LEARNING FROM JUDGMENT IN CASE OF FAG Bearings India Ltd- be very careful before paying tax (or any sum to any one) and have proper checks and controls.

[C.A. DEV KUMAR KOTHARI]

Relevant references, links and provisions etc:

Article 265 of the Constitution of India.

Sections 64, 195, 199, 244A of the Income-tax Act, 1961.

FAG Bearings India Ltd. Versus Chief Commissioner of Income-tax 2012 (11) TMI 184 - GUJARAT HIGH COURT

BASF(India) Ltd. v. W. Hasan, CIT 2005 (10) TMI 34 - BOMBAY HIGH COURT

Circular no. 769 dated 6.8.1998 issued by CBDT.

Circular no. 790 dated 20.4.2000 issued by CBDT

Circular No. 790 issued by CBDT.

Circular No. 285 dated October 21, 1980  issued by CBDT.

CIT v. B.M. Edward, India Sea Foods 1979 (2) TMI 70 - KERALA HIGH COURT;

CIT v. N.T. Ramarao (HUF) 1984 (11) TMI 6 - ANDHRA PRADESH HIGH COURT;

Bakor Moti Pagi v. Ishvar Thakor Moti Thakkor, AIR 1935 Bom 257

CST v. Auraiya Chamber of Commerce 1986 (4) TMI 50 - SUPREME COURT

CIT v. Shelly Products 2003 (5) TMI 4 - SUPREME COURT;

Nirmala L. Mehta v. A. Balasubramaniam, CIT 2004 (4) TMI 43 - BOMBAY HIGH COURT

CIT v. Geeva Films [1983] 140 ITR (St.) 1.

Internal check and control are important tools:

In  any organization according to its size and volume of transactions proper system of internal check and control are very necessary and are considered  very  important tools for effectively carrying out transactions with  a view to minimize mistakes,  omissions, over-looking attitude, collusion and frauds etc. Even a proprietor carrying most of activities personally try to have a system of internal check and control through documents and recording etc. which are used to get up to time information before making payment.

In case of companies requirement of statutory audit is compulsory irrespective of size. With increase in size and volume other audits also become necessary. In case of companies like one whose case is under consideration, that is FAG Bearings India Ltd, internal audit and tax audit are also statutorily required besides many other audits can be conducted for the benefit of management.

Internal check and control are at initial to final stages of a transaction:

Internal checks and controls are to be followed right from the initial stage of transaction to final stage of transaction. Therefore these tools come into role much before audit. Therefore, in case of large organizations internal check and controls must be effective and rules should be seriously followed. Particular when there is not much urgency, any payment should be made only after full and thorough check of accounts, related accounts, related files and after obtaining comments, views and verification etc. from all concerned persons.

Wrong payments may be difficult to recover:

In case a wrong payment is made, and sum become recoverable, it may be hard to get refund, even from government department. From the case of FAG it seems that even government machinery will try to avoid refunds if a tax payer has wrongly paid tax.

In business, we have common honest trade practice that in case. A makes a payment to B, due to mistake and that sum was not due to B, then B is holding the money in trust for A. We come across cases when parties refund excess money received even without claim from the person who made the payment. In business, by and large honesty is followed as best policy. Exceptions involving dishonesty are very low in proportion and major portion of deals are carried with honesty. Even without a single word in writing, large volume of business is carried over words spoken, in fact in many situations transactions are carried over spoken words and the documents are prepared accordingly in due course.

It is unfortunate to note the way in which government machinery, including its counsels, tried to avoid refund of tax which was paid by mistake and excessively, due to payment made  at two occasions (instead of at one occasion) for the same transaction. In fact such attitudes adopted by government machinery, many times may prompts even  very honest  people to  deviate from the policy of honesty is best policy, so as to try to avoid government payments and also payments to other government controlled organizations where similar attitudes are faced.

The case of FAG:

At the time of making the provision for technical assessment fees, payable to the foreign company FAG deducted an amount of Rs. 19,49,400/- as TDS u/s 195  and also deposited such sum with the Government of India on 1.6.1998.

Again when the fees for technical assistance were actually remitted, the petitioner once again deducted a sum of Rs. 21,82,500/- towards tax at source and also deposited the sum with the Government of India on 18.8.1998.

Here seems failure of internal check and control in the office of FAG, which led to second time payment at the time of actual remittance, though provision was made earlier and tax was paid earlier. The difference seems to be due to value of Indian rupees against foreign currency remitted. In fact the amount payable  in Indian Currency should have been recomputed  then gross tax payable and net tax payable should have been computed and net amount after adjusting Rs. 19,49,400/- should have been deposited. However, that was not done, due to mistake or oversight  or sheer mistake of adjusting payment already made and second time TDS was deposited on the basis of amount valued in Indian rupees against foreign currency to be remitted. This can be considered as a serious failure of internal check and control in the organization of FAG particularly because the earlier payment of TDS was just 79 days before the second time deposit, and the matter was not a small as it involved large remittance and such remittance was also concerned with important file and issue.

