was amended to insert
the words ‘referred to in Section 200’ as without the said amendment, Section 201 would
not have covered cases of payment of tax as envisaged in Section 200(2) and would have
covered only cases of failure to deduct or failure to pay after deduction and not failure to
pay without deduction, like the one done by employers. hence, to cover all possible
situations, reference to section 200 was made in Section 201. the notes on clauses and
explanatory memorandum to the Finance Act clearly stated that the amendments in
Section 200 and 201 were consequential in nature.
xxi. No substantive change was made in Section 201 by the Finance Act of 2002. Neither
the language employed in the Statute by the amendment nor other aids of construction
ever suggest any change in the substantive law. Reference to ‘referred to in Section 200",
meant the persons mentioned in that section and not their acts of omission or
commission.
xxii. In the meantime, the ITAT, Mumbai took the view in case of Associated Cement
Co.Ltd. Vs. ITO, TDS (2000) 74 ITD 369 (Mum), that where deductor had failed to
deduct the tax, the recovery under Section 201 could not be made from him in view of the
provisions of Section 191. Since the order was likely to be followed by the other
Coordinate Benches generating a spate of litigation, Parliament took the task of clarifying
the position by adding Explanation to section 191. The fact that the amendment was
clarificatory was stated in the statute itself through the opening words "for the removal of
doubts". The notes on clauses and explanatory memorandum reiterated the same position.
xxiii) Any explanation added to the section can only explain what is stated in the main
provision. The main provision of Section 191 deals with only two situations (i) where
there is no provision of deduction of tax and (ii) where the tax has not been deducted. It
could never have been the intention of the parliament to add an explanation that would
travel beyond the scope of the main provision by adding a third situation viz., where the
tax was deducted but not paid to the Central Government.
xxiv) The Explanation used the same language as was employed in section 201 by the
amendment of 2002 i.e. "referred to in Section 200". Here also the reference was to
persons required to deduct and pay the tax under various provisions of the chapter and
not merely to persons who made the deduction but did not make the payment. "persons
referred to in Section 200" cannot be interpreted to have a restrictive meaning as it would
lead to absurd consequences.
xxv) The tax deduction at source, from the very beginning, has been a effective took in
timely collection of taxes. Any interpretation to suggest that the recovery of tax cannot be
made in the event of non-deduction from the deductor, renders the charging provisions
ineffective and unworkable.
xxvi) if the submission of the Petitioner is accepted, only a company and its Principal
Officer can be brought within the ambit of Section 201 (or 191) for failure to deduct tax
under Section 194, while all other classes of deductors (which are as many as 19 in
number for different sources of income) shall fall in the ambit of the Section 201 only if
they have deducted the tax but failed to pay it to the Government. This interpretation is
not only illogical but would amount to discriminating against the same class of persons
and should, therefore, not be accepted.
xxvii) The provisions of Section 201 clearly stipulate default of two kinds (i) failure to
deduct tax or (ii) after deduction failure to pay the tax. The proposition of the Petitioner
would render vital words of the provision "fails to deduct tax" used in Section 201
therefore such an interpretation has to be avoided.
REJOINDER OF THE PETITIONER
106. The learned Senior Counsel Mr.Chagla appearing on behalf of the Petitioner
submitted the rejoinder to the arguments urged by the Respondents.
Mr.Chagla submitted that the Petitioner reiterates all submissions and contentions in
propositions I to IV and all submissions and contentions of the Respondents to the
contrary are denied.
107. In reply to the Petitioner’s submissions, the Respondents have submitted that;
i) the writ petition is not maintainable as it purports to challenge a show cause notice and
the discretion under Article 226 should not be exercised.
50 -
ii) the transaction of sale of the share capital of CGP Investment (Holdings) Ltd. (CGP)
would give rise to a charge to tax in India.
iii) the provisions of section 195 of the Income Tax Act, 1961 (the Act) and the
impugned show cause notice are not extra-territorial in their operation;
iv) the Petitioner would be an assessee in default even in accordance with the language of
section 201 prior to the amendments made by the Finance Act,2008; and
v) the amendments made by the Finance Act,2008 are not violative of Article 14 of the
Constitution.
Rejoinder to submission (i) of the Respondents
108. It is submitted by the learned Senior Counsel for the Petitioner, that having regard to
the submissions already made in the course of the hearing, this is a fit case for the
exercise of jurisdiction under Article 226 of the Constitution of India. It is submitted that
it is now well settled, and even the decisions relied upon by the Respondents support the
contention that if the High Court is satisfied that the show cause notice was totally non
est in the eye of law for absolute want of jurisdiction a writ petition could be entertained.
In fact the judgment of the Constitution Bench of the Hon’ble Supreme Court in Calcutta
Discount Company Vs. Income Tax Officer (AIR 1961 SC 372) Pages 379-380), clearly
establishes that the High Court would have the power to issue an appropriate writ
prohibiting an executive authority from acting without jurisdiction and where the action
of an executive authority acting without jurisdiction subjects or is likely to subject a
person to lengthy proceedings and unnecessary harassment the High Court will issue
appropriate orders or directions to prevent such con sequences.
109. The learned Counsel Mr.Chagla for the Petitioner submits that before an order under
Section 201 of the Act (prior to the 2008 amendments thereto) could be passed for an
illegal failure to comply with the provision of section 195 of the Act certain jurisdictional
conditions have to be complied with viz;
a. the payment has to be made by a person who is either a resident or a non-resident who
has a presence in India;
b. there has to be income which is chargeable to tax in India that is earned by a nonresident;
c. the recipient has to have failed to pay the tax due on such income; and
d. the payer has to have deducted tax but failed to pay it over the Government.
As none of these conditions have been fulfilled it is clear that Respondent NO.2 is
purporting to act without jurisdiction and hence an appropriate writ ought to be issued.
Even after the 2008 amendments to Sections 191 and 201 of the Act, the show cause
notice is without jurisdiction as conditions (a) to (c) continue to be applicable and the
same have not been fulfilled.
110. Further, in any event, as the petitioner is urging that the provisions of section 195 of
the Act as sought to be interpreted by the Respondents would be violative of Article 14
and the Petitioner is also challenging the validity of the retrospective amendments
inserted by the Finance Act, 2008 in sections 191 and 201 of the Act, the writ petition is
clearly maintainable as it would not be open to the Petitioner to challenge the vires of the
aforesaid provisions in the course of the regular assessment proceedings.
111. The argument that the Petitioner has an efficacious remedy inasmuch as it could
have approached the Assessing Officer under section 195(2) or under section 197 of the
Act or an application could have been furnished to the Authority for Advance Ruling has
no relevance in the present situation. These alternative (assuming that they were
efficacious) remedies may have been availed of it there was an obligation to deduct tax at
source but as according to the Petitioner it was not obliged to deduct tax at source, the
question of invoking one of these remedies does not arise. In any event the failure to opt
for such an alternative would not enable the Respondents to urge that the Petitioner
should be precluded from invoking jurisdiction under Article 226 at this stage. Availing
of an alternative remedy is not a condition precedent to invoking the writ jurisdiction of
this Hon’ble court.
112. It was repeatedly argued that the Petitioner has not produced vital documents that
are crucial to the determination of the issue of chargeability to tax in India of the sum
paid by the Petitioner to Hutchison Telecommunications International (Cayman)
Holdings Ltd. and, therefore, this Hon’ble Court should refuse to exercise its discretion
under Article 226. It is submitted that as rule has already been issued, albeit subject to the
issue of maintainability of the writ Petition, the question of the exercise of discretion by
this Hon’ble Court to entertain the writ petition could not be disputed at this stage. There
is a distinction in law between the exercise of discretion by a Court to entertain a Writ
Petition and the maintainability of a Writ Petition. Both are areas which would have to be
gone into at the threshold itself i.e. when the rule is issued and, hence, it is not open to the
Respondent to urge at this belated stage that this Hon’ble court should not exercise its
discretion to quash an illegal assumption of jurisdiction.
113. Without prejudice to the aforesaid it is submitted that the Petitioner has not
suppressed any vital documents from this Hon’ble Court, as alleged or at all. It was
argued that the Petitioner has not produced either before the Revenue authorities in the
reply to the show cause notice or before this Hon’ble court the agreement dated 11th
February, 2007 which spells out the terms and conditions on which the sale of the share
capital of CGP and the loan interest are made. The Petitioner submits that as according to
it Respondent No.2 was acting without any jurisdiction there was no question of
furnishing any document to Respondent No.2 in the course of the proceedings initiated by
him lest it be urged that by doing so the Petitioner has acquiesced to his jurisdiction. As
regards the argument that the said agreement has not been produced in this Hon’ble
Court, the petitioner submits that in paragraph 3(a) of the Petitioner, the agreement is
specifically referred to and the Petitioner has craved leave to refer to and rely upon the
same. If, according to the Respondents, the said agreement was vital to the determination
of any issue they ought to have sought inspection of the same in the course of the
proceedings and the Petitioner would have offered inspection and/or copies of the same
before the present Division Bench as also the Division Bench which issued rule in the
Writ Petition, Counsel for the petitioner offered to furnish copies of the agreement dated
11th February,2007 to the Court and the Respondents if a request for the same was made
by the Respondents in the present proceedings before this Hon’ble Court. To date no such
request has been made in the proceedings before this Hon’ble court inspite of the fact that
the Petitioner has repeatedly drawn the attention of the Respondents to this course of
action. Therefore, it is not open to the Respondents to urge that the Petitioner has
suppressed any documents or that this Hon’ble Court should draw an adverse inference
against the Petitioner as a consequence thereof.
