Allahabad High Court
Honda Siel Cars India Pvt. vs The Income Tax Officer ... on 30 May, 2011
Bench: Ferdino Inacio Rebello, Chief Justice, Prakash Krishna
HIGH COURT OF JUDICATURE AT ALLAHABAD
(Reserved)
AFR
Chief Justice's Court
1. Case :- WRIT TAX No. - 621 of 2011
Petitioner :- Honda Siel Cars India Pvt.
Respondent :- The Income Tax Officer International Taxation Noida Nad Ors.
Petitioner Counsel :- Gaurav Mahajan,Amit Mahajan
Respondent Counsel :- C.S.C. IT
2. Case :- WRIT TAX No. - 622 of 2011
Petitioner :- Honda Siel Cars India Pvt.
Respondent :- The Income Tax Officer International Taxation Noida Nad Ors.
Petitioner Counsel :- Gaurav Mahajan,Amit Majahan
Respondent Counsel :- C.S.C. IT
3. Case :- WRIT TAX No. - 623 of 2011
Petitioner :- Honda Siel Cars India Pvt.
Respondent :- The Income Tax Officer International Taxation Noida Nad Ors.
Petitioner Counsel :- Gaurav Mahajan,Amit Mahajan
Respondent Counsel :- C.S.C. IT
4. Case :- WRIT TAX No. - 624 of 2011
Petitioner :- Honda Siel Cars India Pvt.
Respondent :- The Income Tax Officer International Taxation Noida Nad Ors.
Petitioner Counsel :- Gaurav Mahajan,Amit Mahajan
Respondent Counsel :- C.S.C. IT
5. Case :- WRIT TAX No. - 625 of 2011
Petitioner :- Honda Siel Cars India Pvt.
Respondent :- The Income Tax Officer International Taxation Noida Nad Ors.
Petitioner Counsel :- Gaurav Mahajan,Amit Mahajan
Respondent Counsel :- C.S.C. IT
6. Case :- WRIT TAX No. - 626 of 2011
Petitioner :- Honda Siel Cars India Pvt.
Respondent :- The Income Tax Officer International Taxation Noida Nad Ors.
Petitioner Counsel :- Gaurav Mahajan,Amit Mahajan
Respondent Counsel :- C.S.C. IT
Hon'ble Ferdino Inacio Rebello,Chief Justice
Hon'ble Prakash Krishna,J.
(Delivered by Prakash Krishna, J)
1. Challenging the legality, validity and propriety of the orders dated 31st of March, 2011 passed by the Income Tax Officer, International Taxation, (TDS) NOIDA, Respondent no.1 herein, covering a period of six years spread over financial years 2004-2005, 2009-2010 in a proceeding under section 201 of the Income Tax Act creating an aggregate demand of Rs.4,739/- Crores [(inclusive of interest under section 201 (1A)] of the Act, the present bunch of writ petitions have been preferred.
2. The Income Tax Officer, International Taxation, TDS under the impugned order treated the assessee as assessee deemed in default for failure to deduct tax at source from payments other than the royalty and fee for technical services, made to non residents towards the price of raw material, stores, motor parts and supply of motorcars by the assessee's parent company at Japan and associate enterprises (hereinafter referred to as AEs).
3. All these petitions were heard together and are being disposed of by a common judgment as the learned counsel for the parties jointly agreed that the common questions of law and fact are involved in these petitions.
4. With the consent of the learned counsel for the parties and after giving notice to the learned standing counsel for the Department, the petitions were heard finally at the admission stage itself, the pleadings having been completed.
5. The petitioner is a registered company under the Companies Act and is manufacturer of passenger cars in India. The petitioner made various payments towards purchases of spare parts etc. including royalty and fee for technical services, to non residents including its parent company at Japan and to its AEs at various other countries. It has deducted the tax at source from payments made towards the royalty and fee for technical services, to which there is no dispute. The Department has sought to raise a dispute with regard to the payments made to its parent company at Japan towards the price of supply of parts, cars, stores etc.. The case of the Department is that the petitioner having failed to deduct the tax at source on the above and various other items except royalty and fee for technical services, is in view of section 195 of the Income Tax Act liable to be charged for non deducting the tax at source, consequently interest also. This is the main bone of contention between the parties.
6. At the very outset, Sri Sambhu Chopra, learned standing counsel for the department, rightly reminded us that against the impugned order dated 31st of March, 2011, a statutory appeal lies under the Act and therefore the petition should be thrown and the petitioner be directed to avail the said statutory remedy by way of appeal. In reply, Sri Ganeshan, the learned senior counsel along with Sri Gaurav Mahajan and Amit Mahajan, Advocates, appearing on behalf of the petitioner, does not dispute that order is appealable and submitted that the present petition falls within one out of three exceptions judicially recognised for the purposes of invoking the writ jurisdiction. Elaborating the argument, the petitioner submitted that the impugned orders have been passed with undue haste in a predetermined manner without giving a proper opportunity of hearing to the petitioner herein, therefore, this Court should exercise its discretion in favour of the petitioner; the writ is not liable to be thrown on the ground of availability of alternative remedy.