When the mistake came to notice, FAG made application for refund of excess amount paid amounting to Rs.19,49,400/-  and such application  was made on 2.11.1998. After many reminders the application was rejected by the Assessing Officer, against which FAG preferred challenge by way of a Writ Petition.

The case of BASF:

The case of BASF was relied on therefore, we also need to consider the facts and ruling in that case.

In this case also BASF also assessee paid the amount of royalty for the period from January 1,1999, to June 30,1999.

The withholding tax was also deducted and depositing to the tune of Rs. 2,73,242.

Later on it was found that royalty was wrongly paid as it was not payable because production did not exceed the fixed target, therefore the royalty wrongly paid was refunded by the payee to tax deductor, BASF, on January 18, 2000.

Therefore, on February 6, 2000, BASF made an application to the Assessing Officer seeking to adjust or refund tax deducted at source on the amount of royalty. The details called for in this regard were furnished by the petitioners on February 16, 2000, to the Assessing Officer.

Counsel of BASF relied on Circular No. 769 dated August 6, 1998 ([1998] 232 ITR (St.) 25) in support of claim for refund on the ground that the Circular laid down a substantive and beneficial provision, it provided base for a vested right of assessee in a substantive manner to claim refund, that new circular revoking the old circular will have a prospective effect.

Counsel also submitted that new circular would also apply and support the applications for refund which were made after issuance of the said circular. In this regard he placed reliance on the judgment in case of Unit Trust of India v. P.K. Unny 2001 (4) TMI 77 - BOMBAY HIGH COURT; wherein it has been held that it is well-settled that the withdrawal of the circulars cannot operate retrospectively since they are in the nature of instructions and/or guidelines for the benefit of the Department.

Reliance was also placed on the Full Bench judgment of the Kerala High Court in CIT v. B.M. Edward, India Sea Foods 1979 (2) TMI 70 - KERALA HIGH COURT; wherein it was held that the assessee is entitled to get the benefit of the circular which was in force and operation at the relevant time; later withdrawal of the circular would not prejudicially affect the rights of the assessee.

The judgment of the Andhra Pradesh High Court in CIT v. N.T. Ramarao (HUF) 1984 (11) TMI 6 - ANDHRA PRADESH HIGH COURT; was also relied on wherein it was held that the circulars which were in force during the relevant assessment years were the circulars that had to be applied and the subsequent circulars either withdrawing or modifying the earlier circulars could not have any application.

The judgment in the case of Gujarat Electricity Board v. Shantilal R. Desai, AIR 1969 SC 239 was also relied on. In this case the only question for decision was:

Whether on the basis of the notice issued by the Bombay State Electricity Board on January 8, 1959, under section 7 of the Indian Electricity Act, 1910, prior to its amendment in 1959, the Gujarat Electricity Board could compulsorily purchase from the respondent therein the concern known as Bilimora Electric Power Supply Co?

The Supreme Court held that the Gujarat Electricity Board could do so as it was not the case of the respondent therein that either expressly or by necessary implication, the new law had taken away the right which was acquired earlier.

Judgment in Bakor Moti Pagi v. Ishvar Thakor Moti Thakkor, AIR 1935 Bom 257 was also relied on. In this case also it was held that an amendment to the legislation during the currency of the suit is irrelevant and the rights of the parties are to be governed by the Act as it existed at the time when the suit was filed or initiated.

Referring to the judgment laying down law in the case of CST v. Auraiya Chamber of Commerce 1986 (4) TMI 50 - SUPREME COURT the counsel pointed out that it was held that if mistake of law or fact is established, then the assessee is entitled to recover the money and the party receiving it is bound to return it irrespective of any other consideration. It further held that where, indisputably, the dealer had a legal title to get the money refunded and since the dealer was not guilty of any laches; and since there was no specific prohibition against refund, it was not proper to get entangled in the cobweb of procedures to defeat substantial justice.

Reliance was also placed upon the judgment and law laid down in CIT v. Shelly Products 2003 (5) TMI 4 - SUPREME COURT; wherein the Supreme court held that in a case where an assessee chose to deposit by way of abundant caution advance tax or self-assessment tax which was in excess of his liability; on the basis of the return furnished or there is any arithmetical error or inaccuracy, it is open to him to claim refund of the excess tax paid in the course of assessment proceeding. Similarly, if, he has by mistake or inadvertence or on account of ignorance, included in his income any amount which was exempted from payment of income-tax or was not income within the contemplation of law, he may likewise bring it to the notice of the assessing authority, who, if satisfied, may grant appropriate relief.

The judgment  in case of  Nirmala L. Mehta v. A. Balasubramaniam, CIT 2004 (4) TMI 43 - BOMBAY HIGH COURT was also relied in which it was held that there could not be any estoppel, against the statute. Article 265 of the Constitution in unmistakable terms provides that no tax shall be levied or collected except by authority of law. Acquiescence cannot take away from a party the relief to which he is entitled on account of levy or collection of tax is without any authority of law.