114. Further, the argument that the challenge to the constitutional validity of the
amendments made to sections 191 and 201 of the Act by the Finance Act, 2008 is not
maintainable in the absence of any facts which are pleaded and proved by evidence in the
form of documents on record, is unsustainable. The only fact required to be pleaded and
proved in the present case to entitle the Petitioner to challenge the constitutional validity
of the 2008 amendments is the issuance of a show cause notice by Respondent No.2
purporting to treat the Petitioner as an assessee in default under Section 201 of the Act.
The issuance of the show cause notice dated 19th September, 2007 is admitted and the
same is annexed to the Writ Petition as Exhibit-"E". . With regard to the third reply of the
Respondents, the learned Senior Counsel for the Petitioner submits, that;
115. It is submitted that submission (iii) above deals with the Petitioner’s case in respect
of section 195 of the Act. This case of the Petitioner is a stand-alone argument, in the
sense that it assumes that the gains accruing as a consequence of the transaction is
chargeable to tax, but nevertheless, there is no obligation to withhold tax under section
195 of the Act. The Petitioner, accordingly, proposes to deal with submission (iii) first.
116. The Petitioner submits that the Respondents have in their Proposition 3 failed to
appreciate the exact scope of the Petitioner’s argument regarding extra-territorial
operation of Section 195 of the Act and consequently failed to answer the same.
117. What the Petitioner has contended was that although Section 195 of the Act casts an
obligation on a "person" to deduct tax at source when making a payment to a nonresident
of a sum which is chargeable to tax in India and the term "person" as defined in
Section 2(31) of the Act would take within its ambit a foreign company like the
Petitioner, nevertheless, one must give a contextual interpretation to the term "person" in
section 195 of the Act. This particularly in view of the presumption or rule of
construction that Parliament does not intend to exceed its territorial jurisdiction or violate
the rules of international law, unless the language of the provision permits only one
construction which is to the contrary. This presumption or rule of construction would
apply more so in the case of section 195 of the Act where a default thereunder entails
penal consequences. On an application of this contextual interpretation the obligation to
deduct tax at source would not extend to a non-resident having no presence in India. It
was submitted that the term "person" must, in its contextual interpretation, be confined to
a person resident in India or a person who has a presence in India as the law would not
contemplate that a person who has no presence in India would be subject to the various
procedural requirements that have to be complied with in India by a person deducting tax
at source such as application for a Tax Deduction Account Number, issuance of
certificates, filing of quarterly and annual returns etc.
118. All that the Respondents have urged in paragraph 6 is that neither the payments nor
the residential status of the payer or the payee are relevant; and that where a restrictive
meaning has been sought to be given to the meaning of the expression "person", the
Legislature has provided so clearly and unambiguously in various parts of the Act. In
other words, the Respondents urge that this Hon’ble Court should prefer the statutory
definition in preference to the contextual interpretation of the expression "person". In so
contending, the Respondents have relied only upon their ipse dixit and have ignored the
judgment cited by the Petitioner in this regard.
119. Mr.Chagla for the Petitioner submitted that the Respondents have completely
ignored the decision of the Hon’ble Supreme Court in the case of Kapurchand V. Tax
Recovery Officer (AIR 1969 SC 682), where, in the absence of any provision by the
Legislature in this regard, the Court preferred a restricted contextual interpretation of the
very word "person" to the wider statutory definition thereof in Section 2(31) of the Act. It
is submitted that the absurdity of reading "person" in the manner sought to be canvassed
by the Respondents has already been demonstrated and it was pointed out how such an
interpretation would render several provisions of the Act unworkable, and accordingly
the expression, as used in section 195 of the Act, must be construed in the context in
which it appears, and so construed cannot include within its scope an entity like the
Petitioner, i.e. a non-resident having no presence in India.
120. In support of its contention that the requirement to deduct tax at source was not
envisaged when a payment is made by one non-resident to another outside India, the
learned Senior Counsel for the Petitioner has relied upon the judgment of the House of
Lords in Clark Vs. Oceanic Contractors Inc (1983) 1 ALL ER 133. This judgment too has
not been dealt with by the Respondent except for referring to a subsequent judgment of
the Court of Appeal in Paramount Airways Ltd (1993) Ch.223, which judgment reiterates
the principle enunciated by the House of Lords in Clark. While the judgment of the
House of Lords is not binding on this Hon’ble court, if certainly has great persuasive
value, more so when the House of Lords has construed provisions of the English statute
which were in pari materia with section 195 of the Act and there is no judgment of an
Indian Court in this regard.
121. The Petitioner also relied upon the Department of Revenue’s Income Tax Manual
referred to in the Commentary on "The Law of Income Tax in India" by V.S. Sundaram,
which clarified that there was no obligation to deduct tax at source under the Indian
Income-Tax Act, 1922 when payments were made outside British India. The Petitioner
also relied upon the authoritative pronouncement in "The Law and Practice of Income
Tax" by Kanga and Palkhivala which clearly states that section 195 of the Act does not
apply to payments made outside India by one foreigner to another.
122. Mr.Chagla submitted that the Respondents have failed to deal with the above
interpretation supplied by leading commentators and have not relied upon any binding
precedent to the contrary. The Respondents have relied upon a ruling of the Authority for
Advance Ruling reported in 228 ITR 487 which ruling would have no precedential value
as section 245S of the Act makes it clear that the ruling has a binding effect only inter
parties and may only be of persuasive value as observed by the Supreme Court in Union
of India Vs. Azadi Bachao Andolan (2004) 10 SCC 1 page 43. It is further submitted that
in the case before the AAR the non-resident payer was required to maintain two offices in
India to supervise the execution of the contract. As such, admittedly, it had a presence in
India. In the present case the Petitioner is a non-resident having no presence in India at
the time when it entered into the Agreement for purchase of the share capital of CGp. The
only "nexus" it had with India was that it owned 5.61% of the equity share capital in an
Indian company and a mere financial investment in an Indian company would not
constitute a "presence", taxable or otherwise, which would give rise to an obligation to
deduct tax at source in terms of section 195 of the Act. Neither the signing of the
agreement on 11th February, 2007 nor the Foreign Investment Promotion Board (FIPB)
approval is indicative of any nexus with, or constitutes any presence of the Petitioner in
India. When the annual inflow of foreign investment has reached approximately US$ 28
billion, it would be absurd to contend that each and every financial investor has a
presence in India.
123. An application under section 197 of the Act sought to be relied on by the
Respondents (which was not referred to in any affidavit filed by the Respondents) is
totally irrelevant and misplaced as the said application was not made by the Petitioner but
another company in respect of transfer of shares in an Indian company, and not a foreign
company. The adjustment in the consideration by way of a "Retention Amount" of
approximately US$ 352 million was not on account of any potential tax liability as falsely
contended by the Respondents. When the Respondent allege a tax liability of around
US$2 billion it is incomprehensible that the Petitioner would retain such a negligible
amount towards such potential tax liability.
124. It is further submitted that the reply proceeds on an erroneous presumption that the
Petitioner has not challenged the vires of section 195 of the Act and, therefore, there can
be no question of "reading down" the said provision, when in fact the same is the subject
matter of Ground (g) at page 30 of the Petition as well as prayer (d). It is submitted in the
petition that if the interpretation placed by the Petitioner upon section 195 of the Act is
not accepted, then the provisions would be violative of Article 14 inasmuch as two
dissimilar classes of people would be treated similarly. The further submission that
section 195 of the Act is only a machinery provision and, therefore, the rules of strict
construction do not apply, overlooks the position that non-compliance with section 195 of
the Act attracts penal consequences and ought, on that account, to be construed strictly
and in a manner that avoids the penalty, if permissible. . In Rejoinder to the submission
(ii) of the Respondents, the learned Senior Counsel for the Petitioner states as under;
125. It is an admitted position that the payee would be chargeable to tax in India only if
income is deemed to accrue or arise to it in India as a consequence of the transfer of a
capital asset situated in India. It is also accepted by the learned Additional Solicitor
General on behalf of the Respondents that the argument that income has arisen through or
from a business connection or through a property or a source of income in India is
tenuous and accordingly was not pressed, and, therefore, it is proposed to rejoin only to
the sole argument that was urged viz., that income has accrued or arisen through or from
the transfer of a capital asset situated in India.
126. Mr. Chagla for the Petitioner contended that the Respondents accept that if it was a
simple sale of share capital of a foreign company there would have been no obligation to
deduct tax at source as the amount would not be chargeable to Tax in India even though
the price at which such sale of the share capital takes place is determined having regard to
the value of certain assets in India. However, accordingly to the Respondents, the present
is a case of a transfer of a valuable property/asset in India. The Respondents, however,
have not categorically asserted as to what is the specific asset situated in India which
stands transferred to the Petitioner. According to the Respondents what is transferred is
the interest, tangible and intangible, in Indian operating companies of the "Hutchison
Group" in favour of the petitioner, a nebulous term to say the least. It is submitted that the
only capital asset transferred is the entire share capital of CGP. This capital asset
admittedly was situated outside India. As a consequence of the transfer of this capital
asset the Petitioner has acquired indirect control over companies of which CGP or its
subsidiaries were a shareholder, including Hutchison Essar Ltd. (now Vodafone Essar
Ltd.) and its subsidiaries. However, there has been no change in or transfer of the
shareholding of any of the Indian companies or of the controlling interest (assuming
while denying that the same is an intangible asset existing independent of shareholding)
of the Indian companies inasmuch as the controlling interest of the Indian companies
continue to remain vested in its shareholders and exercised by them. Therefore, it is
submitted that there is no transfer of a capital asset in India. The Respondents have not
replied to the Petitioner’s submissions and authorities relied upon in Proposition IV that
"controlling interest" is but an incidence of shareholding and is inseparable from the
share.