7. On 22nd of March, 2011 a show cause notice which lacks relevant facts and material on vague allegations, asking the petitioner as to why it should not be treated as "assessee in default" without specifying the grounds in support thereof, was issued. It was followed by subsequent notice dated 23rd of March, 2011 wherein it was stated that why the assessee may not be treated as deemed to be assessee in default in respect of such tax on payments made to various non residents. 28th of March, 2011 was the date fixed for compliance. A third notice purporting to be under section 133 (6) of the Act regarding TDS on payments made to non residents for passing order under section 201 (1)/201 (1A), asking the petitioner to re-conciliate the transaction in foreign currency reflected in balance sheet with detail of payments made to non residents (other than AEs) in the last six years, was given. The date fixed for compliance was March 29, 2011.
8. The case of the petitioner is that it has supplied the various informations which were sought by the Department from time to time within the least possible time granted by the Department. The information sought by the Department under section 133 of the Act was with regard to the six financial years. The assessee cooperated with the Department, however, at no point of time, the petitioner was made aware that the Department intends to treat the assessee as deemed assessee to be in default for its alleged failure to deduct the tax at source on the payments made to its parent company namely Honda Motor Co. Japan in connection with the purchases of the motor parts, cars etc. other than royalty or fee for technical know-how.
9. The main question involving in the present writ petition is whether the impugned order is liable to be set aside being violative of principle of justice as was contended by the learned counsel for the petitioner or the petitioner should be relegated to avail statutory remedy by way of appeal, as was submitted by the learned counsel for the Department.
10. To address the controversy, it is desirable to have the background facts of the case, the facts and events which happened anterior to the show cause notice dated 22nd of March, 2011 in particular. Survey proceeding under section 133 A of the Act was conducted on 24th of June, 2010 in the premises of the petitioner and in that connection, a notice dated 15th of July, 2010 requiring the petitioner to furnish certain information, fixing 5th of August, 2010 was given. The said notice asked the petitioner to furnish the information/details on the date fixed with regard to 17 items mentioned therein for the years 2003-2004 to 2009-2010. It is not necessary to reproduce the details which were sought for from the petitioner. But importantly, it may be noticed that no information as to why the petitioner has not deducted the tax at source or for that matter the petitioner has a permanent establishment in India, was called for. There is not even a whisper in this regard in the said notice. The information sought was voluminous and the part of information was supplied on 5th of August, 2010. The other informations were supplied on 20th of August, 2010. None of the informations sought either singly or jointly is or are indicative of fact that the petitioner has unjustifiably failed to deduct the tax at source.
11. The statement of various persons were recorded on 24th of June, 2010, 28th of June, 2010, 29th of June, 2010, 30th of June, 2010, 5th of July, 2010, 16th of July, 2010 and thereafter a questionare dated 15th of July, 2010 (already referred to above) was issued which was replied on 5th of August, 2010 and 20th of August, 2010. The case of the Department is that thereafter show cause notice dated 22nd of March, 2011 regarding the TDS on payments made to non residents with regard to the financial years 2007-2008 and 2008-2009 was issued. On the next date i.e. 23rd of March, 2011 a show cause notice was issued covering the financial years 2004-2005 to 2009-2010. Certain other informations were called for under section 133(6) of the Act by issuing a notice dated 25th of March, 2011 wherein 29th of March, 2011 was fixed for compliance and thereafter the impugned order dated 31st of March, 2011 was passed. In the background of the above facts, the question as raised by the petitioner that no proper opportunity of hearing was afforded is required to be examined. It is apt at this stage to reproduce the notices dated 22nd of March, 2011 and 23rd of March, 2011:-
To Dated:22.3.2011
The Principal Officer,
Honda Siel Cars India Ltd.
Greater Noida.
Sir/Madam,
Sub:- Show cause regarding TDS on payments made to non- residents for passing orders u/s 201(1)/201(1A) Reg. Financial years 2007-08 to 2009-10.
Please refer to the TDS survey proceedings u/s 133A of the I.T. Act, 1961 conducted in your case on 24.6.2010. After going through the details, it is found that you have failed to deduct TDS on the payments made by you to the non-residents as required under the Act. Therefore, why you should not be treated as deemed to be assessee in default in respect of such tax on payments made to the various non-residents as submitted by you and order u/s 201(1)/201(1A) of the Act be not passed against you.
