Bombay High Court
Vodafone International Holdings ... vs Union Of India on 3 December, 2008
Bench: S. Radhakrishnan, A.V. Nirgude
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,
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 ig 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: ig . ".....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.),
(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
there
two
is a
specified
failure
cases
to deduct
viz.
tax
where
on
under
dividend;
Section
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
payable by
of
ig the
that
assessee
Chapter,
direct".
"income-tax
In other
shall
words,
be
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
tax
who
only
is
not
by
the
a
assessee
legal
can
fiction,
be
a
made
legal
liable
fiction
for the
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
amended
has
ig failed
provision reinforces
to pay the
and
tax.
emphasizes
In
that
fact the
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,
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
fulfilled
applicability
and
the
of
Petitioner
the
cannot
deeming
be
provision
deemed to
is
be
not
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,
his
the
reliance
ig on
learned
the
Senior
decision
Counsel
of the
Mr.Chagla
Hon'ble
placed
Supreme
Court in the case of Electronics Corporation of India
Ltd. Vs. Commissioner of Income Tax 183 ITR 43 (SC)
52,
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 ig 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,,
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.
ig 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
extra-territorial 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.
Section 1(2)
The learned Senior Counsel submitted that
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
ig 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 igthe 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
not
has
recognise
rendered
or
services
enforce the
in India.
revenue laws
A
of
country does
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
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
section
deducted
18,
the tax
in accordance
is payable
with
by
the
the
provisions
assessee
of
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 ighave 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).
(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
ig down
behalf, Mr.Chagla relied on Ujagar Prints Vs. Union
as unconstitutional. In this
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
ig 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 ;
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 ig(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 re-enacting
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 upo
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
is that
power
ig of
such
Parliament
retrospectivity
to legislate
cannot impose
retrospectively
"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,
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. ig 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
quasi-punishment 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
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.
unreasonable
It was submitted that the 2008 amendments are
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),
(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
ig 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,
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
the
and
Petitioner
admitted
that
and
Section
it was
contended
on
did
behalf
not
of
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,
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
impose
as it
a
ig obtained prior
penalty/quasi-punishment
to the
where
amendments.
none
They
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
respect
offshore
of
ig transaction
property and
involving
payment
two
outside
non-residents
the
in
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 ig 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
or arise
that
in
ig accrues
India or
or arises
income
or
that
is
is
deemed
received
to
or
accrue
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
is
of
by
shares
virtue
in
of
a
the
company.
acquisition
In
of
the
the
instant
share
case it
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),
(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),
(Mad-DB) wherein it is observed by the
Madras High Court that;
igThe 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 wold 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),
(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).
(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
an
for
agreement
ig adequate
to live
consideration
apart."
or
(emphasis
in connection
supplied).
with
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).
(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
In
this behalf the learned Senior Counsel referred to the
cases cited in Proposition-I).
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.
that there
The learned Senior Counsel also pointed out
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,
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,
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
ig 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,
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
sub-section (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),
(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 ig 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.
Comp.Cas.467(SC),
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 ig 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,
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 ig 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.),
(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 ig 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
(10) STR 353,
contention he relied on AVM Studio Vs. UOI (Mad) 2008
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.
Re Proposition 1(b) : Writ Petition is premature.
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
in any
the
duty
manner.
to deduct
It has
tax
been
at the
categorically
time of
held by
payment
the
Hon'ble Supreme Court in the case of Aggarwal Chamber
of Commerce Ltd. Vs. Ganpat Rai Hira Lal AIR 1958 SC
269,
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),
(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 ig 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);
(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.
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
in
to
Default,
deduct
the
ig tax
Petitioner
or is
has
construed
a right
to
to
be
Appeal
an assessee
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, ig 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,
ig 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.
(HL) and has been reaffirmed by the Privy
Council in Attorney-General of Trinidad and
(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
was
treated
also
ig as an
requested
assessee
to
in
produce
default.
certain
The
documents
Petitioner
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,
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.
ig 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),
(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,
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,
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
of the
lacking
agreement
in
dated
particulars
11th
as
February,2007
to the
and
nature
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
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 ig 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),
(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
finding
question
authorities
of fact
to
and
go
law
into
and
the
it is for
same,
the fact
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.
92. With regard to second proposition submitted by
the learned Counsel for the Petitioner i.e.
Chargeability to Income Tax,
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,
based on
(i)
source
ig based
of
on
income.
residence
While
or domicile
Indian residents
and (ii)
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,
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:
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.
.
ig 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
in and related to HEL, which HTIL has agreed to sell
and other interests and rights
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
is a
share
shell
igof
company
an unknown
and which
Cayman
was
Island
not even
Company, which
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. V
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:-
Telecommunications
. The expression joint venture had come up for
consideration before the Hon'ble Supreme Court in New
Horizons
478.