127. There may be an indirect transfer of the controlling interest in the Indian companies
as a consequence of the aforesaid transfer of share capital of CGP outside India, but such
indirect transfer would not come within the scope of section 9(1)(i) of the Act which,
being a charging provision creating a legal fiction, must be strictly construed. The
Respondents have not replied to the Petitioner’s submissions in this regard contained in
Proposition IV and the Respondent’s entire argument on chargeability is based on the
erroneous legal premise that an indirect transfer of a capital asset in India attracts
chargeability under section 9(1)(i) of the Act. The Respondents’ reliance on the
application to the FIPB is inapposite as the new policy for Foreign Direct Investment in
India, unlike section 9(1)(i) of the Act,takes into account both direct and indirect holding
(in contrast to the earlier policy) as highlighted in paragraph 36 of the Respondents’
affidavit filed on 19th June,2008.
128. To meet the absurdity of contending that any indirect interest in an Indian company
(e.g. the purchase of 1000 shares of Coca Cola Inc. on the New York stock exchange,
which shares would naturally have the underlying value of the Indian subsidiary) would
amount to a capital asset in India, it was contended that it was only "controlling interest"
that would be considered a "capital asset". This contention, apart from what has been
submitted above, would lead to the further absurdity that a non-resident would be entitled
to indirectly acquire 49.99% of the shares of an Indian company without there being any
chargeability to tax under section 9(1)(i) of the Act. In such a scenario, tax would be
chargeable only on the one share that would give such a non-resident control of the
Indian company.
129. The decisions relied upon by the Respondents with regard to "controlling interest"
are either cases where there was a transfer of a managing agency. The learned Senior
Counsel for the Petitioner relied on CIT Vs. Ram Narain Kapur & Co. Pvt. Ltd. 69 ITR
719 and Rama Narain & Sons Pvt. Ltd. Vs. CIT 41 ITR 534, which was recognized by
the Companies Act as a separate right by itself independent of the shares in such
company, or where the right of shareholders of a company to manage its affairs was taken
over by the Government, which case emphasize that "controlling interest" is an incidence
e of shareholding and can only be separated therefrom by express legislation. In this
behalf, the learned Senior Counsel for the Petitioner placed his reliance on the decision in
the case of CIT Vs. National Insurance Co. Ltd. 113 ITR 37 and Lakshmi Insurance Co.
Ltd. Vs. C.I.T. 80 ITR 575 and CIT Vs. New India Assurance Co.Ltd. 122 ITR 633.
None of these decisions support the proposition that the controlling interest in a company
is an asset independent of the shares.
130. The Respondents have relied upon the public statements made by Hutchison
Telecommunications International Ltd. (HTIL) and the Petitioner to their respective
shareholders and other regulatory authorities to contend that the Petitioner has acquired
67% of HTIL’s interest in the Indian operating companies. It is submitted that the
liability to pay tax in India is not dependent upon such statements or what may in
commercial parlance be regarded as having been acquired. The tax liability would have to
be determined based entirely on well recognized legal concepts and on the legal effect of
the transaction viz. the transfer of the share capital of a foreign company outside India.
131. It is submitted that there is no transfer of any of the telecom licenses or the goodwill
or any of the other assets of the Indian operating companies inasmuch as the telecom
licenses and all other assets continue to vest with the Indian operating companies. Under
the legal position as settled in Bacha F.Guzder Vs. C.I.T. AIR 1955 sc 74, the Petitioner
has acquired no interest of whatsoever nature in such telecom licenses or other assets.
This decision has not been dealt with by the Respondents in their reply. The Petitioner
has not acquired any assets in India. It is an admitted position that the share capital of
CGP (i.e. the capital asset) was transferred to the Petitioner outside India. The
Respondents cannot dispute this position and/or rely on authorities to contend that the
subject matter of transfer as contracted between the parties is not actually the share
capital of CGP, but assets situated in India and/or that the Petitioner’s choice of the mode
of transfer will not alter the nature or character of the asset allegedly transferred.
132. It was argued that there has been a transfer of a bundle of rights in India and for this
purpose several decisions were relied upon where the Courts have held that ’property’ is
a term of wide import. It is submitted that none of the decisions referred to is apposite
and hence they are not being dealt with individually. The question that this Hon’ble Court
has to consider is whether there has been a direct transfer of any capital asset in India,
and the reply thereto can only be in the negative.
133. The next plank of the Respondent’s argument was that the Petitioner has acquired
the Joint Venture interest of the Hutchison Group in Hutchison Essar Ltd. and it
subsidiaries. This argument is also fallacious. If the Respondents’ case was that the
Petitioner has stepped into the shoes of "Hutchison Group" by "Huthison Group" having
allegedly transferred its interest in the Joint Venture to the Petitioner, then, the question
of the Petitioner having entered into any fresh Shareholder’s Agreement with Essar
would not have arisen. In any event is submitted that as one is testing the validity of the
show cause notice and there has been no reference in the show cause notice to a transfer
of a Joint Venture interest, the question of going into it at this stage would not arise.
From the agreements relied on by the Respondents, it is evident that it is only the direct
shareholders of Hutchison Essar Ltd. who have a right to nominate the directors,
Chairman and CEO of Hutchison Essar Ltd.
134. The Petitioner submits that the reliance on the judgment of the Hon’ble Supreme
Court in the case of New Horizon Ltd. Vs. Union of India & Ors. (1995) 1 SCC 478 is
completely misplaced. In that case the issue before the Court was whether in determining
whether a bidder could qualify for a tender the experience of one of its shareholders
could be considered for complying with the requirement that "the tenderer should have
the experience in compiling, printing and supplying of telephone directories of large
telephone systems with the capacity of more than 50,000 lines." The observations of the
Court must be read having regard to this specific issue that it was called upon to consider.
The Court was not called upon to consider whether the rights of a "joint venture partner"
are a "capital asset" or whether such "partner" has any interest in the property of the joint
venture company. It is therefore submitted that this decision would have no application
when determining the taxability of an amount, more so when such taxability is dependent
upon a legal fiction.
135. It was urged that in effect the transaction has resulted in shares and all other interest
of the eight Indian companies that were controlled by HTIL "stood stapled with" the
share capital of CGP and, hence, there has been a transfer of such shares and other
interests as a consequence of the transfer of the share capital of CGP and in this regard
reliance was placed on certain decisions including that of the Company Law Board. It is
submitted that the ratio of these decisions does not aid in adjudicating the specific issue
that arises for consideration before this Hon’ble Court.
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136. The decision of the Company Law Board in Air Touch International (Mauritius)
Ltd. Vs. RPG Cellular Investments 121 Comp. Cases 647, (the propriety of citing the
same before this Hon’ble Court apart) involved the issue whether the disputes raised in
the Company Petition had arisen out of or in connection with the Shareholders
Agreement and whether there is any commonality of parties to the proceedings before the
Company Law Board and the Shareholders Agreement. It was held that the Petitioner in
that case could not escape a reference to arbitration in terms of the shareholders
agreement on the ground that certain Respondents to be Petition were not parties to the
said agreement, in view of the Petitioner’s own pleadings that such Respondents
constituted a single economic entity and were different limbs of one organization. The
observation of the Company law Board relied upon by the Respondents must, therefore,
be considered having regard to the background in which they were made. Likewise in
Samayanallur Power Investments Pvt. Ltd. Vs. Covanta Energy India (Balaji) Ltd. (130
Comp. Cases 21), the question that arose was whether the sale by a holding company of
its shares in a subsidiary company would invite the rights of preemption pursuant to a
shareholders agreement between the subsidiary and another shareholder. In view of the
claim by the holding company that the business carried on by the subsidiary was that of
the holding company, the Court was of the view that the holding company and the
subsidiary constituted a single economic unit. This was a case where the Court was of the
view that the Company was seeking to resile from its obligation under the shareholders
agreement by adopting a device. This decision has not considered the judgment of the
Division Bench of this Court in CDS Financial Services (Mauritius) Ltd. Vs. BPL
Communications Ltd. & Ors. 121 Comp. Cases 374 (relied on by the Respondents) which
rejected the contention that the business of the subsidiary is the business of the holding
company, and also held that the sale of shares cannot be equated with the sale of
undertaking or any part thereof.
137. In the present case, in response to a specific query from this Hon’ble Court it has
been categorically asserted by the learned Additional Solicitor General that it is not the
case of the Respondents that the transaction entered into by HTIL and the Petitioner is a
colourable device or that there has been any attempt at evasion of tax, and hence the
decision of the Madras High Court (referred to in the preceding paragraph) would also
not have any application. In view of the aforesaid assertion by the learned Additional
Solicitor General the decisions relied upon in the Respondent’s Proposition 2 with regard
to evasion of tax are not being dealt with.
138. Mr. Chagla, the learned Senior Counsel for the Petitioner submitted that the "effects
doctrine" is irrelevant and cannot be relied on in determining the incidence of taxation in
view of the well-settled principle of strict interpretation of a charging provision, the scope
of which cannot be expanded to cover presumed legislative intent. In order to bring a sum
to tax in India what has to be established by the Respondents is that there is a direct
transfer of a capital asset situated in India. There is no question of determining the
taxability of income based on the effect a transaction has or does not have in a particular
jurisdiction. Even assuming the transaction of purchase by the Petitioner of the share
capital of CGP has some effect in India, nevertheless, that would not give rise to a charge
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to tax in India based on such effect. Rejoinder to submissions (iv) and (v) of the
Respondents
139. In so far as Propositions 4 and 5 of the Respondent is concerned, it was submitted by
the Petitioner that an order under Section 201 of the Act could be passed against only two
classes of persons viz.