Date fixed for the purpose is 28.3.2011. Non-compliance will lead to passing of order u/s 201(1)/201(1A) treating in deemed default.
Rakesh Verma
Income Tax Officer
International Taxation, Noida
________________________________________________________
To Dated:23.3.2011
The Principal Officer,
Honda Siel Cars India Ltd.
Greater Noida.
Sir/Madam,
Sub:- Show cause regarding TDS on payments made to non- residents for passing orders u/s 201(1)/201(1A) Reg. Financial years 2004-05 to 2009-10.
In continuation to this office letter dated 22.3.2011 in the above matter, the desired required information required to be furnished may be taken as for financial years 2004-05 to 2009-10. Also show cause why should not be treated as deemed to be assessee in default in respect of such tax on payments made to the various non-residents as submitted by you and order u/s 201(1) of the Act be not passed against you.
Date fixed for the purpose is 28.3.2011. Non-compliance will lead to passing of order u/s 201(1)/201(1A) treating in deemed default.
Rakesh Verma
Income Tax Officer
International Taxation, Noida
12. It is also apt to reproduce the notice dated 25th of March, 2011 through which certain information under section 133(6) of the Act was required regarding the TDS on payments made to non residents for passing the orders under section 201(1)/201(1A) regarding the financial years 2004-2005 and 2009 - 2010:
To Dated:25.3.2011
The Principal Officer,
Honda Siel Cars India Ltd.
Greater Noida.
Sir/Madam,
Sub:- Information required u/s 133(6) of the Incometax Act, 1961 regarding TDS on payments made to non-residents for passing orders u/s 201(1)/201(1A) Reg. Financial years 2004-05 to 2009-10.
Please refer to the correspondence this office had with you from time to time.
As per the 3CEB report for the last 6th years from FY 2004-05 to 2009-10 you have only deducted tax at source on royalty and technical fees. Rest all the payments to your various AEs have been made without deducting tax at source. You were asked to show cause why order u/s 201(1) & 201(1A) be not passed treating you an assessee in deemed default for not deducting tax at source u/s 195 of the Act on all the payment other than FTS & royalty as per 3CEB submitted by you.
Other than the above payment you are asked to submit the details of payment to non-resident in the last 6 years (other than AEs) for which you have not deducted at source and the reasons thereof.
Please reconcile your transaction in foreign currency reflected in the balance sheet with the details in the above para's.
This information is sought u/s 133(6) of the Income Tax Act, 1961 and date fixed for compliance is 29.3.2011.
Rakesh Verma
Income Tax Officer
International Taxation, Noida
13. At this stage, the learned counsel for the petitioner, submitted that the notices dated 22nd of March, 2011 and 23rd of March, 2011 are cryptic, vague and silent and at any rate do not disclose the points which the noticee was required to meet. The order impugned in the writ petition is based on the footing treating the petitioner company as having permanent establishment in India. The order proceeds on that premises. Statements of certain officers which were recorded under section 133A of the Income Tax Act have been extensively quoted and relied upon to arrive at the aforesaid finding. However, the fact remains that at no point of time the petitioner was put to notice by the Department that it is going to be treated as deemed assessee in default for not deducting the tax at source on the various payments made by it to its parent companies and other AEs on the basis of the various statements recorded by it, but were not supplied to the petitioner.
14. Sri Shambhu Chopra, learned standing counsel, on the other hand, contends that under Section 195 of the Act any person responsible for paying to non resident or to a foreign company any interest, or any other sum chargeable under the provisions of the IT Act is liable to deduct the tax at source at the time of credit of such income to such person. The consequences of failure to deduct or pay the tax at source is provided under Section 201(1) and 201(1A) of the Act. The point which was urged by the learned counsel is that there is no express provision under the Act for affording an opportunity of hearing to such person. Elaborating the argument it was submitted that these proceedings are not assessment proceedings, in the sense as it is generally understood with regard to the assessment of tax and therefore, the principle of natural justice cannot be read therein. To put it in simple words, the learned counsel submitted that there being no express provision for giving an opportunity of hearing to such person like the petitioner who according to the department was liable to deduct the tax at source, but failed like the petitioner, the order impugned in the writ petition cannot be faulted with on this score.
15. We have given careful consideration to the aforesaid submission of the learned counsel for the respondent and are of the view that the said argument has been stated to be rejected.
16. Chapter XVII of the I.T. Act contains the provisions for collection of tax and recovery of tax. Sections 195 and 201 fall under the said chapter. Any person, responsible for paying to a non resident, on the condition set out therein, is liable to deduct income on certain payments at the rates in force. Consequences of failure to deduct or pay is provided in section 201, reads as follows:
"Sec. 201 (1) Where any person, including the principal officer of a company. --
(a) who is required to deduct any sum in accordance with the provisions of this Act; or
(b) referred to in sub-section (1A) of section 192, being an employer, does not deduct, or does not pay, or after so deducting fails to pay, the whole or any part of the tax, as required by or under this Act, then, such person, shall, without prejudice to any other consequences which he may incur, be deemed to be an assessee in default in respect of such tax;
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(2) ................................
