TMI Blog2011 (8) TMI 344X X X X Extracts X X X X X X X X Extracts X X X X ..... tion is maintainable - Impugned show cause notices are hereby quashed and this writ petition is allowed - 9100 of 2007 - - - Dated:- 12-8-2011 - MR. JUSTICE A.K. SIKRI, MR. JUSTICE M.L. MEHTA, JJ. For Appellant : Mr. Harish Salve, Sr. Advocate with Ms. Anuradha Dutt, Ms. Fereshte Sethna, Mr. Anish Kapur, Ms. Ekta Kapil, Mr. Kuber Dewan, Ms. Shweta and Mr. Pratyush Miglani, Advocates. For Respondent: Mr. Mohan Parasaran, A.S.G. with Mr. Sanjeev Sabharwarl, Sr. Standing Counsel, Mr. Soheb Horrain, Mr. Alok P. Kumar and Ms. Aarthi Rajan. A.K. SIKRI, J. 1. By the present petition, the petitioners are challenging the legality and validity of the notices dated 10.04.2007 and 10.10.2007 issued under Section 163 of the Income Tax Act (hereinafter referred to as the Act‟) vide which respondent No.1 proposes to treat respondent no.4 as an agent of the first petitioner and make an assessment on respondent No.4 as a representative assessee of the first petitioner. 2. Vide impugned notices served upon the respondent No.4 treating as a representative assessee of the petitioner No.1, the Department is seeking to bring within the tax net the purported income gener ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uals as nominee shareholders in 1998 with the approval of the Foreign Investment Promotion Board. The second petitioner is a wholly owned subsidiary, through various intermediate holdings, of the first petitioner. The remote business processing and offshore support operation that provided specified business process outsourcing services (BPO) to the first petitioner and its affiliates were carried out from facilities located in India (through GECIS as explained aforesaid), as well as in China, Hungary, Mexico, the United Kingdom and the United States of America, through other, this BPO business grew, acquiring outside clients apart from the petitioner‟s group of companies and gathered value. With certain investors evidencing interest in acquiring 60% of the petitioner‟s BPO business and, with a view to divesting it worldwide ownership in companies through which such business was conducted, the petitioners‟ along with other affiliated companies embarked on a series of transactions in December, 2004. 5. The series of transactions entered into in transferring the shares with the objective of acquiring of the BPO business of the petitioner is set out in Annexure-A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... usly a company incorporated in Luxembourg wholly owned by the Second Petitioner as the new holding company of the Petitioners‟ BPO business viz., GECIS Global Holdings directly and indirectly through its subsidiaries bought out the shares/assets of the other operating companies which carried on the petitioners‟ BPO business activity in the United States, the United Kingdom, Hungary Mexico and China. 6. The Second Petitioner thereafter transferred its shareholding in GECIS Gibraltar to GECIS Global Holdings for a consideration which was discharged by issue of common stock, preferred stock, as well as a payment of US $37 million in cash by GECIS Global Holdings to the Second Petitioner. Subsequently GECIS Gibraltar was liquidated and hence the shares of GECIS India International which hitherto belonged to GECIS Gibraltar were distributed to GECIS Global Holdings in liquidation. 7. The Second Petitioner in turn transferred the preferred stock it received in GECIS Global Holdings to GE Luxembourg Investments S.a.r.l, a company incorporated in Luxembourg for a consideration which was secured by issue of promissory notes by GE Luxembourg Investment S.a.r.l. 8. GE ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uritius company. (b) The shares of the GECIS India Investments were transferred to a holding company. The shares with the holding company were then transferred and so on in a series of transactions, and finally the holding company was GECIS Global Holdings, in which other BPO businesses from other countries were also consolidated. (c) The shares of GECIS Global holdings were sold to a Luxembourg company, and through a series of transactions, the holding shares were acquired by Gecis Investments Co. (Lux). (d) In the aforesaid manner, Gecis Investments Co. (Lux) acquired 99.1% of the preferred stock and 60.6% of the nominal common stock of GECIS Global (Lux) a newly organized Luxembourg company and which was a transfer of a capital asset situated outside India i.e. shares in a company incorporated in Luxembourg. 8. As per the petitioners, the only capital asset in India which was transferred in the course of the restructuring and reorganization transactions was the gift of the shares of CECIS by the second petitioner a Mauritius company and certain nominee shareholders to GECIS India Investments and GECIS India Holdings, respectively (each a Mauritius incorporate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing to the sale of the stake in respondent No.4. It was further stated that the income arising to the first petitioner from the sale of its direct/indirect stake in respondent No.4 is liable to tax in India in view of the deeming provisions contained in Section 9(1)(i) of the Act. It was proposed in the notice to treat the respondent No.4 as an agent and consequently, the representative assessee of the first petitioner under the provisions of Section 136 read with Sections 160 and 161 of the Act and proposed to proceed to act in accordance with law. This show cause notice also referred to