(a) in the case of a person referred to in section 200 of the Act i.e., either a person who
has deducted tax at source and is required to pay the tax to the Government or a person
who has failed to pay the tax borne by him in terms of section 192(1A) of the Act; or
(b) in a case where the person referred to in section 194 of the Act has failed to deduct
tax at source. As the Petitioner did not fall under either of these categories the question of
initiating proceedings under section 201 of the Act did not arise. The Respondent’s
argument is that this would not be a correct manner of interpreting section 201 of the Act
because a person who is guilty of a gross failure to deduct tax could not be considered as
an assessee in default whist a person who has deducted tax at source but not remitted it
(which according to the Respondents is a lesser default) would be so considered.
Accordingly, the Respondents contend that the Court should embark on an impermissible
exercise of adding words to section, which words were in fact added by the 2008
amendments. That apart, it is submitted that a person who has failed to deduct tax at
source, assuming that he was obliged to do so, would be visited with penal consequences
as provided for under section 271C of the Act but a person who has failed to pay over the
tax after deducting the same would be visited with prosecution as provided for in section
276B of the Act. It is thus apparent that a failure to remit tax deducted at source as
opposed to a failure to deduct tax at source is viewed by the Legislature as a far more
serious default.
140. The Petitioner submits that the Legislature has provided that if a person deducts tax
at source and fails to pay it over to the Government he should be proceeded against under
Section 201 of the Act and recovery of the tax be made from such person because under
section 205 of the Act the Revenue would be precluded from recovering such tax from
the recipient of the income. On the other hand if the payer has failed to deduct tax at
source there is no bar against the Revenue recovering it from the recipient, and in fact
section 191 of the Act provides that tax would be recovered directly from the assessee, as
he is the person primarily responsible for the payment of tax. Therefore, the assertion that
the Petitioner wants to place a premium upon a person committing a gross default is not
warranted.
141. The interpretation of section 201 of the Act by the Respondents is contrary to the
plain language of the section. The decisions relied upon by the Respondents in support by
this contention are cases which construed the provisions of section 201 of the Act as they
stood before the amendment of the Finance Act, 2002. Therefore, the same would not
enable the Respondents to urge that after the 2002 amendments made in section 201 of
the Act all persons who have failed to deduct tax at source could be proceeded against
under section 201 of the Act. In fact the decisions relied upon by the Respondents accept
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that the provisions of section 201 of the Act are penal provisions, and accordingly it is
submitted that they have to be strictly construed and, therefore, the argument of the
respondents that the rule of strict construction is inapplicable as they are merely
machinery or procedural provisions, is therefore misconceived.
142. It is submitted that the observation in the judgment of this Hon’ble Court in Yashpal
Sahni Vs. Rekha Harjanavis 293 ITR 539 is at the highest obiter and not binding, as is
ex-facie evident from the facts of the case and the question considered by the Court. It is
stated in the judgment that "the only question to be considered is, if the employer -
respondent No.6 has failed to deposit the tax deducted at source from the salary income
of the Petitioner to the credit of the Central Government, whether the Revenue can
recover the TDS amount with interest once again from the Petitioner? (emphasis
supplied). The Court ultimately upheld the contention of the assessee that no recovery
could be made from him in view of the clear mandate of section 205 of the Act. This
decision, therefore, in no manner whatsoever militates against the interpretation placed
by the Petitioner on the provisions of section 201 of the Act as they stood after its
amendment in 2002 but before the amendments made by the Finance Act,2008.
143. The argument that the amendment made in section 201 of the Act by the Finance
Act, 2002 was as a consequence of the amendments made in section 192(1A) and section
200(2) of the Act, and the same was only clarified by the 2008 amendment is
unsustainable. The amendments made in section 201 of the Act by the Finance Act, 2002
made it absolutely clear that proceedings under Section 201 of the Act could only be
taken against the two classes of persons referred to in paragraph 35 hereinbefore. On a
literal reading of these penal provisions, therefore, a person who has failed to deduct tax
at source as required in terms of a section other than section 194 of the Act could not be
proceeded against under section 201 of the Act. It was by the Finance Act, 2008 that
section 201 of the Act has been substantively amended, and the interpretation to the
contrary that has been urged by the Respondents in its reply is without any basis and
contrary to well-settled principles of construing a penal provision.
144. It is submitted that the Respondent’s interpretation of section 191 of the Act is also
fallacious. The Explanation to section 191 of the Act makes it clear that the Revenue can
proceed against the payer only after the assessee who actually receives the income fails to
pay the tax - a position reinforced by the 2008 amendments. Undoubtedly the obligation
to deduct tax at source is at a point of time prior to the assessee being obliged to pay the
tax in its own hands. Nevertheless, on a proper interpretation of the Act, it must follow
that the recovery from the payer can be enforced only after the Revenue has failed to
recover the tax from the recipient. If the contrary interpretation of the Respondents is to
be accepted it would leave a payer with no recourse against the payee unlike section 162
of the Act which specifically provides for a remedy if a person other than an assessee is
called upon to pay the tax of the assessee.
145. The argument of the Respondents that the payee in the present case has not paid its
advance tax and, therefore, it must be construed that the payee has failed to pay the tax
and hence it is open to the Revenue to proceed against the Petitioner is erroneous, and
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contrary to the earlier statement of the larned Additional Solicitor General to this Court
that no notice had been issued to the payee as the time for filing its return had not yet
expired. Assuming while denying that any tax is payable, it is submitted that when the
show cause notice was issued the time for payment of the advance tax had not expired.
Even as of now the time for filing a return has not expired and hence it could not be
stated that the payee has failed to pay such tax directly as contemplated in section 191 of
the Act so as to vest Respondent No.2 with jurisdiction to take proceedings against the
Petitioner under section 201 of the Act. It is submitted that proceedings under section 201
of the Act ought to be taken only after the assessee has failed to pay the tax. This is
because the primary obligation to pay tax is that of the recipient of the income. Assuming
the payer is required to, but does not deduct tax at source, then, logically, proceedings to
recover the tax from him should be taken only after the Revenue has established, at least
by an assessment order, that the amount paid is chargeable to tax in India, and the payee
has thereafter failed to pay the tax, as there is no mechanism available in the Act to
refund such tax to the payer if the payee subsequently does pay the tax. In the absence of
any such mechanism an interpretation should be placed on sections 191 and 201 of the
Act which make the provisions workable and it is only the interpretation canvassed by the
Petitioner that would have the desired effect.
146. The Petitioner submits that the argument of the Respondents that the Petitioner has
no vested rights and hence the "clarificatory" amendments made by the Finance Act 2008
are not violative of Article 14 is without any substance. It is submitted that as explained
hereinbefore on a plain construction of section 201 of the Act, as it stood before the 2008
amendments, no proceedings could be taken against the Petitioner to treat it as an
assessee in default. it is only by virtue of the amendments that Respondent No.2 may be
able to contend that a default under section 195 of the Act is now within the purview of
section 201 of the Act and, therefore, the Petitioner’s vested right has been affected and it
is imperative that this Court strike down the impugned amendments to the extent that
they operate retrospectively. The judgments relied on by the Petitioner in support of its
submission to strike down the impugned retrospective amendments of 2008 have not
been dealt with by the Respondents.
147. The arguments that section 201 of the Act is a procedural provision and, therefore,
the amendments made thereto can have retrospective effect is totally misconceived.
Section 201 of the Act empowers the Assessing Officer to treat a person as an assessee in
default thereby visiting such person with severe penal consequences viz., an obligation to
pay over the tax of another, a liability for interest, liability to penalty under section 221 of
the Act and a further liability to penalty under section 271C of the Act. Such a provision
imposing penalty/quasi-punishment cannot be enacted with retrospective effect, and the
same is unconstitutional. 148. It is therefore submitted by Mr. Chagla that this Court may
be pleased to quash the impugned notice and make the rule absolute with costs.
CONSIDERATION:
149. The main submission of Mr.Parasaran, the learned Additional Solicitor General of
India, is that the moment the Petitioner signed the agreement to acquire interests in India
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on 11th February, 2007, it automatically acquired a nexus to a source of income in India
and it is significant to note that the said agreement was conditional upon the approval of
the Indian regulatory authorities, and only after the grant of approval, the payment was
made for acquiring Indian interest. Therefore it is clear that the nexus was clearly
established even before the payment was made on 8th May, 2007.
150. In fact, it is Petitioner’s own case that the approval of FIPB was mandatory and the
petitioner had reserved the right to cancel the agreement in case the FIPB does not grant
approval. The above terms were acted upon in a binding document. In this context, it is
very vital note, that as per the terms of the FIPB approval, the Petitioner is bound to
comply with all Indian laws, including Indian Income Tax Act.
151. Like most other taxing jurisdictions, the Indian Income Tax Act follows the twin
basis for taxation, (i) based on residence or domicile and (ii) based on source of income.
