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2016 (4) TMI 316 - DELHI HIGH COURT

2016 (4) TMI 316 - DELHI HIGH COURT - [2016] 383 ITR 300 - Qualification for exemption under Section 10(15)(iv)(c) - CBDT rejecting the prayer of the Petitioner for refund being the excess tax withheld at source on the penal interest paid by the Petitioner to Sanwa International Finance Limited (SIFL), Hong Kong - whether the payment by the Petitioner of penal interest and other charges would fall within the definition of ‘Interest’ under Section 2(28A)? - Held that:- It must be noticed that its .....

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ngful deduction of TDS, the refund of which was sought. This circular was beneficial to the person who had deducted TDS and was seeking refund. Therefore, there was no question of the CBDT not considering the applicability of the said circular as far as 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.

There is only one ground on which the CBDT rejected the Petitioner’s ap .....

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to be for breach of the terms of the conditions but in terms of the conditions imposed for condoning such breach. The impugned order of the CBDT, therefore, proceeds on an erroneous interpretation of the clauses of the Agreement.

The order of the CBDT does not state that the Petitioner otherwise does not satisfy the conditions contained in the CBDT’s circular dated 6th August, 1998. It also does not state that the said circular would not apply to the Petitioner’s application for refun .....

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#8377; 64,53,214 is not admissible in terms of Circular No. 769 dated 6th August, 1998 of the CBDT, a direction is issued to the DCIT to pass appropriate orders granting refund to the Petitioner for the said sum together with whatever interest is admissible in accordance with law within a period of four weeks from today. - Decided in favour of assessee - W. P. (C) 3244/1999 - Dated:- 7-4-2016 - S. Muralidhar And Vibhu Bakhru, JJ. For the Petitioner : Mr. S. Ganesh, Senior Advocate with Ms. Malli .....

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377; 64,53,214/- being the excess tax withheld at source on the penal interest paid by the Petitioner to Sanwa International Finance Limited (SIFL), Hong Kong, since the said payment did not qualify for exemption under Section 10(15)(iv)(c) of the Income Tax Act, 1961 (the Act ). 2. The challenge in the writ petition is also to a consequential communication dated 16th February, 1999, issued to the Petitioner by the Deputy Commissioner of Income Tax (DCIT), TDS, Circle-I, Mumbai rejecting the Pet .....

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acility 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 .....

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ad to furnish. In terms of clause 18(F), it was stipulated that the Petitioner s indebtedness would not at any time exceed 250% of its net worth and its borrowings would not at any time exceed 80% of the book value of the project assets. Under clause 17(C), the Petitioner was required to intimate SIFL its compliance with the financial ratios in conformity with clause 18(F). 5. Under clause 19(C) of the agreement, it was stated that in the event the Petitioner failed to comply with the undertakin .....

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capital goods for the abovementioned plants. On 29th December 1989, the DEA issued an approval for the above proposal. In particular, approval was granted for payment of interest at 0.5% over the LIBOR rate as well as payment of interest and management fee, etc. exempting such payment under Section 10(15)(iv)(c) of the Act. It was consequent upon the above approval that the agreement was entered into between the Petitioner and SIFL on 20th September, 1990. 7. The total loan utilised by the Peti .....

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ision. 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 ind .....

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ly 1, 1993, and onetime payment of USD 8,000 as additional agency fee to Sanwa International Finance Limited. Pursuant to the above approval, the Petitioner remitted a sum of ₹ 6,51,41,380 Japanese Yen. It is stated that tax thereon amounting to ₹ 49,51,049 was deducted at source and paid to the MoF/Respondent No. 3. 10. Meanwhile the Petitioner decided to disinvest the tyre cord division as it wanted to concentrate on its core business, viz., tyres. However, the Petitioner realised .....

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should be made to the consortium of lenders. The Petitioner agreed to the said conditions. By the letter dated 24th April 1995, the Petitioner wrote to the DEA seeking permission to prepay the entire outstanding loan amount in full along with penal interest at 2% from 1st July, 1995 till the date of repayment. Another letter was addressed on 8th May, 1995 for the same purpose. On 19th May 1995, the DEA conveyed its approval for prepayment of the outstanding sum of Japanese Yen 1,763,687,637 by .....

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Officer (AO) under Section 237 of the Act claiming refund of the aggregate TDS in the sum of ₹ 64,53,214. The main submission of the Petitioner was that the penal interest was interest within the meaning of Section 2(28A) of the Act. This payment of penal interest had been specifically approved by the Government and was also exempt from tax. Accordingly it was contended that the Petitioner was entitled to refund of the tax wrongly deducted from the prepayments of the loan to SIFL. 13. The .....

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, (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 Oc .....

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ter file refund claim/return with the non-resident refund circle under the charge of CIT, Mumbai. The alternative was to approach the CBDT to persuade it to exercise its powers under Section 119(2)(a) of the Act. 16. On 17th December 1996, the Petitioner wrote to the CBDT requesting it to issue necessary instructions under Section 119 of the Act and grant a refund. 17. On 6th August, 1998, the CBDT issued a circular No.769, setting out the procedure for tax deducted at source under Section 195 o .....

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of the CBDT. 19. On 21st August 1998, the Petitioner again wrote to the CBDT asking it to issue necessary instructions to the ITO to grant the Petitioner refund of income tax in the sum of ₹ 64,53,214. Further the Petitioner on 14th September 1998, once again, applied to the ITO (TDS) by an application under Section 154 of the Act bringing to the ITO s notice the circular No.769 dated 6th August, 1998 issued by the CBDT, which had since granted powers to the ITO to issue refund due to an A .....