the earlier notice dated 02.11.2006 issued to the respondent No.4 stating that such information had not been furnished. Accordingly, the respondent No.4 was required to show cause as to why such action of treating the respondent No.4 as representative assessee be not taken and income accrued to the petitioner No.1 assessed in accordance with the law. 13. Respondent No.4 submitted its reply to the said show cause notice, inter alia, stating that it had no obligation to deduct the tax at source in respect of such transactions between the petitioners on the one hand and General Atlantic Partners ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . We would like to point out at this stage that in the writ petition, the petitioners have also stated that from the transactions in question, no income has accrued or arisen to the petitioner No.1 which is taxable in India. This position is contested by the Official Respondents explaining their stand in much detailed in the counter affidavit. However, as pointed out above, since we are not concerned with that issue in the present petitioner, which was not pressed or argued by the petitioners, we are avoiding to take note of such averments for this reason. 17. The respondents have challenged the maintainability of the writ petition by raising certain preliminary objections. The main emphasis of the respondents in the counter affidavit and in particular the argument that was pressed at the time of hearing was that the matter is still at the show cause notice as to why the respondent No.4 be not treated as agent of petitioner No.1 and writ petition challenging show cause notice is not maintainable and the statute provides for efficacious remedy of appeal under the Act. It is also contended that writ petition is pre-mature as well. Maintainability is also challenged on the ground ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Act, BPO company submitted that on 30.12.2004, GECIM (Mauritius company) contributed shares of BPO company to GECIS India Investments, Mauritius (GII) another Mauritius company, which is wholly owned subsidiary of Mauritius company. This wholly owned subsidiary was incorporated in Mauritius on 07.12.2004 (i.e., after the Securities Purchase Agreement of 17.11.2004) and its name was subsequently changed to Genpact India Investment on 04.10.2005. These facts, which became available, indicated that the shares of BPO company, which were valued at Rs.15,000/- per share in 2006 were transferred by Mauritius company to GII at Nil‟ value in December, 2004. In fact, the General Atlantic Partners, General Electric and Oakhill Capital Partners issued a joint press release on November 08, 2004. Upon perusal of press release, it is noticed that the transaction values GECIS/BPO company at $800 million. Upon closing GE rain a 40% stake in GECIS and receive cash proceeds approximately $500 million. It also states that the parties aim to complete the transaction sometime in the next six months. Further, BPO company was carrying on a successful business and had potential to grow further ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quently the control also stood transferred. The question whether this transfer of shares of an upstream company resulted in a capital gain in the hands of the transferor or petitioner No.1 is a matter that would require consideration. The issue of the validity of the show cause notice has, in the first instance, to be decided on the applicability of Section 163 on the facts as alleged in the show cause notice on a demurrer assuming them to be correct. Respondent No.4 is the target company‟, i.e., the company, the control of which has shifted on account of sale of shares (of the Luxembourg Company) prior to the transaction, it was known as GE Capital International Services (GECIS India). GECIS India is the Indian company whose control passed pursuant to the transaction. 22. Mr. Salve‟s argument was that the aforesaid facts clearly demonstrate that conditions stipulated in Section 163 of the Act for the purpose of treating respondent No.4 as an agent of the petitioner No.1 had not been fulfilled. His submission was that Section 163 of the Act has to be read in conjunction with Section 161, which provides that the specified person can be treated as assessee as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llowed GE Capital Services India Ltd., New Delhi to have GE Capital Services, USA as the foreign collaborator for setting up the wholly owned subsidiary companies to undertake the business of hire purchase and lease financing and financial billing and services company. The Government of India, Ministry of Industry, Department of Industrial Policy and Promotion, Secretariat for Industrial Assistance, EOU Section vide letter No.FC/98/EOP/46/97 had allowed M/s GE Capital International Services, AIFACS Building, 1 Rafi Marg, New Delhi had conveyed approval to their foreign collaboration proposal. The name of foreign collaborator and country was GE Capital International (Mauritius), Mauritius (a subsidiary of M/s General Electric Capital Corporation, USA). The approval was for the manufacture of computer software. This approval dated 09.01.1998 was amended on 02.03.1998 as per request letter dated 20.02.1998 of M/s GE Capital International Services. As per the amendment, the foreign collaborators were M/s GE Capital International (Mauritius), Mauritius and M/s GE Capital Indian Service, Netherlands. The approved items of manufacture were computer software (data entry, conversion, da ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of that business. In such cases the question whether there is business connection from or through which income, profits or gains arise or accrue to a non-resident must be determined upon the facts and circumstances of the case. The expression business connection‟ postulates a real and intimate relation between he trading activity carried on outside the taxable territories and the trading activity within the territories, the relation between the two contributing to the earning of income by the non-resident in his trading activity. 