While Indian residents are taxed on global income under Section 5(1), non-residents are
taxed only on the income, which has its source in India under Section 5(2). The nonresidents
should have either received or deemed to have received the income in India or
the income should have arisen or accrued in India or should be deemed to have accrued
or deemed to have arisen in India. The deeming provision is enumerated in section 9 of
the Income Tax Act. It is the submission of the Revenue that the income or capital gains
of HTIL is deemed to have accrued or arisen in India and therefore, it squarely falls
within the ambit of Section 9 and is hence chargeable to Income Tax.
152. Prima facie, HTIL, by reason of this transaction, has earned income liable for
Capital Gains Tax in India as the income was earned towards sole consideration of
transfer of its business/economic interests as a group, in favour of the Petitioner.
153. Under Section 9(1)(i), income is deemed to accrue or arise in India whether directly
or indirectly, through or from (a) business connection in India (b) property in India (c)
any asset (d) any source of income in India, and (e) through the transfer of a capital asset
situated in India.
154. The subject matter of the present transaction between the Petitioner and HTIL is
nothing but transfer of interests, tangible and intangible, in Indian companies of the
Hutch Group in favour of the Petitioner and not an innocuous acquisition of shares of
some Cayman Islands Company, M/s. CGP Investments (Holdings) Ltd.
155. In this context, it is vital to note the chronological sequence of events in the above
matter, as under:
. HTIL owned 67% interests in HEL (India) directly and indirectly;
. HEL was a joint venture company of the Hutch group (foreign investor) with the Essar
Group (Indian partner) and obtained Telecom license to provide cellular service in
different circles in India from November 1994. The existence of joint venture structure
between Hutchison group and the Essar Group in mobile telephony services is clearly
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stated, recognised and affirmed if one looks at the restated term sheet of dated 24th
August,2007. Term sheet dated 5th July,2003 and agreement dated 2nd May,2000.
. the Hutch group was controlling 8 companies in India and operating in joint venture
with Essar and others providing cellular service in India.
.22nd December, 2006: HTIL discloses that it had been approached by potential
interested parties regarding a possible sale of the Company’s interests in HEL group.
. January/February, 2007:
. It is reliably learnt that among several interested buyers two Groups, namely Reliance
and Hinduja also offered their bids and these interested buyers were asked to determine
the price of its’ interests by reference to the enterprise value of :134: Hutch Essar. . 11th
February,2007:
. Agreement between Petitioner and HTIL for acquisition of Indian interests of HTIL by
the Petitioner. . 12th February,2007:
. Petitioner’s disclosure to SEC, USA for acquisition of 67% stock of HTIL in HEL, for a
consideration of US$ 11.1 billion, which confirms the total enterprises value of US# 18.8
billion. . 20th February,2007:
. Circular of HTIL to its share holders that the Company was selling its 67% stock in
India for US$ 11.1 billion, based on an enterprise value of HEL of US/$ 18.8 billion and
was expected to realize an estimated ‘before tax gain’ of approximately US$ 9.6 billion
from the transaction.
. 20th February,2007:
. Petitioner’s application to the FIPB for approval of direct acquisition of 51.96% stock in
HEL. . 15th March,2007:
. Settlement agreement between HTIL and Essar Group disclosing HTIL’s agreement to
dispose off its "HTIL interests" to the Petitioner. "HTIL’s interests" has been defined as
HTIL’s direct and indirect equity, loan and other interests and rights in and related to
HEL, which HTIL has agreed to sell to the Petitioner.
. 27th March,2007.
. Petitioner files certain details with FIPB in reply to FIPB’s letter dated 22nd
March,2007.
. 7th May,2007
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. Conditional approval by the FIPB stipulating that there should be compliance and
observance of applicable laws and regulations of India, which would naturally include tax
obligations under Income Tax Act. . 8th May,2007:
. Petitioner enters into an agreement with HTIL to provide for the retention of US$ 352
million out of total consideration payable by it to HTIL to meet certain specific liabilities
which the Petitioner may incur for a period of up to 10 years.
. June/July,2007 . The names of 8 operating companies undergo change.
. 13th June,2007 :136:
. HTIL announces a special dividend of HK $ 6.75 per share or approximately US $
12.94 per ADS out of the proceeds from sale of its interests in HEL.
. 24th August,2007
. Restated term sheet entered in India between Petitioner and essar group, confirming
substitution of joint venture by the Petitioner in India and conferment of valuable rights
and interests on the Petitioner, including Tag along rights and the right of first refusal and
appointments of majority Directors.
156. VODAFONE AND ESSAR AGREE TO PARTNERSHIP TERMS:
. Vodafone and Essar have reached an agreement under which they will work to continue
the growth of Hutchison Essar Limited ("Hutchison Essar"), one of India’s leading
mobile operators. This follows Vodafone’s announcement on 11 February 2007 that it
had agreed to acquire Hutchison Telecommunications International Limited’s ("HTIL")
controlling interest in Hutchison Essar, in which Essar is and will continue to be a 33%
shareholder.
. The partners have agreed that Hutchison Essar will be renamed Vodafone Essar and, in
due course, that the business will market its products and services under the Vodafone
brand.
. With penetration levels of around 13%, both partners believe that there are substantial
growth opportunities in the Indian mobile telecommunications market. Vodafone is the
leading international mobile operator with an extensive range of products and services,
many of which are not currently available in India. Essar is a major industrial group with
a deep understanding of India and the Indian mobile telecommunications industry. With
these complementary strengths Vodafone and Essar plan to broaden Vodafone Essar’s
service offering and enable it to become the leader in the Indian mobile telephony
market.
. Commenting on the new partnership, Arun Sarin, Chief Executive of Vodafone said:
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. "I am delighted that Essar and Vodafone have agreed the terms of an ongoing
partnership. Essar has played a key role in transforming this business into a leading
Indian mobile operator. We look forward to leveraging this experience and working with
our partner as the company enters its next phase of growth in the attractive Indian
telecommunications market. We will be bringing the relevant range of Vodafone products
and services to the Indian consumer".
. Under the terms of the partnership, Vodafone will have operational control of Vodafone
Essar and Essar will have rights consistent with its shareholding, including proportionate
Board representation. Ravi Ruia will be appointed by Vodafone as Chairman of
Vodafone Essar and Arun Sarin will be appointed by Essar as Vice Chairman.
. Essar will have certain liquidity rights including, between the third and fourth
anniversaries of completion, and subject to regulatory requirements, an option to sell its
33% shareholding in Vodafone Essar to Vodafone for US$5 billion or an option to sell
between US$1 billion and US$5 billion worth of Vodafone Essar shares to Vodafone at
an independently appraised fair market trading value.
. Vodafone expects to complete the acquisition of HTIL’s interest in Hutchison Essar in
the coming weeks. 14th June, 2007/Annueal Report . Acquisition of Hutchison Essar: On
8 May 2007, the Group completed its acquisition of 100% of the share capital in CGP
Investments (Holdings) Limited ("CGP") for US$10.9 billion from Hutchison
Telecommunications International Limited. CGP owns a 51.95 indirect shareholding in
Hutchison Essar Limited ("Hutchison Essar"), a mobile telecommunications operator in
the Indian market.
. As part of its acquisition of CGP, Vodafone acquired a less than 50% equity interest in
Telecom Investments India Private Limited ("TII") and in Omega Telecom Holdings
Private Limited ("Omega"), which in turn have a 19.54% and 5.11% indirect
shareholding in Hutchison Essar.
. The Group was granted call options to acquire 100% of the shares in two companies
which together indirectly own the remaining shares of TII for, if the market equity value
of Hutchison Essar at the time of exercise is less than US$25 billion, an aggregate price
of US$431 million or, if the market equity value of Hutchison Essar at the time of
exercise is greater than US$25 billion, the fair market value of the shares as agreed
between the parties. The Group also has an option to acquire 100% of the shares in a third
company, which owns the remaining shares in Omega. In conjunction with the receipt of
these options, the Group also granted a put option to each of the shareholders of these
companies with identical pricing which, if exercised, would require Vodafone to
purchase 100% of the equity in the respective company. These options can only be
exercised in accordance with Indian law prevailing at the time of exercise.
. In conjunction with the acquisition, Vodafone assumed guarantees over US$450 million
and INR10 billion (Pound 21 million) of third party financing of :140: TII and Omega
and received investments in preference shares of TII and its subsidiaries amounting to
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INR 25 billion (Pound 292 million), which entitle the holder to a redemption premium of
approximately 13% per annum.
. Concurrently with the acquisition of CGP, the Group granted put options exercisable
between 8 May 2010 and 8 May 2011 to members of the Essar group of companies that
will allow the Essar group to sell its 33% shareholding in Hutchison Essar to the Group
for US$5 billion or to sell between US$1 billion and US$5 billion worth of Hutchison
Essar shares to the Group at an independently appraised fair market value. As with the
above call and put options, this put option can only be exercised in accordance with
Indian law prevailing at the time of exercise.
157. Under the aforesaid facts and circumstances, Revenue has made out a strong prima
facie case that the transaction entered upon by the Petitioner amounts to transfer of a
capital asset and not merely a transfer simplicitor of controlling interest ipso facto in a
corporate entity, especially in the light of the fact that the interest in Telecom License is
jointly held with the Essar Group complied with the use of Brand & Goodwill and noncomplete
rights given by HTIL. There is a right to enter into Telecom Business in India,
with a control premium.
158. It will be too simplistic to answer away all the above facts and circumstances, by a
submission of the Petitioner that what was transferred was only shares of an unknown
Caymon Island Company, which is a shell company and the same was not even
considered in the enterprise value of HEL.