(3) No order shall be made under sub-section (1) deeming a person to be an assessee in default for failure to deduct the whole or any part of the tax from a person resident in India, at any time after the expiry of--
(i) two years from the end of the financial year in which statement is filed in a case where the statement referred to in section 200 has been filed;
(ii) four years from the end of the financial year in which payment is made or credit is given, in any other case:
Provided that such order for a financial year commencing on or before the Ist day of April, 2007 may be passed at any time on or before the 31st day of March, 2011."
17. It is true that these provisions do not expressly contemplate any hearing, but looking to the nature of power which is being exercised by the respondent no.1, there appears to be no difficulty in holding that it exercises quasi judicial power; more so in view of section 136 of the Act.
18. The law is firmly settled by now that a provision having civil consequences incorporating the principle of natural justice should be read in every Statute having civil or evil consequences unless it is expressly excluded. Reference can be made to Rajesh Kumar & others Vs. D.C.I.T. & others, JT 2006 (10) SC 76.
19. This was a case under section 142 (2A) of Income Tax Act. The unamended provision did not contain any provision for hearing, prior to ordering that the account books be specially audited by an auditor appointed by the department. It was held that a hearing is implicit in the provision. Statutory recognition to the judicial pronouncement has been given by amending the law to bring it in conformity. Therein reliance has been placed upon State of Orissa Vs. Dr. (Miss) Binapani Dei & others, (1967) 2 SCR 625 in paras 26 and 33, which are reproduced below:
26. "Effect of civil consequences arising out of determination of lis under a statute is stated in State of Orissa v. Dr. (Miss) Binapani Dei and Others. It is an authority for the proposition when by reason of an action on the part of a statutory authority, civil or evil consequences ensue, principles of natural justice are required to be followed. In such an event, although no express provision is laid down in this behalf compliance of principles of natural justice would be implicit. In case of denial of principles of natural justice in a statute, the same may also be held ultra vires Article 14 of the Constitution.
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33. Exceptions, therefore, are required to be provided for either expressly or by necessary implication."
20. Now, the main question as to whether on the facts and circumstances of the case, can it be said that proper opportunity of hearing was afforded to the petitioner, requires consideration.
21. The show cause notices and the proceedings preceding the show cause notices have been set out in detail in the earlier part of this judgement. A bare perusal of the impugned order would show that it proceeds to hold the deemed assessee as in default on the premises that it has got permanent establishment, a fact which was not mentioned in the show cause notices dated 22nd and 23rd of March, 2011. The impugned order would further show that the finding that the petitioner is PE in India is based on the statements of the various officers of the company recorded during survey proceedings already conducted under section 133A of the Act. In the impugned order, paragraphs after paragraphs of the various statements have been reproduced by the respondent no.1, and on the basis of the quoted portions of the statements, it has been deduced that the petitioner is PE in India.
22. To put it differently, the petitioner has been deemed assessee in default on account of the findings that it has PE in India, a finding based upon statements. Firstly, there is no indication in any notice that these statements were going to be relied upon by the Department against the petitioner. Secondly, as contended the copies of these statements were not even made available to the petitioner, a fact which has not been controverted. Only this much has been set out in reply that the statements were recorded in the presence of a responsible officer of the company. Be that as it may, on these facts it is but obvious that no proper opportunity of hearing was afforded to the petitioner. An opportunity to explain the statements which were sought to be relied or has been relied upon against it should have been given. In other words, the petitioner has been taken by surprise and right in his submission that it came to know for the first time through the order impugned that the Department has treated Honda Motor Company (petitioner) as a permanent establishment in India or that Honda Motor Company is assessable to income tax in India on the basis of its having a PE in India. The notices dated 22nd of March, 2011 and 23rd of March, 2011 do not disclose that the petitioner is going to be treated as deemed assessee in default for not deducting the tax at source on the above premises. Through notice dated 25th of March, 2011 an information under section 133(6), as mentioned in the subject clause of it, was sought for and by no stretch of imagination it could be treated a show cause to show cause as to why the petitioner may be treated as deemed assessee in default as having P.E. in India. This is one aspect of the case.