26. Mr. Parasaran submitted that the issue of jurisdiction for the issue of notice under Section 163 of the Act came up for consideration before the Kerala High Court. The Kerala High Court in the case of Commissioner of Income Tax Vs. Fertilizers and Chemicals (Travancore) Ltd. [(1987) 166 ITR 0823] held that a non-resident may have several representative assessees in respect of several heads under which income is derived by him. There can, therefore, be more than one assessment in respect of income accrued or arisen to a non-resident provided that there is more than one representative assessee. Direct assessment on the non-resident in respec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ral provisions Representative assessee 160. (1) For the purposes of this Act, "representative assessee" means (i) In respect of the income of a non-resident specified in sub-section (1) of section 9, the agent of the non-resident, including a person who is treated as an agent under section 163; xxx xxx xxx (2) Every representative assessee shall be deemed to be an assessee for the purposes of this Act. Liability of representative assessee. 161. 1) Every representative assessee, as regards the income in respect of which he is a representative assessee, shall be subject to the same duties, responsibilities and liabilities as if the income were income received by or accruing to or in favour of him beneficially, and shall be liable to assessment in his own name in respect of that income; but any such assessment shall be deemed to be made upon him in his representative capacity only, and the tax shall, subject to the other provisions contained in this Chapter, be levied upon and recovered from him in like manner and to the same extent as it would be leviable upon and recoverable from the person represented by him. Right of representative assessee to recover tax paid. 162.(1) Eve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der the given circumstances, certain persons can be treated as representative assessee on behalf of non-resident specified in sub-section(1) of Section 9 of the Act. This would include an agent of non-resident and also who is treated as an agent under Section 163 of the Act. Section 163 deals with special cases where a person can be regarded as an agent. These are: (i) who is employed by or on behalf of the non-resident: or (ii) who has any business connection with the non-resident; or (iii) from or through whom the non-resident is in receipt of any income, whether directly or indirectly; or (iv) who is the trustee of the no-resident; or (v) any other person, a resident or even a non-resident, who has acquired a capital asset in India by means of transfer. 29. Once a person comes within the net of any of the aforesaid Clauses, such a person would be the agent‟ of the non-resident for the purposes of the Act. However, merely because a person is an agent or is to be treated as an agent, it would lead to an automatic conclusion that he becomes liable to pay taxes on behalf of the non-resident. That would only mean that he would be treated as representati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have been, prima facie, fulfilled. Thus, respondent No.4 can be treated as an agent in relation to the petitioner No.1 a non-resident . As an agent respondent No.4 would be the representative assessee within the meaning of Section 161(1) of the Act. The question before us is as to whether in its capacity as representative assessee of the petitioner No.1, liability of the respondent No.4 arises within the meaning of Section 161 of the Act and it would be assessed in that representative capacity. To put it otherwise, whether the purported income earned by the petitioner No.1 through transfer of shares can be treated as the income in respect of which he is a representative assessee. It is because of the reason that Section 161 makes him liable only as regards that particular income. 32. This very aspect has been considered and explained in various judgments. In fact, similar provision existed in the Income Tax Act 1922 which repeatedly came up before the Courts for interpretation. We may start our discussion from the Privy Council‟s judgment rendered in 1936. Name of the case is Commissioner of Income Tax, Bombay Presidency, and Aden Vs. Currimbhoy Ebrahim and Sons, Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all, could be made liable for the income-tax due on the nonresident's house property in Bombay with which they had no concern, and this notwithstanding that tax had hitherto been duly assessed upon and paid by the person managing the property on behalf of the non-resident . 