159. The Petitioner themselves have not disputed that the transaction involves transfer of
controlling interest. If any transaction involves a transfer of controlling interest in a
company or a group of companies, such a transfer has to be viewed both from the point of
view of transferor and transferee. It is inconceivable as to how HTIL can transfer its
controlling interest in HEL without extinguishing its rights in the shares of the Indian
group and without which, a transferee cannot acquire a controlling interest. A divestment
or extinguishment of right, title or interest must necessarily precede the divestment of the
controlling interest and it would be impossible to dissociate one from the other and any
divestment by one of any interest of enormous value in shares of such high intensity
would certainly amount to acquisition of enduring benefit to the other, resulting in
acquisition of a capital asset in India. The transaction also results not only in
extinguishment of HTIL’s rights in HEL but relinquishment of its asset viz., its interest in
the Hutchison - Essar Group, so as to fall within the ambit of transfer as defined in
Section 2(47) of the Income Tax Act (qua the transferor).
160. It is clear from the various declarations made supra by HTIL, that the purpose of
transfer of its Interest in HEL was to enable the Petitioner to acquire controlling interest
in HEL by acquiring 67% direct and indirect equity and loan interest, held by HTIL
through its subsidiaries, in HEL and thus acquire the right to manage HEL by appointing
its own directors on the board. The object of the transaction in the present case was also
to enable the Petitioner to successfully pierce the Indian mobile market to enlarge its
global presence.
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161. Shares in themselves may be an asset but in some cases like the present one, shares
may be merely a mode or a vehicle to transfer some other asset(s). In the instant case, the
subject matter of transfer as contracted between the parties is not actually the shares of a
Cayman Island Company, but the assets (as stated supra) situated in India. The choice of
the Petitioner in selecting a particular mode of transfer of these right enumerated above
will not alter or determine the nature or character of the asset.
162. Prima facie, apart from the acquisition of controlling interest, the Petitioner has
acquired other interests and intangibles rights. The Petitioner accordingly became a
successor in interest in the joint venture between HTIL and the Essar group and became a
co-licensee with the Essar group to operate mobile telephony in India. The joint venture
by itself confers an enduring benefit to the Petitioner. Prima facie, the Petitioner has not
only become the successor in interest in that Joint Venture to HTIL, but also has acquired
a beneficial interest in the license granted by the Department of Telecommunications in
India to its group companies, now known as Vodafone Essar Limited.
163. It is an admitted fact that VEL (earlier HEL), a subsidiary of the Petitioner in which
the Petitioner has acquired 67% interest, was a group company of HTIL and now a group
company of the Petitioner. Any profit or gain which arose from the transfer of a group
company in India has to be regarded as a profit and gains of the entity or the company
which actually controls its, particularly when on facts, the flow of income or gain can be
established to such controlling company (HTIL). In the present case, by reason of the
transfer, the income accrued not to CGP, but to HTIL and was treated as profits of HTIL
and accordingly was distributed to the share holders of HTIL in Hong Kong at the rate of
Hong Kong $ 6.15 per share. Therefore, the recipient of the sale consideration was none
other than HTIL and this was a consequence of divestment of its Indian interests in
Hutchinson Essar Group, liable for capital gains.
164. The Petitioner themselves, by their various declarations supra, made it apparent and
clear that the purpose of their acquiring shares in GDP was to acquire the controlling
interest of 67% in HEL.
165. Another aspect to be noted is the American principle of "Effects Doctrine" which is
as follows:
. "Any state may impose liabilities, even upon persons not within its allegiance,
for conduct outside its borders that has consequences within its borders which the
state represents." In International Law 4th Edition by Malcolm N.Shaw at pages
483 to 490 and also Page 456, which reads as follows: "International law accepts
that a state may levy taxes against persons nor within the territory of that state, so
long as there is some kind of real link between the state and the proposed
taxpayer, whether it be, for example, nationality or domicile."
166. The above "Effects Doctrine" has been upheld and followed by our Hon’ble
Supreme Court in the case of Shyama Charan Agarwala & Sons Vs. Union of India
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(2002) 6 SCC 201. . In the above case, it was held that even if an agreement is executed
outside India or the parties to the agreement are not in India and the agreement may not
be registrable under Section 33 of the MRTP Act, being an outside agreement,
nevertheless, if there is a restrictive trade practice as a consequence of outside agreement
is carried out in India, then the Monopolies Restrictive Trade Practices Commission in
India will have jurisdiction. The above principle is reiterated in Man Roland
Druckimachinen AG Vs. Multicolour Offset Ltd. and Another (2004) 7 SCC 447.
167. The principle has been very well enunciated by Viscount Siminds in Collco
Dealings Ltd. Vs. Inland Revenue Commissioners 1961 (1) LL ER 762, especially page
Nos.763 and 765. Page 763 reads as under:
"These transactions, which might seem strange to those unversed in the devious
ways of tax avoidance, had their natural sequel in a claim for repayment of the tax
that had been deducted. It was this claim and its rejection that led to these
proceedings."
. The Learned House of Lords point out that such evasion transaction might seem strange
only to unversed in devious ways of tax avoidance. In the present is a case of tax evasion
and not tax avoidance. It may noted that the House of Lords rules in favour of the
Revenue and against the tax payer. . Page 765 reads as under:
"I am not sure on which of these high-sounding phrases the Appellant company
chiefly reliefs. But I would answer that neither comity nor rule of international
law can be invoked to prevent a sovereign state from taking what steps it thinks fit
to protect its own revenue laws from gross abuse or to save its on citizens from
unjust discrimination in favour of foreigners. To demand that the plain words of
the stature should be disregarded in order to do that very thing is an extravagance
to which this House will, I hope, give ear."
168. The very purpose of entering into agreements between the two foreigners is to
acquire the controlling interest which one foreign company held in the Indian company,
by other foreign company. This being the dominant purpose of the transaction, the
transaction would certainly be subject to municipal laws of India, including the Indian
Income Tax Act. The Petitioner has admitted that HTIL has transferred their 67%
interests in HEL qua their shareholders, qua the regulatory authorities in India (FIPB),
qua the statutory authorities in USA and Hong Kong and the Petitioner has also admitted
acquiring 67% held by HTIL in HEL. This being the case, a different stand cannot be
taken before the tax authorities in India and a different stand cannot be put forth by either
HTIL or the Petitioner.
169. We are also clearly of the view that the Petitioner has wilfully failed to produce the
primary/original agreement dated 11th February, 2007 and other prior and subsequent
agreements/documents entered into between the Petitioner and HTIL. In the absence of
all relevant agreements and documents, it will be impossible to appreciate the true nature
of the transaction.
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We agree with Mr.Parasaran, that in the absence of the said agreement and other relevant
documents, constitutional validity of Income Tax provisions cannot be gone into.
170. Under the aforesaid facts and circumstances, the Petitioner has not been able to
demonstrate the show cause notice to be totally non-est in the eyes of law for absolute
want of jurisdiction of the authority to even investigate into the facts, by issuing a show
cause notice. In this context, the following observations of the Hon’ble Supreme Court in
The Special Director & Anoter Vs. Mohd. Ghulam Ghouse & Anr. (2007) 120
Comp.Cases 467 (SC) would be relevant:
5. This Court in a large number of cases has deprecated the practice of the High
Courts entertaining writ petitions questioning legality of the show cause notices
stalling enquiries as proposed and retarding investigative process to find actual
facts with the participation and in the presence of the parties. Unless, the High
Court is satisfied that the show cause notice was totally non est in the eye of law
for absolute want of jurisdiction of the authority to even investigate into facts,
writ petitions should not be entertained for the mere asking and as a matter of
routine and the writ petitioner should invariably be directed to respond to the
show cause notice and take all stands highlighted in the writ petition. Whether the
show cause notice was founded on any legal premises is a jurisdictional issue
which can even be urged by the recipient of the notice and such issues also can be
adjudicated by the authority issuing the very notice initially, before the aggrieved
could approach the Court. Further, when the Court passes an interim order it
should be careful to see that the statutory functionaries specially and specifically
constituted for the purpose are not denuded of powers and authority to initially
decide the matter and ensure that ultimate relief which may or may not be finally
granted in the writ petition is accorded to the writ petitioner even at the threshold
by the interim protection, granted.
171. Similarly in Kunisetty Sathyanarayana AIR 2007 SC 906, the Hon’ble Supreme
Court has held as under:
13. It is well settled by a series of decisions of this Court that ordinarily no writ
lies against a charge sheet or show-cause notice vide Executive Engineer, Bihar
State Housing Board Vs. Ramdesh Kumar Singh and others JT 1995 (8) SC 331,
Special Director and another Vs. Mohd. Ghulam Ghouse and another AIR 2004
SC 1467, Ulagappa and others Vs. Divisional Commissioner, Mysore and others
2001 (10) SCC 639, State of U.P. Vs. Brahm Datt Sharma and another AIR 1987
SC 943 etc.
14. The reason why ordinarily a writ petition should not be entertained against a
mere show-cause notice or charge-sheet is that at that stage the writ petition may
be held to be premature. A mere charge-sheet or show-cause notice does not give
rise to any cause of action, because it does not amount to an adverse order which
affects the rights of any party unless the same has been issued by a person having
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no jurisdiction to do so. It is quite possible that after considering the reply to the
show-cause notice or after holding an enquiry the authority concerned may drop
the proceedings and/or hold that the charges are not established. It is well settled
that a writ lies when some right of any party is infringed. A mere show-cause
notice or charge-sheet does not infringe the right of any one. It is only when a
final order imposing some punishment or otherwise adversely affecting a party is
passed, that the said party can be said to have any grievance.