23. The second aspect of the matter is that the proceedings were commenced and concluded with undue haste. The petitioner is right in his submission that the notices were given on 22nd of March, 23rd of March, and 25th of March, 2011 fixing compliance date as 29th of March, 2011. The voluminous information for six financial years were called for. The petitioner collected all the possible informations and supplied them to the Respondent no.1 on 29th of March, 2011, 30th of March, 2011 and 31st of March, 2011. On 31st of March, 2011 the impugned order running over 354 pages was passed for all these six financial years (59 pages of the impugned order for financial year 2004-2005). The submission is that the reply asked for by the Respondent no.1 from the petitioner was simply an eyewash and has not been even referred or considered whatsoever its worth may be in the impugned order. The opening portion of the impugned order narrates that the assessee is hundred per cent subsidiary of Honda Motor Company, Japan and it has imported parts (CKDs and Honda CRVs cars) from Honda Motor Company Japan and made payments to other Honda affiliates i.e. Honda Thailand, Honda Tywan etc. for imports of various parts without deducting the tax at source and thereafter, para 5 mentions that the assessee has submitted its written reply which has been considered at length in paras dealing with PE. It further mentions that the main contention of the assessee is that none of its AEs and PEs in India and therefore they are not taxable in India. After noticing the above, the impugned order proceeds to hold that none of its AEs has its PEs in India. It was held under the impugned order that the petitioner has its PEs in India on the basis of the statements of certain employees, copies of which were not supplied to the petitioner. Having regard to the above, we are of the considered opinion that the petitioner was not put to notice by the Respondent No.1 that it was liable to deduct tax at source having PEs in India. The principle of natural justice, thus, is clearly violated and the said order cannot be allowed to stand. The haste with which the order impugned in the present writ petition raising a demand to a astronomical figure to the tune of Rs.4,739 Crores speaks a lot against the conduct and manner of the Respondent No.1.
24. There is no period of limitation for passing an order under Section 201 of the Act, the Respondent contends. If it is so, passing of such a lengthy order creating such huge demands, without even fixing a date for hearing, on the last date of the financial year within two days of furnishing the reply, lends support to the argument, that the order was passed under undue haste.
25. The other facet of the petitioner's argument is that in the impugned order it has been held that the petitioner's parent company i.e. Honda Motor Company Japan and its affiliates has a permanent establishment in India and the petitioner was bound to deduct the tax at source on all payments made by it to Honda Motor Company for raw materials, components, finished goods, stores, capital goods etc.. In para 6 of the writ petition it has been set out that Honda Motor Company ( not its affiliate company) is assessed to tax in India by the Deputy Director, International Taxation, Delhi. The tax returns of Honda Motor Company for the assessment year 2008-2009 have been filed. In the case of Honda Motor Company it has not been found by the Assessing Officer that Honda Motor Company had a PE in India, as set out in para 8 of the writ petition. Along with the writ petition copies of Transfer Pricing Orders for financial year 2004-2005 to 2006-2007 have been filed. The reply of paragraphs 6 and 8 of the writ petition have been given in paragraphs 12 and 14 of the counter affidavit wherein these facts have not been challenged by the Respondent no.1. He came out with the case that he being the Income Tax Officer (TDS) is entitled to examine the said issue relating to PE in India as the petitioner has not obtained any certificate under section 195 (3) or under section 197 of the Income Tax for not deduction of tax/lower deduction of tax from ITO, TDS, International Taxation.
26. The Apex Court in the case of CIT Vs. Eli Lilli & Co. (India) Pvt. Ltd. (2009) 312 ITR 225 had an occasion to examine an issue relating to deduction of tax at source with reference to expression 'any person' used in section 192 and other provisions of the Income Tax Act, section 201 in particular. The following portion which was heavily relied upon by the learned counsel for the petitioner is reproduced below:
"............The purpose of the TDS provisions in Chapter XVII-B is to see that the sum which is chargeable under section 4 for levy and collection of income-tax, the payer should deduct tax thereon at the rates in force, if the amount is to be paid to a non-resident. The said TDS provisions are meant for tentative deduction of income-tax subject to regular assessment."
27. Ultimately, on page 250 of the report, the Apex Court from the discussions made in earlier part of this judgment drew two conclusions. The first with which are concerned is that " it cannot be said as a broad proposition that TDS provisions which are in nature of machinery provisions to enable the collection and recovery of tax are independent of the charging provisions which determines the assessibility in the hands of the employee assessee." It, thus, follows that TDS provisions has some connection with the charging provisions. In other words, if there is no tax liability under the charging provisions, the provisions relating to TDS and its breach should be viewed differently.
