9911796707
TMI Blog2016 (4) TMI 316X X X X Extracts X X X X X X X X Extracts X X X X ..... h February, 1999, issued to the Petitioner by the Deputy Commissioner of Income Tax (DCIT), TDS, Circle-I, Mumbai rejecting the Petitioner's application dated 9th October, 1998 addressed to the Commissioner of Income Tax (CIT) for issuing refund. Background facts 3. The Petitioner entered into an agreement with SIFL, which represented a consortium of banks to finance the cost of the Petitioner's tyre cord plant, which it was setting up at Gwalior, Madhya Pradesh. In terms of the Agreement dated 20th September, 1990, entered into between the Petitioner and SIFL as well as other banks, the Petitioner was granted a term loan facility of Japanese Yen 5 billion. Under the loan agreement, the entire proceeds of the loan facility were to be used for import of capital plant, equipment, raw materials and components for setting up a new nylon tyre cord unit at Malanpur and an expansion of an existing fibre glass plant unit at Timapur. The term loan was to be repaid in ten equal instalments. The Petitioner had a right to prepay the loan wholly or in part without premium or penalty by giving the lenders not less than 14 days' notice of the sum that was to be prepaid. Interest on the loan was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch it had utilised for the glass fibre division. Both these prepayments were made with the approval of the MoF dated 29th April, 1994 and 19th August, 1994 respectively. 9. It is stated that the residual loan was charged against the assets of the Petitioner's tyre cord division. Meanwhile the Petitioner was unable to maintain the stipulated ratio of actual indebtedness to net worth. For the financial year ending 30th June 1993 and the financial year ending 30th September 1994, this ratio was 318% and 316% respectively. Since the indebtedness ratio crossed 250%, the lenders imposed a normal penal interest of 1% from 1st July, 1993 onwards. The agency fee was also increased by additional one-time payment of US$ 8,000. As a result on 24th March 1995, the Petitioner wrote to the DEA seeking the approval for payment of penal interest as charged above from 1st July, 1993 onwards. On 7th April, 1995, the DEA replied to the Petitioner approving "payment of penal interest @ 1% per annum on the outstanding amounts with effect from July 1, 1993, and onetime payment of USD 8,000 as additional agency fee to Sanwa International Finance Limited." Pursuant to the above approval, the Petitione ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 19th September 1996, stating inter alia that "refund can be granted only in respect of excess tax deducted and/or deductible under Section 192 to 194D of the I.T Act. In your case, the tax under reference was deducted under Section 195 of the I.T Act." The Petitioner then simultaneously appealed against the said order before the Commissioner of Income Tax (Appeals) [CIT(A)] and also filed a rectification application before the ITO, (TDS) Mumbai under Section 154 of the Act. 14. The Petitioner's application under Section 154 of the Act was rejected by the ITO by an order dated 28th October, 1996. There were two reasons given in this order - one was that since the Petitioner stated that the tax had been paid by it on behalf of SIFL, the refund of excess tax, if any, paid can only be made by the said party, on an application made by it under Section 237 of the Act. Attention was drawn to CBDT's circular No.285 dated 21st October, 1980 as to the circumstances when "a person other than an Assessee" could claim refund of tax. Since the Petitioner did not fall within the scope of the said circular its application for refund was not entertained. The Petitioner filed an appeal against ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the letter dated 8th December 1998, issued by the CBDT in which it was observed that the "interest paid to Sanwa International Finance Ltd., Hong Kong does not qualify for exemption as the payment does not relate to the borrowings made for the purpose stated in section l0(15)(iv)(c) of I.T. Act, 1961. Thus tax has correctly been deducted at source u/s.195 on interest paid to M/s. Sanwa and the question of refund does not arise." 23. This was virtually the same as the letter dated 8th December 1998 by the CBDT rejecting the plea for refund. Here it was pointed out that the payment of the penal interest was for transgressing the provisions of clause 18(F)(1)(a) of the Agreement with Sanwa. The consequential letter dated 16th February 1999, written by the DCIT to the Petitioner communicating the rejection of its application dated 9th October, 1998 for issue of refund has already been adverted to hereinbefore and has also been challenged by the Petitioner. Submissions of the Petitioner 24. Mr. S. Ganesh, learned Senior Advocate appearing for the Petitioner, submitted as under: i. The Petitioner had fulfilled all the conditions stipulated for payments made to a non-resident which w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent for the CBDT to give a hearing to the Petitioner for rejecting the application for refund of the TDS and in any event the Petitioner never sought such an opportunity of being heard. Ms. Malhotra pointed out that against the order dated 19th September 1996 passed by the ITO (TDS), rejecting the application for refund the Petitioner did not seek any remedy and allowed that order to become final. Instead only a rectification application was filed. Having not preferred an appeal against those orders before the CIT(A) there was no occasion for the Petitioner to have moved the CBDT under Section 119 of the Act for grant of refund. Accordingly, the entire proceedings were misconceived. 