16. No doubt, in some very rare and exceptional cases the High Court can quash a
charge-sheet or show-cause notice if it is found to be wholly without jurisdiction
or for :149: some other reason if it is wholly illegal, however, ordinarily the High
Court should not interfere in such a matter.
172. On similar lines, this Court in Jayanthi Lal Thankar & Co. Vs. Union of India (2006)
195 ELT 9 (Bom.), has held as under;
9. It is true that in large number of cases, the Apex Court has deprecated the
practice of the High Courts entertaining writ petitions questioning legality of the
show cause notices stalling enquiries as proposed and retarding investigative
process to find actual facts with the participation and in the presence of the
parties. Unless, the High Court is satisfied that the show cause notice was totally
non est in the eye of law for absolute want of jurisdiction of the authority to even
investigate into facts, writ petitions should not be entertained for the mere asking
and as a matter of routine and the writ petitioner should invariably be directed to
respond to the show cause notice and take all stands highlighted in the writ
petition.
10. The position regarding the course to be adopted by the Courts when alternate
remedy is available is also fairly well-settled. If a show cause notice is issued by a
statutory authority relying upon some facts, the said notice can be challenged
before the Writ Court only on the ground that even if the facts are assumed to be
correct no case has been made out against the noticee. If a prima facie case has
been made out in the show cause notice, it is for the adjudicating authority to
finally decide all the questions including the questions of fact. It has also been
laid down in series of cases by the Supreme Court that the High Court should not
interfere at the stage of show cause notice to take over the fact finding
investigation which is to be resolved by fact finding authorities constituted under
the relevant statute. In a series of recent cases, the Supreme Court has taken the
aforesaid view. Some reported cases are: State of Goa Vs. Leukoplast (India) Ltd.
1997 (92) E.L.T. 19 (SC) = AIR 1997 SC 1875; Union of India Vs. Polar Marmo
Aglomerates Ltd. - 1997 (96) E.L.T. 21 (SC) and Union of India Vs. Bajaj Tempo
Ltd. - 1997 (94) E.L.T. 285 (S.C.). In State of U.P. Vs. Labh Chand - AIR 1994
SC 754, the Supreme Court befittingly illuminated the power as under:
"When a statutory Forum or Tribunal is specially created by a statute for redressal
of specified grievances of persons on certain matters, the High Court should not
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normally permit such persons to ventilate their specified grievances before it by
entertaining petitions under Article 226 of the Constitution is a legal position
which is too well settled......"
In State of A.P. Vs. T.C. Lakshmaiah Setty & Sons AIR 1994 SC 2377, the above
decision was reiterated by the Supreme Court and it was observed that the orders
of assessment rendered under tax laws should be tested under the relevant Act and
in no other way.
In Shyam Kishore Vs. Municipal Corporation of Delhi AIR 1992 SC 2279, it was
observed that recourse to writ petition is not proper, when more satisfactory solution is
available on the terms of the statute itself. The position is, therefore, clear that
extraordinary and discretionary power under writ jurisdiction should be exercised with
caution when statutory remedy is sought to be by-passed.
173. Another important aspect is where the question involved is one of determination of
taxability of a transaction or when the question involved is whether the activity comes
within the purview of the tax, net the same has to be gone into only by the concerned
authorities and cannot be determined on the basis of affidavits and counter affidavits in a
proceeding under Article 226 of the Constitution of India. The following observations
would be relevant and opt as made in AVM Studio vs. UOI (Mad) 2008 (10) STR 353,
We do not find any merits in this case as the learned single judge is very categoric
and the show cause notice is also very categoric in its terms and it only directed
the appellant to show cause as to why the sum of Rs.44,26,741 cannot be
recovered as service tax on consideration that the activity of the petitioner in
leasing out the studio would come within the definition of "video production
agency" as defined in the Finance Act. If the activity of the appellant does not
come within the purview, it is well open to the appellant to explain the activity
carried on the appellant so as to have a finding to that effect. It is well-settled and
well established principle that a classification or whether an activity comes within
the purview of the tax net has to be done by the authorities only, which cannot be
determined on the basis of an affidavit and counter-affidavit in a proceeding under
article 226 of the Constitution of India. Useful reference can be had to the
judgment of the Supreme Court in the case of State of Goa Vs. Leukoplast (India)
Ltd. reported in (1997) 105 STC 318 (SC).
Hence, we are not able to take a view different than the one taken by the learned single
judge.
174. We also find that the Petitioner is fully safeguarded under Section 195(2), 195(3)
and Section 197 of Income Tax Act. As held by the Hon’ble Supreme Court in
Transmission Corporation case, (1999) 239 ITR 587 (SC), Petitioner’s rights are
adequately safeguarded under Section 195(2), 195(3) and 197 of the Income Tax Act, and
the only thing required to be done is to file an application before the Assessing Officer
under those provisions.
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175. In this behalf, the following observations of the Hon’ble Supreme Court in the case
of Indo Asahi Glass Company Ltd. & Anr. Vs. I.T.O. & Ors., 2002 (254) ITR 210,
2002(10) SCC 444, would be relevant:
The aforesaid show-cause notice was issued on the allegation that salary had been
paid to four employees who were working with the appellants in India. These
employees were Japanese and the salary in question had been paid by a Japanesecompany
in Japan. In addition thereto, the appellants had also paid salaries to
these four employees but tax had been deducted at source. The show-cause notice
stated that what was paid to these four employees in Yen currency was also
taxable under Section 9 of the Income-tax Act and-tax should have been deducted
at source. Instead of filing a reply to the show-cause notice, the appellants chose
to file a writ petition. The singe judge dismissed the writ petition on the ground
that alternative remedy was available to the appellants. In appeal, the Division
Bench took the same view.
Hence, this appeal by special leave. It is contended by Dr.Pal, on behalf of the
appellants that during the pendency of this appeal, taking advantage of the
Voluntary Disclosure Scheme, Asahi Glass Co.Ltd. Japan, had filed returns of
income in respect of the four employees in question and had paid the entire
amount of income-tax payable in respect of what was paid to these four
employees in Yen currency. This and the other facts cannot be taken up for
consideration by this Court for the first time. In our opinion, the High Court was
right in coming to the conclusion that it is appropriate for the appellants to file a
reply to the show cause notice and take whatever defence is open to them. While
affirming the decision of the High Court, we, therefore, grant ten weeks’ time to
the appellants to file a reply to the aforesaid show-cause notice dated May 16,
1996. On the reply being so filed, the Income-tax Officer will take a decision,
after giving an opportunity of hearing to the Appellants. The decision should be
taken within four months of the reply being so filed. It will be open to the
appellants to place on record the subsequent facts the effect of which will be for
the Income Tax Officer to decide.
176. Similarly, in Titaghur Paper Mills Co.Ltd. & Anr. Vs. State of Orissa & Ors. 142
ITR 663 SC, the Hon’ble Supreme Court has held as under:
Under the scheme of the Act, there is a hierarchy of authorities before which the
petitioners can get adequate redress against the wrongful acts complained of. The
petitioners have the right to prefer an appeal before the prescribed authority under
sub-s. (1) of s.23 of the Act. If the petitioners are dissatisfied with the decision in
the appeal, they can prefer a further appeal to the Tribunal under sub-s.(3) of s. 23
of the Act, and then ask for a case to be stated upon a question of law for the
opinion of the High Court under s.24 of the Act. The Act provides for a complete
machinery to challenge an order of assessment, and the impugned orders of
assessment can only be challenged by the mode prescribed by the Act and not by
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a petition under Article 226 of the Constitution. It is now well recognised that
where a right or liability is created by a statute which gives a special remedy for
enforcing it, the remedy provided by that statute only must be availed of. This rule
was stated with great clarity by Willes J., in Wolverhampton New Water Works
Co. V. Hawkesford (1859) 6 CB (NS) 336 at p.356 in the following passage;
"There are three classes of cases in which a liability may be established founded
upon statute...... But there is a third class, viz., where a liability not existing at
common law is created by a statute which at the same time gives a special and
particular remedy for enforcing it..... the remedy provided by the statute must be
followed, and it is not competent to the party to pursue the course applicable to
cases of the second class. The form given by the statute must be adopted and
adhered to."
The rule laid down in this passage was approved by the House of Lords in Neville
Vs. London "Express" Newspaper Ltd. (1919) AC 368 (HL) and has been
reaffirmed by the Privy Council in Attorney-General of Trinidad and Tobago Vs.
Gordon Grant & Co. (1935) AC 532 (PC) and Secretary of State Vs. Mask & Co.,
AIR 1940 PC 105. It has also been held in to be equally applicable to enforcement
of rights, and has been followed by this Court throughout. The High Court was,
therefore, justified in dismissing the writ petitions in limine.
177. In the present case, the Petitioner has been requested to only show cause as to why it
should not be treated as an assessee in default. The Petitioner was requested to produce
certain documents for proper adjudication in the matter. One of the crucial documents
required by the second Respondent was the primary agreement entered upon between the
Petitioner and HTIL. The said agreement has not been produced by the Petitioner either
before second Respondent or even before us. Without the said agreement and other
relevant documents, it will be impossible for us to find out the true nature of the
transaction. Inspite of repeated demands by the Respondents, the same have not been
produced, leaves us with no option but to draw an adverse inference against the
Petitioner, since it clearly amounts to withholding of the best evidence, even assuming
that the onus of proof does not lie on the Petitioner.
