TMI Blog2011 (9) TMI 536X X X X Extracts X X X X X X X X Extracts X X X X ..... stances, conditions of the scheme, evidences of utility of the funds and the legal matrix of the case, the withdrawal of exemption was unwarranted. Consequent there upon we also hold that the appellant company was not liable to deduct withholding tax @ 20% in respect of the interest payment of US $ 1,05,902 to M/s. Deutsche Bank - AG. With the result. - Decided in favor of assessee The Hon'ble Supreme Court in Radhasoami Satsang v. CIT (1991 -TMI - 5353 - SUPREME Court) has held that, "Strictly speaking, res judicata does not apply to income-tax proceedings. Though, each assessment year being a unit, what was decided in one year might not apply in the following year; where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order, it would not be at all appropriate to allow the position to be changed in a subsequent year. - ITA Nos. 2046, 2057 to 2059 (Mum.) of 2008, 5167, 5168, 5174, 5193, 5195 & 5196 (Mum.) of 2010 - - - Dated:- 23-9-2011 - SHRI D.K. AGARWAL, AND SHRI R.K. PANDA, JJ. Appearances by: Smt. Malathi Sridharan and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... above ECBs. In respect of the ECBs referred to in Para 2.1 above, the Appellant made payment of interest of Rs. 18,90,161/- to ANZ Investment Bank on behalf of various investors through whom the loans were taken. The appellant filed return as agent of ANZ Investment Bank and claimed that the interest payment of Rs. 18,90,161/- was exempt from tax in India as per section 10(15)(iv)(f) of the Income Tax Act and accordingly no amount was taxable in India. The AO examined the issue and held that after withdrawal of the approval by the Government of India, through their letter dated 5.2.2002 withdrawing the exemption, the appellant was not entitled to claim that the interest was not liable to tax in India. The AO accordingly held that the interest payment was liable to tax in India. The AO levied tax as per the rates prescribed under the relevant DTAA of the country of tax residency of the interest beneficiary on the interest income after grossing up." The AO further observed that the Tribunal in ITA No.516/Mum/2002 dated 8.2.2005 have quashed the order passed u/s 195(2) of the Act as well reversed the findings of the ld. CIT(A) accordingly and in the result, the appeal of the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nue to be exempt; The appellant prays that the order of the ld. CIT(A) on the above grounds be set aside and that of the AO restored" 6. The common grounds taken by the Revenue in appeals in ITA No.5167, 5168, 5193, 5174, 5195 and 5196/Mum/2010 read as under (extracted from ITA No.5167/Mum/2010) :- "1. Whether on the facts and the circumstances of the case and in law the CIT(A) erred in holding that the withdrawal order by the Central Government to the effect that the interest payable by Reliance Industries Ltd. is not exempt under section 10(15)(iv)(f) in the hands of the lenders, is to be ignored and the interest payment to the non-resident lenders for the ECB loan approved by the Central Government would continue to be exempt. 2. Whether on the facts and the circumstances of the case and in law the CIT(A) erred in holding that the interest income of Rs. 1,16,51,64,099/- in the hands of the lenders is not chargeable to tax in India. 3. Whether on the fact and the circumstances of the case and in law the CIT(A) failed to appreciate that the Assessing Officer is bound by the IT Act to ensure that the exemption under section 10(15)(iv)(f) is granted only where the necessar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e order of the quasi-judicial authority suffers from any illegality they could have carried the matter higher up." In paragraph 38 of the judgment it has been observed and held that "There cannot be any doubt whatsoever that the assessing authority and the appellate authority are quasi-judicial authorities. By reason of the order impugned in the writ petition the Central Government has in noway curtailed the power of judicial or quasi-judicial authority." In paragraph 39, it has been observed and held that "It is well known that the jurisdiction of judicial review of this court is limited. Having regard to the facts and circumstances, we do not find that there exists any illegality, irrationality or procedural impropriety in the decision. This court is not concerned with the merit of the decision." He further submits that against the said four orders of the Tribunal, the Hon'ble Jurisdictional High Court vide order dated 20.06.2011 has dismissed the Notice of Motion vide decision in the Director of Income Tax (International Taxation) v. Reliance Industries Ltd. in Notice of Motion Nos.693, 695, 698 and 699 of 2011 with Income Tax Appeal (L) Nos.1688, 1682,1692 and 1685 of 2006 resp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eamline the question to be answered by us which according to us are as follows: (1) What is the implication of Hon'ble Delhi High Court decision as well as the SLP filed before the Hon'ble Apex Court on the jurisdiction of the Tribunal. (2) What is the scope of Section 10(15)(iv)(f) and whether the exemption was rightly withdrawn considering the utilization of ECB and merits of the case. (3) Whether the A.O was right in directing the assessee to deduct withholding tax @ 20% vide an order u/s.195(2) of IT Act 14. Even before we proceed to answer the above questions it is pertinent to examine the contents of section 248 of IT Act, which according to both the parties is the only section under which an appeal lies against such-direction as made in the impugned order u/s.195 of IT Act. The section 248 reads as follows: "248. Appeal by person denying liability to deduct tax. Any person having in accordance with the provisions of sections 195 and 200 deducted and paid tax in respect of any sum chargeable under the Act, other than interest, who denies his liability to make such deduction may appeal to the Commissioner (Appeals) to be declared not liable to make such section. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such exemption had been withdrawn is communication of a foundation of fact. If, according to the petitioner, the order of the quasi-judicial authority suffers from any illegality they could have carried the matter high up." So the Hon'ble Court has viewed that the quasi-judicial authorities cannot be denuded of their quasi judicial power. Mere communication of withdrawal of exemption, according to the view expressed was a foundation of fact to be adjudicated by quasi-judicial authority to determine whether such an order suffers from any illegality. After expressing this view the Hon'ble Court has concluded as follows vide placitum "C" and "D" on page - 160. "There cannot be any doubt whatsoever that the assessing authority and the appellate authority are quasi-judicial authorities. By reason of the order impugned in the writ petition the Central Government has in no way curtailed the power of a judicial or quasi-judicial authority (c) It is well known that the jurisdiction of judicial review of this court is limited. Having regard to the facts and circumstances, we do not find that there exists any illegality, irrationality or procedural impropriety in the decision. This cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... legislature such as rules, notifications, approvals etc. Some of the decisions in this regard are worth quoting as follows: (i) CIT v. Abdul Hussein Essaji Arsiwalla, 69 ITR 38 (Bom.) wherein the Hon'ble Court at page-44 has observed as under: "It is a cardinal principle of interpretation that it is this main statute which will govern the rules made under the rule making power given under the Act and not vice versa. If the interpretation of the provision of the statute is clear, a rule framed under the rule making power given under the statute cannot affect it. It is well-settled that rules must be interpreted in the light of the section under which it is made and no exercise of the rule-making power can affect or derogate from the full operative effect of the provisions of the statute." (ii) CIT v. Taj Mahal Hotel, 82 ITR 44 (SC), wherein vide para-49 the Hon'ble Court has observed as under: "It has been rightly observed that the Rules meant only for the purpose of carrying out the provisions of the Act and they could not take was what was conferred by the Act or whittle down its effect" (iii) M.C.T. Muttaiah Chettiar Family Trust v. 4th ITO, 86 ITR 282(Mad) wherein at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 62(AP) wherein the Hon'ble Court at page No.775 776 has observed as under: "Learned Counsel for the assessee invited our attention to the decision of the Supreme Court in CIT v. S. Chenniappa Mudaliar [1969] 74 ITR 41. Relying on this decision, learned counsel represented that if the notification should be held to be inconsistent in any manner, it should given way to the statutory provisions contained in section 36(1)(iv) of the Act and, therefore, it is not strictly necessary for this court to strike down conditions Nos. 2 and 3 of the notification in question ... In all these cases, the courts were dealing with the constitutional validity of the provisions as opposed to the validity of subordinate legislation with reference to the provisions of the Act itself. Learned standing counsel does fairly admit that the Supreme Court decision referred to above does provide that even in a reference proceeding, if the subordinate legislation is held to be in excess of the power conferred, it could be ignored and the matter decided keeping in mind the provisions of the Act which are paramount. We think that in the facts and circumstances of this case, we must invoke t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the ITAT has both the power and duty to deal with such rules or notification and decide whether the same are in agreement with the main provisions of the statute. In view of above discussion, in the present appeal, now we have to decide the validity of the withdrawal of exemption as has been done by the subordinate competent authority. For this purpose first of all we have to examine the language of the relevant section and its scope as well as its application. 18. The section under with exemption is granted is section 10(15)(iv)(f) of IT Act, reads as follows: "10. Income not included in total income. In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included (15) ** ** ** (iv) Interest payable --- (f) by an industrial undertaking in India on any money borrowed by it in foreign currency from sources outside India under a loan agreement approved by the Central Government having regard to the need for industrial development in India, to the extent to which such interest does not exceed the amount of interest calculated at the rate approved by the Central Governm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the tune of US$224.88 million. So at that time it was mentioned that the conditions were satisfied as the entire amount of ECB obtained for Hazira Phase-II Project was either utilized in the Project or kept for Forex commitment. On page 15 of the compilation placed on record there is a detailed working of the amount utilized and also kept for Forex commitment. Subsequently a request was made to grant permission to pre-pay/ buy back to 20% of outstanding ECB per year. A proposal was made to the concerned Ministry in the year 1998. In