28. The other case relied upon is DIT (International Taxation) Vs. Morgan Stanley & Co. Inc. (2007) 292 ITR 416 (SC). Relevant para 32 is reproduced below:
"The object behind enactment of transfer pricing regulations is to prevent shifting of profits outside India. Under Article 7(2) not all profits of MSCo would be taxable in India but only those which have economic nexus with P.E. In India. A foreign enterprise is liable to be taxed in India on so much of its business profit as is attributable to the P.E. in India. The quantum of taxable income is to be determined in accordance with the provisions of the Income-tax Act. All provisions of the Income-tax Act are applicable, including provisions relating to depreciation, investment losses, deductible expenses, carry-forward and set-off losses etc. Such deviations are also made under the Income-tax Act (for example : sections 44BB, 44BBA etc.). Under the impugned ruling delivered by the AAR, remuneration to MSAS was justified by a transfer pricing analysis and, therefore, no further income could be attributed to the P.E. (MSAS). In other words, the said ruling equates an arm's length analysis (ALA) with attribution of profits. It holds that once a transfer pricing analysis (is undertaken; there is no further need to attribute profits to a P.E. The impugned ruling is correct in principle in so far as an associated enterprise, that also constitutes a P.E., has been remunerated on an arm's length basis taking into account all the risk-taking functions of the enterprise. In such cases nothing further would be left to be attributed to the P.E. ............."
30. The aforesaid cases were relied upon to highlight that the provisions relating to TDS are only machinery provisions and have been enacted for the purposes of collection of tax where no tax is due even assuming for the sake of argument that the tax was not deducted at source, the person cannot be charged by raising a demand for not deducting the tax at source in such cases. The argument put forward by the petitioner certainly needs consideration and adjudication at least. It cannot be said that the said argument is totally baseless or ex-facie untenable. The said argument at any rate is available to the petitioner and could have been pressed before the authority concerned had an opportunity been provided for. The opportunity having not been provided has certainly prejudiced the right of the petitioner to raise a plea available to it under law has been denied. It is not necessary for us to say a final word on the above at this stage. For the purposes of disposal of the writ petition, undoubtedly, it can be said that contentions raised by the petitioner in this regard and the reply given in the counter affidavit raises serious triable issues which need to be decided by considering the relevant facts, by affording opportunity before hand, before passing of the impugned order. This having been not done vitiates the impugned order.
31. The attention of the Court was invited to Circular No. 23 dated 23rd of July, 1969 and CBDT Instruction No.20 of May, 2003. It was contended on the basis of the aforesaid that no deduction of tax at source at the end of the petitioner while making the payments to non residents, was required. In reply, the respondents also brought to our notice another circular no.7 of 2009 dated 22nd of October, 2009 informing that CBDT Circular no.23 dated 23rd of July,1969 regarding the taxability accruing or arising on the payments made in business connection in India to a non resident, under section 9 of the Income Tax Act has been withdrawn. The withdrawal circular states that it will nowhere prejudice the arguments which the Income Tax Department has taken or may take in any appeal, reference or petition. Notwithstanding the fact that the earlier circular has been withdrawn by subsequent circular dated 22nd of October, 2009, the fact remains that the contention of the petitioner that it bonafidely on the basis of the circular dated 23rd of July, 1969 has not deducted the tax at source on income accruing or arising to a non resident, has prima facie got some substance. Till 22nd of October, 2009, the Circular dated 23rd of July, 1969 was holding the field and a person is certainly entitled to derive the benefit from the said circular during its period of operation on fulfilment of the conditions set out therein.
32. The upshot of the above discussions is that certainly the petitioner could place its reliance upon the said circular had it been put to notice adequately by the Respondent no.1 before passing of the impugned order.
33. A dispute has been raised by the petitioner that the impugned order is barred by time in view of two decisions of Delhi High Court in CIT Vs. NHK Japan Broadcasting Corporation, (2008) 305 ITR 137 (Delhi and CIT Vs. Hutchison Essar Telecom Ltd., (2010) 323 ITR 230 (Delhi).
34. The contention is that there is no contrary decision by any other High Court and the Department has accepted the decision of the Delhi High Court there being no further challenge before the Supreme Court. This being so, the decision of the Delhi High Court providing the period of limitation by a judicial process even though no period of limitation was expressly provided by the Statute was binding on the Respondent no.1. The learned standing counsel for the Department contends otherwise and submits that there being no decision by the Allahabad High Court on the point, the Respondent No.1 has not erred in holding that there is no period of limitation for passing such an order. The respective contentions raised by the learned counsel for the parties definitely requires serious consideration. We are not expressing any opinion in view of the order proposed to be passed.