178. In this context, the following observations of the Hon’ble Supreme Court in the case
of Gopal Krishnaji Ketkar Vs. Mohamed Haji Latif & Ors. AIR 1968 SC 1413, would be
very relevant;
Even if the burden of proof does not lie on a party the Court may draw an adverse
inference if he withholds important documents in his possession which can throw
light on the facts at issue. It is not, in our opinion, a sound practice for those
desiring to rely upon a certain state of facts to withhold from the Court the best
evidence which is in their possession which could throw light upon the issues in
controversy and to rely upon the abstract doctrine of onus of proof. In Murugesam
Pillai Vs. Gnana Sambhanda Pandara Sannadhi, 44 Ind. App. 98 at P.103 = (AIR
1917 PC 6 at p.8) Lord Shaw observed as follows:
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"A practice has grown up in Indian procedure of those in possession of important
documents or information lying by, trusting to the abstract doctrine of the onus of
proof, and failing, accordingly, to furnish to the Courts the best material for its
decision. With regard to third parties, this may be right enough - they have no
responsibility for the conduct of the suit, but with regard to the parties to the suit
it is, in their Lordships’s opinion, an inversion of sound practice for those desiring
to rely upon a certain state of facts to withhold from the Court the written
evidence in their possession which would throw light upon the proposition."
This passage was cited with approval by this Court in a recent decision - Biltu Ram V.
Jainandan Prasad, Civil Appeal No.941 of 1965, D/- 15-4-1968 (SC).
179. Similarly, the observations of the Hon’ble Supreme court in Prestige Lights Ltd. Vs.
State Bank of India (2007) 139 Comp.Cases.169 (SC), would squarely apply in the
present case:
"32. It is thus clear that though the Appellant-Company had approached the High
Court under Article 226 of the Constitution; it had not candidly stated all the facts
to the Court. The High Court is exercising discretionary and extraordinary
jurisdiction under Article 226 of the Constitution. Over and above, a Court of
Law is also a Court of Equity. It is, therefore, or utmost necessity that when a
party approaches High Court, he must place all the facts before the Court without
any reservation. If there is suppression of material facts on the part of the
Applicant or twisted facts have been placed before the Court, the Writ Court may
refuse to entertain the Petition and dismiss it without entering into merits of the
matter."
"33. The object underlying the above principle has been succinctly stated by
Scrutton, LJ in R.V.Kinsington Income Tax Commissioners (1917) 1 KB 486:
86b LJ KB 257: 116 LT 136, in the following words:
"It has been for many years the rule of the Court, and one which it is of the
greatest importance to maintain, that when an applicant comes to the Court to
obtain relief on an exparte statement he should make a full and fair disclosure of
all the material facts - facts, not law. He must not misstate the law if he can help it
- the Court is supposed to know the law. But it knows nothing about the facts, and
the applicant must sate fully and fairly the facts, and the penalty by which the
Court enforces that obligation is that if it finds out that the facts have not been
fully and fairly stated to it, the Court will aside, any action which it has taken on
the faith of the imperfect statement".
34. It is well settled that a prerogative remedy is not a matter of course. In
exercising extraordinary power, therefore, a Writ Court will indeed bear in mind
the conduct of the party who is invoking such jurisdiction. If the Applicant does
not disclose full facts or suppresses relevant materials or is otherwise guilty of
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misleading the Court, the Court may dismiss the action without adjudicating the
matter. The rules have been evolved in larger public interest to deter unscrupulous
litigants from abusing the process of Court by deceiving it. The very basis of the
writ jurisdiction rests in disclosure of true, complete and correct facts. If the
material facts are not candidly stated or are suppressed or are distorted, the very
functioning of the writ courts would become impossible.
180. When the Petitioner has challenged the constitutional validity of the Amendment to
Sections 191 and 201 of the I.T. Act by the Finance Act,2008, then the same must be in
context of certain facts pleaded and proved by evidence in the form of documents on
record and not in vaccum or in the abstract. The present Petition totally lacks particulars
as to the nature of agreement dated 11th February, 2007 and all other agreements
preceding or following the same entered into by HTIL and/or the Petitioner. The essential
facts supported by the necessary documents as proof of such facts, have been
conveniently kept away from this Court.
181. In the above context, it is relevant to note the observations of the Hon’ble Supreme
Court in Sant Lal Bharti Vs. State of Punjab AIR 1988 SC 485 = (1988) 1 SCC 366, as
under:
It must, however, be mentioned that the petition is lacking in particulars as to
what premises the appellant owned and in respect of which premises the appellant
is making the grievances. On this ground it is not possible to decide the question
of vires canvassed before the High Court and repeated before us. A petition
challenging the constitutional validity of certain provisions must be in the context
of certain facts and not in abstract or vacuum. The essential facts necessary to
examine the validity of the Act are lacking in this appeal. On this ground the
petition was rightly rejected and we are not inclined to interfere with the order of
the High Court on this ground alone.
182. A perusal of the show cause notice, the chronological list of dates and events, clearly
reveals that the present case involves investigation into voluminous facts and perusal of
numerous lengthy and complicated agreements. Based on the above, the question of
chargeability of the transaction to tax and also the question of duty to deduct tax at source
can be determined. In the present case, the show cause notice, cannot be termed
extraneous or irrelevant or erroneous on its face or not based on any material at all.
183. In this context, the following observations of the Calcutta High Court in Assam
Consolidated Tea Estates Ltd. Vs. ITO ‘A’ Wards & Ors. 1981 ITR 699 (Cal), would be
relevant:
"15. Section 9(1) of the Act is a complicated provision applying to all income
accruing or arising whether directly or indirectly, through or from (a) a business
connection in India; (b) and money lent at interest and brought into India in cash
or in kind; (e) a transfer of a capital asset situated in India. This being a deeming
provision, it is not enough merely to say that the income does not arise directly
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through or from any of the sources mentioned in the section. The words of the
Section are of the widest amplitude, namely accruing directly, accruing indirectly,
arising directly or arising indirectly. The Petitioner has tried to sever the two
transaction, namely, the transaction of the loan and the transaction of the transfer.
Mr.Gupta contended that the interest arising from the unsecured loan stock may
be held to arise from either a business connection in India or from the transfer of a
capital asset in India. In this case the loan was part of the consideration for the
transfer and the interest accruing on such a loan can be assessed under either of
the above three heads. As a result of this transaction certain rights have been
exchanged between the Petitioner and the Indian company. The loan was granted
to enable the Indian company to pay for the assets which were in India and it may
very well be argued that as a result of the transaction assets in India have been
transferred. Serious questions as to the scope and effect of Section 9(1) are
involved which it is neither convenient nor desirable to decide in an application
under Article 226.
16......................... 17......................... 18.........................
19. Could it be said that the reasons given by the Income Tax Officer for his
belief that the interest income is assessable under Section 9(1) and has escaped
assessment due to the failure of the assessee to file its return are extraneous or
irrelevant? I agree with Mr.Gupta that the question whether the interest due on the
unsecured loan stock is assessable under Section 9(1) of the Act or not is not
within the scope of this application. This Court has only to be satisfied that the
impugned notices are on their face erroneous and/or that the issuing Income Tax
Officer had no material for his belief that any income has escaped assessment due
to any omission or failure on the part of the assessee either to file its returns or to
disclose the primary material facts necessary for such assessment.
In this case there is no dispute that apart from the assessment year 1958-59 no
returns were filed by the assessee. Whether the Income Tax Officer should have
made enquiries on the basis of the information received in connection with the
assessments of the Indian company is not germane to the present question. it is for
the assessee to file returns and furnish the necessary particulars. Very difficult
questions of the interpretation and application of the provisions of Section 9(1) of
the Act have been raised and issues have been joined in respect thereof. These are
matters for decision by competent tribunals and courts cannot conveniently be
decided by this Court in its writ jurisdiction. However, the case of the impugned
notice for the assessment year 1958-89 is quite different. The point is covered by
the decision of the Supreme Court in Ranchhoddas’s case and it must be held that
the Income Tax Officer exceeded his jurisdiction in issuing that notice. The rule
would, therefore, be made absolute only in the case of the notice for the
assessment year 1958-59 while it would be discharged in respect of the notices for
the other years. The interim orders, if any, except for those applicable to the
assessment year 1958-59, are vacated. There will be no order as to costs of this
application. Operation of this order is stayed till a week after the long vacation."
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184. The Hon’ble Supreme Court has held that where the question involved is as to the
nature of the transaction depending on the construction of documents, the same is a
mixed question of facts and law and it is for the fact finding authorities to go into the
same, particularly when the law prescribes a particular procedure for ascertaining those
facts and the same cannot be subject matter of a Writ Petition. In this context, the
following observations of the Hon’ble Supreme Court in M/s.Sri Tirumala Venkateswara
Timber and bamboo Firm Vs. Commercial Tax Officer AIR 1965 SC 784, would be very
relevant;
5. It is manifest that the question as to whether the transactions in the present case
are sales or contracts of agency is a mixed question of fact and law and must be
investigated with reference to the material which the appellant might be able to
place before the appropriate authority. The question is not one which can properly
be determined in an application for a writ under Art.226 of the Constitution.
185. Under the aforesaid facts and circumstances and for the various reasons set out
hereinabove, Rule stands discharged with costs.
186. After pronouncement of the judgment, the learned Senior Counsel Mr.Iqbal Chagla
appearing on behalf of the Petitioner sought an extension of stay granted earlier by a
period of eight weeks.
187. In view thereof, the stay granted earlier to continue for a period of eight weeks from
today.
(A.V.NIRGUDE,J.) (DR.S.RADHAKRISHNAN,J.)