34. Next case of some relevance would be the judgment of Bombay High Court in the case of Ramnarayan Rajmal Vs. Commissioner of Income Tax, Bombay South, Bombay [(1952) 22 I.T.R. 241]. In that case, M/s Ramnarayan Rajmal Rathi was treated as representative assessee by the Department and the assessment was made on it as against the non-resident, M/s. Shivnarayan Brothers of what was the former Hyderabad State. Ramnarayan Rajmal were the agent of the non-resident in respect of transactions effected by the non-resident principal through the assessee and it was not disputed that they had been rightly appointed an agent under Section 43 of the Income Tax Act, 1922 (which corresponds to Section 161 of 1961 Act). There was, thus, a business connection between the assessee/agent and the non-resident. However, the question was as to whether income which accrues to or earned by non-resident from business done throu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... almost impossible claim by seeking to tax the appellant as agent on behalf of principal in connection with qua a particular income with which there was no connection. The judgment opened with the following interesting remarks: 1. The Income-tax Department is known to cast its net very wide in order to collect as much tax as possible. To the extent that its activities are legal and supported by the law, we have given every encouragement to the Department, but this is a striking case where there does not seem to us the slightest justification for the attempt made by the Department to collect the tax from this particular assessee. 36. The Supreme Court has also accorded the same reasoning in the case of C.R. Nagappa Vs. Commissioner of Income Tax [73 ITR 626]. In that case, the Apex court was concerned with the present Income Tax Act of 1961 and the same provisions, viz., Sections 160 and 161 of the Act, though these provisions came up for interpretation in the context of assessment of income at the hands of trustee under Section 64(v) of the Act. We may quote the following passage from the said judgment for our benefit: 14. In our view Chagla C.J. was right in observi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... residents did not carry on any business operations in the taxable territories: they acted as selling agents outside India. The receipt in India of the sale proceeds of tobacco remitted or caused to be remitted by the purchasers from abroad did not amount to an operation carried out by the non-residents in India as contemplated by Clause (a)of the Explanation to Section 9(1)(i) of the I.T. Act, 1961. The commission amounts which were earned by the non-residents for services rendered outside India could not be deemed to be income which had either accrued or arisen in India. 38. While so holding, the Court explained the scope of Section 160, 161 and 163 of the Act in the manner already stated by us hereinbefore. 39. The issue has been considered at length by Kerala High Court as well in the case of Commissioner of Income Tax Vs. Fertilizers Chemicals (Travancore) Ltd. [166 ITR 823]. In that case, the assessee-company had entered into a collaboration agreement with a foreign company for construction of a synthesis gas plant. The assessee was to pay certain amount to the foreign company for construction of a synthesis gas plant. The assessee was to pay certain amount to the f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty. Therefore, it is clear that every case of an assessment against a trustee must fall under section 41, and it is equally clear that, even though a trustee is being assessed, the assessment must proceed in the manner laid down in Chapter III ...... Section 41 only comes into play after the income has been computed in accordance with Chapter III. Then the question of payment of tax arises and it is at that stage that section 41 issues a mandate to the Taxing Department that, when they are dealing with the income of a trustee, they must levy the tax and recover it in the manner laid down in section 41." 41. We, thus, agree with the submission of Mr. Salve, learned Senior counsel appearing for the assessee, that a harmonious reading of Sections 160, 161, 162 and 163 would show that: (i) In order to become liable as a representative assessee, a person must be situated such as to fall within the definition of a representative assessee; (ii) The income must be such as is taxable under Section 9; (iii) The income must be such in respect of which such a person can be treated as a representative assessee; (iv) The representative assessee has a statutory right to withho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has to be further established by the Department that the respondent No.4 had some connection with the income earned by the first petitioner which is sought to be taxed at the hands of the respondent No.4. Even when we examine the case treating the allegations made by the Department as correct, we find no such live link of income earned by the first petitioner and the respondent No.4 in respect of the transaction which is sought to be taxed. As already held by us that Section 163 has to be read in conjunction with Section 161 which provides that the specified person can be treated as assessed ..as regards the income in respect of which he is a representative assessee . Therefore, an agent can only be a representative assessee as regards the income in respect of which the alleged agent has business connection and/or from or through directly and/or indirectly the income was received. 44. At this stage, it would be necessary to deal with another contention of Mr. Parasaran, questioning the maintainability of this writ petition at this stage on the ground that it is pre-mature proceeding only a show cause notice has been issued and the facts are yet to be ascertained/inves ..... 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