response to this proposal of buy back of ECB a show cause was issued by the Ministry of Finance on 12/4/99. After prolonged correspondence between the appellant company and the Ministry there was a proposal from Dy. Director ECB for withdrawal of tax exemption granted u/s.10(15)(iv)(f). The main objection of the appellant in this regard is that the concerned authorities have arbitrarily decided to withdraw the exemption though there was no withdrawal as far as the approval of loan and agreement was concerned. The basic objection of the appellant company is that the approval originally granted in the year 1997 remained intact and the same was not reject ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... outside India or raw material or capital plant and machinery". So the end use in the said section is categorically specified. Few more sections have also been quoted in support of this argument, therein also the phrase was distinctly used. Another example cited of the phraseology used in section 10(15) (iv) (e) wherein the language used is, "where the moneys are borrowed either for the purpose of advancing loan to industrial undertakings in India for purchase outside India or raw material or capital plant and for the purpose of importing any goods". So the section clearly laid down the purpose of utilization of monies borrowed. Thus the arguments before us is that the purpose of utilization of ECB is missing in the statute, therefore, imposition of such condition through a letter by Dy. Director (ECB) was illegal and against the intention of the legislature. 19. We have examined the several connected provisions referred supra and also the case laws in this regard and arrived at the conclusion that the Revenue Authorities have to act upon in the light of the statute and the provisions of the Act and not empowered to exercise discretion by making the rules or notification / order ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om the appellant's own resources incurred upto 22/11/95. So it was argued that it was very much within the knowledge of the concerned authority about the fungibility of funds. The said mixed method of utilization of funds was in a way accepted by the Ministry in the past. As far as the concept of fungibility of funds is concerned this is not a new concept and it is approved by several judicial authorities. We have persued the precedents cited in this regard in the light of the prevailing circumstances of the appeal in hand. In one of the case of Woolcombers of India Ltd 134 ITR 219 (Cal) the concept of fungibility was considered and it was held that the profits were sufficient to meet the advance tax liability as the profits were deposited in the overdraft account, so the taxes were not paid out of overdraft but out of the profits of the relevant year. An another case of Hon'ble Supreme Court has also been cited, decided in the case of J.B. Boda Co., 2323 ITR 271, wherein Their Lordship have expressed that, "A two way traffic is unnecessary. To insist on a formal remittance first and thereafter to receive the commission from the foreign reinsurer, will be an empty formality and a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mitted by the borrower even then the lender cannot be punished by withdrawal of exemption. This view of ours gets fortified by a decision of Hon'ble Apex Court in the case of CIT v. Chotatingrai Tea Estate Pvt. Ltd. 258 ITR 259. 22. After an elaborate discussion made herein above we deem it proper to summarize the gist of those elongated paras. First of all we want to observe that if the bureaucracy or executive is acting in an unjustifiable manner then the only course left to a citizen is to approach the judiciary for legitimate redressal. This is what exactly had been done in this appeal by the appellant company. At first the company had tried to convince the authorities concerned i.e Dy. Director (ECB) about the utility of foreign currency loan already approved, but on failure knocked the door of the judiciary by filing a writ to Hon'ble Delhi High Court. Special Leave Petition has also been filed, however, the Hon'ble Apex Court vide an order dated 31/5/02 has observed as follows: "Be that as it may, since the issue of utilization or pre-payment of the ECBs is not before us, we will not go into that question, if the petitioners are aggrieved by any such action of the respon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vely the mode of utilization of the funds could not be altered. Rather the sanctioning authority has not checked at that very point of time when according to them, if at all, there was mis-utilization of ECB borrowings. On the contrary the claim of the assessee was that the utilization was in accordance with the scheme though by the process of fungible funds, the obligations were satisfied and the conditions were fulfilled. So according to us, at that stage, it was catastrophic to withdraw the exemption already granted u/s.10(15)(iv)(f). Due to the withdrawal of the exemption the impugned order u/s.195 (2), now under dispute was passed directing to deduct withholding tax @ 20%. To arrive at a logical conclusion first we hold that, considering the totality of the facts, circumstances, conditions of the scheme, evidences of utility of the funds and the legal matrix of the case, the withdrawal of exemption was unwarranted. Consequent there upon we also hold that the appellant company was not liable to deduct withholding tax @ 20% in respect of the interest payment of US $ 1,05,902 to M/s. Deutsche Bank - AG. With the result, we hereby quash the order passed u/s.195(2) of IT Act as wel ..... X X X X Extracts X X X X X X X X Extracts X X X X
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