28. Ms. Malhotra placed reliance on the decisions in BASF (India) Ltd. v. W. Hasan, Commissioner of Income Tax (2006) 151 Taxman 31 (Bom) and Mardia Chemicals Ltd. v. Commissioner of Income Tax & Anr. (2012) 26 taxmann.com 42 (Guj.). The thrust of the submissions of Ms. Malhotra on the basis of these decisions was that the Petitioner's application for refund had to be processed only in terms of the circulars that were in force at the time of making of such application. The subsequent circular including ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion'. It could include a 'service fee'. It could include any other 'charge'. It is in this context that one has to examine the clauses in the Agreement entered into between the Petitioner and SIFL on 20th September, 1990. Relevant clauses of the agreement 33. Clause 8(B) of the Agreement refers to 'Normal Interest Rate', which is linked to the LIBOR as already noticed. Clause 9 deals with the Fees to be paid. Clause 9(B) talks of the 'Management Fee'; 9(C) deals with the 'Participation Fees' and 9(D) deals with the 'Agency Fee'. Clause 10A makes it clear that all sums payable by the borrower shall be paid free of any restriction or condition and in particular "without any deduction or withholding for or on account of any tax imposed, levied, collected withheld and under Clause 10(A)(3) "without deduction or withholding except to the extent required by law" on account of any other amount, whether by way of set off or otherwise. 34. Under Clause 10(B) of the Agreement 'Grossing-up of payments' is envisaged. It states that if the borrower himself at any time deducts or withholds any tax in the sum payable, the borrower shall pay such additional amount as is necessary to ensu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of by the Petitioner under the Agreement. Therefore, the said objection raised by the CBDT at the subsequent stage cannot be countenanced. 39. Clause 27(B) of the Agreement itself envisages that waiver of a default event could be granted subject to the conditions that might be stipulated for such waiver. It was on the strength of this clause that SIFL agreed to ignore the event of default on the condition that the Petitioner paid the additional rate of 1% interest for the period from1st July, 1993 to 31st December, 1994 and at the rate of 2% interest for the period from 1st January to 1st June, 1995. These payments were, therefore, in the "nature of interest" and would in any event be covered by the expression "other charge in respect of the moneys borrowed" occurring in Section 2(28A) of the Act. Consequently the objections raised by the Respondent on these grounds do not appear to be justified in law. The CBDT Circular of August 1998 40. The other major objection raised is that at the time when the application for refund was made, the CBDT circular No.769 dated 6th August, 1998 was not in force. Ms. Malhotra drew the attention of the Court to circular No.285 dated 21st October ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er, in the meanwhile the CIT, Mumbai-IV addressed a communication dated 19th November, 1996 in response to the Petitioner's letter dated 30th September, 1996 giving its advice as to what it could do in the matter. The said letter reads as under: "Sub: Application under Section 154 of the Income-tax Act, 1961 (The Act) Ref: Your letter dated 30.9.1996 Please refer to the above letter addressed to ITO, TOS-IV, Mumbai, endorsing copy of this letter. In this connection I have been directed by the CIT MC IV, Mumbai to inform you that you may declare yourself as a representative assessee of M/s.Sanwa International Finance Ltd., Hong-Kong U/s.161 of the Income-tax Act, 1961 and thereafter file the refund claim/return with non resident refund circle under the charge of CIT, MCIT,Mumbai. In case you decline to declare yourself as a representative assessee you may please approach the CBDT with your request in view of the powers vested with them U/s.119(2)(a) of the Income-tax Act, 1961." 43. It was pursuant to the above letter that on 17th December, 1996, the Petitioner addressed a letter to the CBDT under Section 119 of the Act. 44. Meanwhile the CIT(A) by the order dated 13th August, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made to the decision in Transmission Corporation of A.P. Ltd. v. CIT (1999) 7 SCC 266, which recognised the right of the person expected to deduct tax at source to apply to the ITO (TDS) in case there was any doubt as to the amount to be deducted at source. 50. It appears to the Court that in the light of the law explained in GE India Technology Centre Private Limited (supra), the Petitioner in the present case was justified in going before the ITO with an application dated 14th September, 1998, requesting that the CBDT's circular No.769 dated 6th August, 1998 be applied. 51. It must also be noted at this stage that this circular No.769 dated 6th August, 1998 of the CBDT came as a result of a number of representations made to it for granting approval for refund of excess deduction of TDS. The circumstances noted in para 1(i) by the CBDT itself details where such refund appears to be justified is - (a) where a contract is cancelled and no remittance is required to be made to the foreign collaborator; (b) where the contract is cancelled after the remittance is made and the foreign collaborator returns the remitted amount; and (c) where the TDS is found to be in excess "for any othe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Petitioner was concerned. These decisions, therefore, do not come to the aid of the Revenue to justify its rejection of the application made by the Petitioner. Validity of the impugned order of the CBDT 54. That brings us to the question of validity of the order passed by the CBDT rejecting the Petitioner's application for refund. In the first place it is required to be noticed that the CBDT, in fact, did not give the Petitioner any opportunity of being heard. The impugned order was not directly communicated to the Petitioner. The Petitioner got to know of it when a copy thereof was enclosed with the letter dated 16th February 1999 of the DCIT. 55. There is only one ground on which the CBDT rejected the Petitioner's application for refund. This was that the penal interest was paid by the Petitioner as a result of violation/transgression of the Agreement and was, therefore, not exempt under Section 10(15)(iv)(c) of the Act. This is factually incorrect since Clause 27 of the Agreement itself provides for waiver, in the event of default, by SIFL subject to certain conditions. The penal interest was imposed as part of the conditions of the Agreement itself. Therefore, the paymen ..... X X X X Extracts X X X X X X X X Extracts X X X X
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