35. The other line of the argument of the learned counsel for the respondent in support of the impugned order is in the light of sub section (2) of section 195 of the Act. It provides that where the person responsible for paying any sum chargeable under the Act to a non resident considers that the whole act of such sum would not be income chargeable in the case of recipient, he may make an application to the Assessing Authority to determine, the appropriate portion of such sum was chargeable and upon such determination, the tax shall be deducted under sub section (1) of section 195 only on that proportion of the sum which is so chargeable. The impugned order also proceeds on the same hypothesis. The Respondent no.1 has harped greatly in the impugned order that certificate was not obtained by the petitioner for non deduction of tax at source or deduction of tax at source at lower rate. The learned standing counsel supports the said argument with the help of the judgment of the Apex Court delivered in Transmission Corporation of AP Ltd. Vs. CIT (1999) 239 ITR 587. The relied upon decision has been considered and explained by the Apex in its subsequent decision in the case of J.E. India Technology Central (P) Ltd. (supra). On page 465 of the report, it has been said that section 195 (2) is based on the "principle of proportionality". The said sub section gets attracted only in cases where the payment made is a composite, made in such certain proportion of payment has an element of income chargeable to tax in India. In this context the decision in the case of Transmission Corporation case should be read and understood. The relevant extract is reproduced below:
"...........In Transmission Corporation case [1999] 239 ITR 587 (SC) it was held that TAS was liable to be deducted by the payer on the gross amount if such payment included in it an amount which was exigible to tax in India. It was held that if the payer wanted to deduct TAS not on the gross amount but on the lesser amount, on the footing that only a portion of the payment made represented "income chargeable to tax in India", then it was necessary for him to make an application under section 195(2) of the Act to the Income-tax Officer (TDS) and obtain his permission for deducting TAS at lesser amount. Thus, it was held by this court that if the payer had a doubt as to the amount to be deducted as TAS he could approach the Income-tax Officer (TDS) to compute the amount which was liable to be deducted at source. In our view, section 195(2) is based on the "principle of proportionality". The said sub-section gets attracted only in cases where the payment made is a composite payment in which a certain proportion of payment has an element of "income" chargeable to tax in India. It is in this context that the Supreme Court stated, "If no such application is filed, income-tax on such sum is to be deducted and it is the statutory obligation of the person responsible for paying such 'sum' to deduct tax thereon before making payment. He has to discharge the obligation to TDS". If one reads the observation of the Supreme Court, the words "such sum" clearly indicate that the observation refers to a case of composite payment where the payer has a doubt regarding the inclusion of an amount in such payment which is exigible to tax in India."
36. In view of the above clarification by the Apex Court, the impugned order holding that the petitioner having failed to obtain an order under section 195(2) is an assessee deemed in default cannot be allowed to stand. Emphasis is on the words " sums chargeable" employed in section 195 (1). Tax at source is deductible only from "sums chargeable" under the provisions of the Income Tax Act so held by the Apex Court in the case of JE Technology Centre (supra). This being so, first there has to be a finding by a competent authority with regard to "sums chargeable". Having regard to the argument of the petitioner that so far as Honda Motor Company is concerned it has not been found liable to pay any income tax and therefore, no tax was deductiable at source, merits serious consideration before treating the assessee as an assessee deemed to be in default. The said aspect of the matter has not been addressed at all in the impugned order and it, thus,vitiates it.
37. The trend of judicial pronouncement in the recent time is that exclusion of hearing should not be readily inferred unless there are very strong reasons. Whether or not natural justice has been excluded depends upon the language and basic scheme of the statutory provision conferring power, the nature of the power, the purpose for which it is conferred and the effect of the exercise of that power. The Apex Court in Mohinder Singh Gill Vs. Chief Election Commissioner, AIR 1978 SC 851 has held that it is not permissible to interpret any statutory instrument so as to exclude the natural justice unless the language of instrument leaves no option to the Court. In the same case, the Court emphasized that the natural justice is so integral to good government that "the onus is on him who urges exclusion to make out why." In Menka Gandhi Vs. Union of India, AIR 1978 SC 597, it has been held that there is rule of implied inclusion of natural justice rather than that of exclusion. It has been emphasized again and again that implied exclusion of natural justice is a rarity. The natural justice has been described as "fair play in action". The doctrine of natural justice seeks not to secure justice but also to prevent miscarriage of justice. The concept of natural justice entails the idea that a person affected by decision has a right to be heard - audio alterm partem. Hearing means a fair hearing. In Hira Nath Mishra Vs. The Principal Rajendra Medical College, Ranchi and another AIR 1973 SC 1260 two basic facets of natural justice enumerated below have been pointed out:-
(1) to make known the nature of acquisition;
(2) to give opportunity to state case.
38. Coming to the facts of the present case, it may be noted that the show cause notices were given on 22nd and 23rd of March, 2011, and 29th of March, 2011 was the date fixed for compliance. Without fixing any date for hearing, the impugned orders on 31st of March, 2011 have been passed, creating a huge liability. Here, complex and difficult questions involving accounting, arm's length pricing exercise, interpretation of statutory provisions relating to determination of tax at source and consequences of its failure were involved. Looking to the complexity of the facts and the controversy involved, in our considered view an opportunity of personal hearing in addition what has been stated above on the facts of the present case to meet the end of justice was required.