Ltd.
The
ig Vs.
Hon'ble
Union
Supreme
of India
Court
&
held
Ors.
that
1995(1)
a
SCC
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
acquired
Petitioner
share
ig cannot
holding
contend
rights in a
that they
foreign
merely
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)
Vs. Coventa
Samayanallur Power Investment Private Ltd.
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
ambit of
-
transfer
Essar
as
Group,
defined
so
in
as to
Section
fall
2(47)
within
of
the
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.).
(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:
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),
. ig 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.
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
The
acquired
Petitioner
ig other
accordingly
interests
became
and intangibles
a successor
rights.
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
at the rate
to
of
the
Hong
share
Kong
holders
$ 6.15
of HTIL
per
in
share.
Hong Kong
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).
(SC) He further
relied on the decision in the case of McDowell & Co.
Ltd. Vs. CTO 154 ITR 148 (SC).
(SC) He also referred to
the judgment in the case of State of U.P. Vs.
Renusagar Power Co. AIR 1988 SC 1737.
1737 He further
relied on CDS Financial Services (Mauritius) Ltd. Vs.
BPL Communications Ltd. and Ors. (2004) 121 COMP CAS
-0374 (Bom.).
(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
interest
shares
of
ig in
67% in
CGP
HEL.
was to
The
acquire
Petitioner
the
itself
controlling
has
disregarded the maze of subsidiaries in the matter of
ownership, receipt of 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
pages 483 to 490 and also Page 456,
4th
456 which reads as
Edition by Malcolm N.Shaw at
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)
2002) 6 SCC 600.
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:
ig "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."
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,
ig 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
not the
to
some
case of
States
the
like
Revenue
Jammu
that
&
the
Kashmir.
Income Tax
It is
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 in-apposite.
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
are Indian
of
ig those
citizens
Acts
cannot
to
be
persons
compared
or entities
with
who
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).
(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',
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 the
in
light
question
of
is
the
chargeable
principles
to tax in
aforementioned.
India
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
Sections 194,194C,194-I, 196A, 196B, 19C refer to
Annexure A).
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.
ig 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).
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
No prejudice is caused either to the deductor or to
the moneys payable to deductor.
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
recovery
income
of such
of
tax
an assessee.
by way of
Section
tax
4(2)
deduction
provides
at
of
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
assessee
the assessee
has
ig made
(deductee)
payment
under section
of tax
directly,
Once the
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
make payments
under
ig by
the
way
Income
of
Tax
advance
Act
tax
and
or by
has
any
failed to
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).
(Kant)
. He also relied on Traco Cables Co. Ltd. Vs.
CIT 166 ITR 278 (Ker.)
xi) It is further submitted that one other
significant
Petitioner,
aspect
on
which
08/05/2007,
requires
had
notice
withheld
is
to
that
itself,
the
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
which has
would
to
not
be
apply
construed
to a
liberally
machinery
in order
provision
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
intepretation 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
Government,
taxes
but
ig but
not
who
to apply
do
to
not
cases
remit
where
it
the
to 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 rad "if any such person.......
fails to deduct tax or after deduction fail to
pay........".
necessarily to
ig The
the
word
person occurring
"such
in
person"
the
referred
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
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
ig and
2002 or 2003, the Petitioner is liable to be treated
199 and post the amendment made in
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).
(Bom)
xx) In the year 2002, Section 192 (1A) was
inserted in the Income Tax Act. Certain non-monetary
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',
payment of
as
ig tax.
that
This
introduced
led
a
to
third
insertion of
category
new
of
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
failed
to
ig 74
deduct
ITD
the
tax,
(Mum),
(Mum)
the
that
recovery
where
under
deductor had
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
payment.
persons who
ig made
"persons
the
referred
deduction
to
but
in
did
Section
not
200"
make the
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
Section 201 therefore such an interpretation has to be
"fails to deduct tax" used in
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.
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
from acting
writ
without
prohibiting
jurisdiction
an
and
executive
where the
authority
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
non-resident;
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 ig 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
should
the
be
ig Respondents
precluded
to
from
urge
invoking
that
jurisdiction
the Petitioner
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
vital documents
that
from
the Petitioner
this Hon'ble
has not
Court,
suppressed
as alleged
any
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
Hon'ble
Respondents
Court.
ig in
To
the
date
present
no such
proceedings
request has
before
been
this
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 non-resident 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
territorial
Parliament
jurisdiction
does
or
not
violate
intend
the
to exceed
rules
its
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
Court
other
should
words,
prefer
the Respondents
the
urge
statutory
that this
definition
Hon'ble
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),
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 n 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.
requirement
In support of its contention that the
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.