Coming on facts the counsel Mr. Jasani further submitted and summarized that, admittedly, the petitioners had under mistake remitted the royalty which was returned by the collaborator as such deductor is entitled to refund because it was not an amount paid by way of tax. It is well-settled that no tax can be levied except with the authority of law as enjoined by article 265 of the Constitution of India. The Central Board of Direct Taxes has opined in Circular No. 790 (see [2000] 243 ITR (St.) 58) that the amount paid by the assessees like petitioners is not a tax and, therefore, the same cannot be retained by the respondents. The amount deposited by the petitioners is in excess of tax which could not be collected from the petitioners. The Central Board of Direct Taxes in the context of section 192 of the Act in Circular No. 285 dated October 21, 1980 (see [1981] 130 ITR (St.) 1), had suggested grant of refund independent of the provisions of the Act. There is no way the payee could have claimed the tax deducted at source and credited with the Department inasmuch as no income had accrued to it as the remittance itself had been returned to the payer and, consequently, a certificate of tax deducted at source could not have been issued by the petitioners. In his submission, equity, therefore, demands that the amount should be refunded to the deductor, i.e. the petitioners - BASF.

Thus it was claimed, submitted  and prayed that the petitioner (BASF)  were entitled to refund of tax deducted at source on the amount of royalty wrongly paid to the foreign collaborator, which was  refunded back by the collaborator to the petitioners and the revenue could not retain the same as it was not tax due which can only be collected.

The counsels of revenue had main contentions that the new circular was applicable and old circular was not applicable and supported decisions of the AO and CIT.

Per High court:

After consideration of all contentions raised by concerned parties the Court observed and held as follows (Highlights provided in red colour)

“In the above view of the law laid down by the Andhra Pradesh High Court in consonance with the law laid down by the Kerala High Court, we have no hesitation to come to the conclusion that the application moved by the petitioners for refund was liable to be considered in accordance with Circular No. 769 (see [1998] 232 ITR (St.) 25) issued by the Central Board of Direct Taxes as the circumstances for refund referred to therein are liable to be held applicable to the facts of the case at hand in its true letter and spirit. taxmanagementindia.com

Having said so, we need to consider one more contention raised by the Revenue that Circular No. 790 dated April 20, 2000 (see [2000] 243 ITR (St.) 58), being procedural one has a retrospective operation; as such the said circular will be applicable to the refund application moved by the petitioners. This argument need not detain us. At the first blush, both circulars give an impression that they are procedural but on deeper scrutiny we find that they are not. There is no provision under the Act permitting the deductor to claim refund of the amount of tax deducted at source (TDS). For the first time, this right to claim refund of TDS was given to the deductor by Circular No. 769 (see [1998] 232 ITR (St.) 25) and subsequently, it was recognised by Circular No. 790 (see [2000] 243 ITR (St.) 58) issued by the Central Board of Direct Taxes. Thus, the said circulars created a vested right in favour of the deductor to claim refund of TDS. Therefore, the said circulars cannot be said to be circulars merely providing for procedure for refund of TDS. In that view of the matter, applying the very same test, the subsequent circular in question i.e. Circular No. 790 dated April 20, 2000 (see [2000] 243 ITR (St.) 58), cannot be said to be merely a procedural one so as to give it retrospective effect. Since the petitioners have been non suited   only on the ground of applicability of the second circular, the said view is no longer sustainable for the reasons recorded hereinabove. In our considered view, this petition is liable to be allowed on this count alone. Refund to the petitioners is liable to be granted applying the first circular. So far as the other contentions are concerned, they need no consideration for the view taken by us.

In the result, the impugned orders dated February 28, 2001, passed by the Commissioner of Income-tax, Mumbai and the order dated July 14, 2000, passed by the Assessing Officer rejecting the application for refund of TDS are set aside and it is declared that the petitioners are entitled to refund of the TDS amount. The petition is allowed. Rule is made absolute in terms of this order with no order as to costs.

Learning from facts in these cases:

We find that both the companies FAG and BASF are large multinational companies. Both have substantial business and locations of business. They are also professionally managed companies having devised suitable system of internal check and control. The impugned payments of remittances including tax thereon cannot be called small sums or petty sums even on consideration of the size of business of these companies. Though for controlling owners/shareholders these sums may be petty sums but we have to consider the delegated powers which executives might had. For remittances of such amounts there must be delegation to senior authorities.

In case of FAG, there was only double payment of tax and in case of BASF there was also case of wrong payment which was refunded by the collaborator and tax was also paid by mistake. Thus, there cannot apparently be a case or even doubt of any case of collusion or fraud or some vested rights of concerned people.

Therefore, we can say that these are simple cases of failure of internal check and control. These also reflect that how carelessly executives may work even while paying substantial sums?.     

This shows that executives of big companies need to be more careful.