39. In the context of the Income Tax Act, the judgment of the Apex Court in the case of Rajesh Kumar (supra) has already been referred. A constitution bench of the Apex Court in the case of C.B. Gautam Vs. Union of India (1993) 199 ITR 530 while interpreting the provisions relating to compulsory acquisition of property under the Income Tax Act has held that provision regarding the reasonable opportunity of being heard to be read in section 269UD and 269UE of the Act. The relevant extract is reproduced below:
"It must, however, be borne in mind that courts have generally read into the provisions of the relevant sections a requirement of giving a reasonable opportunity of being heard before an order is made which would have adverse civil consequences for the parties affected. This would be particularly so in a case where the validity of the section would be open to a serious challenge for want of such an opportunity.
xx xx xx
...........Although Chapter XX-C does not contain any express provision for the affected parties being given an opportunity to be heard before an order for purchase is made under section 269UD, not to read the requirement of such an opportunity would be to give too literal and strict an interpretation to the provisions of Chapter XX-C and, in the words of judge Learned Hand of the United States of America " to make a fortress out of the dictionary." Again, there is no express provision in Chapter XX-C barring the giving of a show cause notice or reasonable opportunity to show cause nor is there anything in the language of Chapter XX-C which could lead to such an implication. The observance of the principles of natural justice is the pragmatic requirement of fair play in action. In our view, therefore, the requirement of an opportunity to show cause being given before an order for purchase by the Central Government is made by an appropriate authority under section 269UD must be read into the provisions of Chapter XX-C. There is nothing in the language of section 269UD or any other provision in the said Chapter which would negate such an opportunity being given. Moreover, if such a requirement were not read into the provisions of the said Chapter, they would be seriously open to challenge on the ground of violation of the provisions of article 14 on the ground of non-compliance with the principles of natural justice."
40. Viewed as above, now the objection raised by the respondent that the petitioner be relegated to seek alternative remedy by way of appeal is to be considered. The power to issue prerogative under Article 226 of the Constitution of India is plenary in nature. The High Court has very wide and discretionary power having regard to the facts of the case to entertain or not to entertain a writ petition. The plea of alternative remedy is self imposed restricted by High Court. But in appropriate cases it can certainly exercise its discretion. There are three well known exceptions to the aforesaid rule, as laid down by the Apex Court from time to time. They are whether the writ petition has been filed for enforcement of any of the fundamental rights or whether there has been a violation of principles of natural justice or whether the order or proceedings are wholly without jurisdiction or the vires of an Act is challenged. Reference can be made to Whirlpool Corporation Vs. Registrar of Trade Marks, Mumbai, (1998) 8 SCC 1.
41. In the light of the discussions made in various paragraphs, we are of the opinion that it is a fit case where the High Court should exercise its jurisdiction under Article 226 of the Constitution of India. The case on hand falls within the exception category of the cases. We have found above that the impugned orders were passed in violation of principles of natural justice. The preliminary objection vehemently raised by the respondent during the course of the argument and as also set out in the counter affidavit is therefore rejected.
42. We have noticed the arguments touching the merits of the case which were highlighted by the petitioner during the course of hearing with a view to show that petitioner's contention have some substance. By way of clarification, it is added that we have not expressed our opinion on any issue touching the merits of the case. The arguments have been noticed in detail to prima facie judge the case of the petitioner and to form an opinion as to whether it would be or not an empty formality to restore the matter back on the file of the respondent no.1. While doing so the theory of "useless formality" and "prejudice doctrine", was in the background of our minds.
43. The impugned orders being in violation of the principles of natural justice as no reasonable opportunity was given cannot be allowed to stand and therefore all the six impugned orders all dated 31st of March, 2011 relating to the financial years 2004-2005 and 2009-2010 are hereby set aside.
44. It is further provided that this judgment will not come in the way of the respondents to initiate proceedings if it is otherwise permissible under law after giving a proper show cause notice and opportunity of hearing to the petitioner.
45. The following directions are therefore issued:
The respondent may issue a fresh show cause notice to the petitioner exactly setting out the case which the petitioner is required to meet therein by giving the materials, particulars and details sought to be relied upon by the respondent;
Copies of the statements of the witnesses recorded under section 133A if sought to be relied upon should be supplied to the petitioner;
A reasonable period of time say two to three weeks to file reply to the show cause notice be provided; and
A date for personal hearing be fixed.
46. It shall be open to the respondent no.1 to pass appropriate order in accordance with law in the light of the show cause notice and its reply if any.
47. With the aforesaid directions the writ petitions, therefore, succeed and are allowed. The impugned orders all dated 31st of March, 2011 are hereby set aside.
48. Consequently, the penalty notices issued are also set aside.
(Prakash Krishna, J) (F.I. Rebello, CJ)
Order Date :-30.5.2011
LBY