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,
Ch.223 which judgment
reiterates the principle enunciated by the House of
Lords in Clark.
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 persuative 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
indicative of
Promotion
any
Board
nexus with,
(FIPB
FIPB)
FIPB
or
approval
constitutes
is
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
the
is the
Petition
subject
as well
matter
as
of
prayer
Ground
(d).
(g)
It
at
is
submitted
of
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
proposed to
was
rejoin
not
only
pressed,
to the
and, therefore,
sole argument
it
that
is
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,
Vodafone Essar
including
Ltd.)
Hutchison
and its
Essar
subsidiaries.
Ltd. (now
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'
is inapposite
reliance
as
on
the
the
new
application
policy for
to the
Foreign
FIPB
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.
and Rama
Ram
Narain
Narain
&
Kapur
Sons Pvt.
& Co.
Ltd.
Pvt.
Vs.
Ltd.
CIT
ITR
ITR
534,
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
ITR 575 and CIT Vs. New India Assurance Co.Ltd. 122
ITR 633.
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
HTIL)
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
the transaction viz. the transfer of the share
concepts and on the legal effect of
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,
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
It is
held
submitted
ig that
that
'property'
none
is
of
a
the
term of
decisions
wide
referred
import.
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 Eessar
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 judgment
The Petitioner submits that the reliance on
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
Company
placed
Law
ig on
Board.
certain
It
decisions
is submitted
including
that
that
the
of
ratio
the
of
these decisions does not aid in adjudicating the
specific issue that arises for consideration before
this Hon'ble Court.
136. The decision of the Company Law Board in Air
Touch International (Mauritius) Ltd. Vs. RPG
Cellular Investments 121 Comp.Cases 647,
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
of
in
preemption
a
ig subsidiary
pursuant
company
to a
would invite
shareholders
the rights
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.
the learned
ig In
Additional
view of
Solicitor
the aforesaid
General
assertion
the
by
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 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
viz.
be
(a)
in
passed
the
against
case of
only
a
two
person
classes
referred
of
to
persons
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
ig remit
a failure to deduct tax at source is viewed by the
tax deducted at source as opposed to
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
failed
in
to
section
deduct
tax
of
at
the Act
source
all
could
persons
be
who have
proceeded
against under section 201 of the Act. In fact the
decisions relied upon by the Respondents accept 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
ig of
after its amendment in 2002 but before the amendments
section 201 of the Act as they stood
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
the payer
it
ig only
clear that
after
the Revenue
the
can
assessee
proceed
who
against
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 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.
has not
Even
expired
as
and
of
hence
now
it
the
could
time for
not
filing
be
a
stated
return
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
explained
is
without
hereinbefore
any substance.
on a
It
plain
is submitted
construction
that as
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 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
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.
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,
India (b)
through
ig property
or from
in India
(a)
(c) any
business
asset
connection
(d)
in
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 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:
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:
. 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
naturally include tax obligations under Income Tax
regulations of India, which would
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.
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:
. "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
ig million
of Hutchison Essar at the time of exercise is greater
or, if the market equity value
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
TII and Omega and received investments in preference
shares of TII and its subsidiaries amounting to 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
at an
worth
independently
of Hutchison
appraised
Essar
fair
shares
market
to
value.
the Group
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 non-complete 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,
the point of
such
view
a transfer
of
has
transferor
to
and
be viewed
transferee.
both
It
from
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
to successfully pierce the Indian mobile market to
case was also to enable the Petitioner
enlarge its global presence.
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:
.
persons not
"Any state may impose liabilities, even upon
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,
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
(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
Revenue Commissioners 1961 (1) LL ER 762, especially
Collco Dealings Ltd. Vs. Inland
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
laws of
would
India,
certainly
including the
be
Indian
subject
Income
to
Tax
municipal
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. 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
observations
notice.
of
ig the
In this
Hon'ble
context,
Supreme Court
the
in
following
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
ig 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.
172. On similar lines, this Court in Jayanthi Lal
Thankar & Co. Vs. Union of India (2006) 195 ELT 9
(Bom.),
(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 ig 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
ig 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),
(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.
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,
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 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.
176. Similarly, in Titaghur Paper Mills Co.Ltd. &
Anr. Vs. State of Orissa & Ors. 142 ITR 663 SC,
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 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 ig 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
ig clearly
evidence, even assuming that the onus of proof does
amounts to withholding of the best
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,
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:
"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
ig Prestige Lights Ltd. Vs. State Bank
of India (2007) 139 Comp.Cases.169 (SC),
(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,
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.
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,
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 ig 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),
(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 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."
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,
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.)