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plication for refund 22. The DCIT wrote to the Petitioner on 16th February 1999, rejecting its application for refund. The reason for this rejection was 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 .....

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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 would be exempt from tax in terms of Section l0(15)(iv)(c) of the Act. Accordingly, there was no basis for rejecting its claim. ii. The interest paid .....

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im for exemption from payment of tax on the penal interest paid. iii. The Petitioner s claim for refund had been rejected on account of such procedural technicalities. Between 1996 and 1998, in all of the Petitioner s applications for refund the fact that the interest paid was exempt under Section 10(15)(iv) (c) was not disputed. It was for the first time that the CBDT was taking a contrary view without any valid reason. iv. Lastly it was submitted that the CBDT had not given the Petitioner an o .....

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lure of the Petitioner to adhere to the conditions stipulated in the Agreement regarding repayment or prepayment of the loan. It was for the Petitioner to maintain the indebtedness ratio in terms of clause 18(F)(i)(a) of the Agreement. Even clause 8 of the Agreement, which defined interest did not include penal interest. The DEA had granted exemption from payment of tax only on the interest on the term loan and not on payment of penal interest. 26. Ms. Malhotra further pointed out that the appro .....

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996 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 .....

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ply in the case of the Petitioner since its application was made for the first time on 5th June, 1995. 29. Ms. Malhotra further submitted that the penal interest paid by the Petitioner was in the nature of compensation and did not service the principal loan component. She referred to clauses 18(F) and 27 of the Agreement for this purpose. Reference was also made to the decisions in Commissioner of Income Tax, Shimla v. H.P. Housing Board (2012) 18 taxmann.com 129 (HP) and Commissioner of Income .....

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the Petitioner of penal interest and other charges would fall within the definition of Interest under Section 2(28A) of the Act. The said provision reads as under: 2(28A) " interest" means interest payable in any manner in respect of any moneys borrowed or debt incurred (including a deposit, claim or other similar right or obligation) and includes any service fee or other charge in respect of the moneys borrowed or debt incurred or in respect of any credit facility which has not been .....

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moneys borrowed or debt incurred or in respect of any credit facility which has not been utilised. 32. Thus, it is seen that the expression interest is meant to encompass all kinds of payments in respect of moneys borrowed or debt incurred. It need not be interest per se but it could be a discharge of any other similar right or obligation . 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 .....

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ithout 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 n .....

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ons as are envisaged thereunder. Effect of prior approval of the MoF 35. What is important to note here is that this Agreement itself was entered into with the prior approval of the DEA. It should be recalled that the Petitioner obtained an advance approval of the DEA on 29th December, 1989 in terms of which the Government of India approved payment of interest at 0.5% over the LIBOR rate and confirmed that payment of such interest and management fee, etc. would be exempt under Section 10(15)(iv) .....

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D) of the MoF, which had to grant such approval, was not the stand taken at any of the stages when the Petitioner applied for and obtained the approval of the DEA. The Petitioner cannot, therefore, be faulted for proceeding on the basis that the DEA had duly approved the remittances of the penal interest amount without deducting TDS. 38. It appears to the Court that a considered decision was taken by the MoF to grant approval not only to the Agreement as entered into between the Petitioner, the .....

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t 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 .....

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was not in force. Ms. Malhotra drew the attention of the Court to circular No.285 dated 21st October, 1980, which first stipulated the procedure for regulating refund of amounts paid in excess of tax deducted at source. She also referred to the subsequent circulars that had been issued, i.e., circular No.790 dated 20th April, 2000; circular No.7/2007 dated 23rd October, 2007 and the most recent being 2/2011 dated 27th April, 2011. 41. In the present case, it is interesting to note that when the .....

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9th September, 1996 referred to CBDT s circular No.285 dated 21st October 1980, which stated that refund could be granted only in respect of excess tax deducted under Sections 192 to 194D of the Act whereas in the case of the Petitioner the tax had been deducted under Section 195 of the Act. This was the only ground on which the application was rejected. In other words, the rejection was not on the grounds subsequently stated, viz., that the application should have been made by SIFL and not the .....

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me it was stated that the application under Section 237 of the Act could have been made only by SIFL and not the Petitioner. The only exception where a person other than an Assessee could claim refund was provided in the CBDT s circular No.285 dated 21st October, 1980 and since the Petitioner s case did not fall within the scope of the said circular its request could not be entertained. 42. To be fair to the Petitioner it did challenge the above orders by filing appeals before the CIT(A). Howeve .....

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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 .....

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ies in this regard including that of the CBDT. 45. In view of both this order as well as the letter dated 19th November, 1996 of the CIT, the Petitioner considered it appropriate to approach the CBDT itself. 46. The Petitioner's letter dated 17th December 1996 to the CBDT did not elicit any response. It addressed a further application on 21st August, 1998 to CBDT following the order dated 13th August, 1998 of the CIT(A). The Petitioner pointed out that it was not a representative Assessee of .....

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made to Section 195 of the Act which deals with payments of sums to non-residents. While Section 195(1) obliges a person paying to a foreign company any interest to deduct tax at source from such payments under Section 195(3) of the Act it need not do so if a certificate is obtained from the Assessing Officer by the non-resident. There is a role envisaged for the CBDT under Section 195(5) of the Act to make specific rules on the aspect of deduction of tax at source with regard to payments to no .....

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d by the payer even if such payment is not chargeable to tax. A reference was 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 jus .....

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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 other reason . Para 2 of the said circular acknowledges that a lot of hardship resulted where the Assessing Officer while assisting a foreign resident in whose case deduction was made at source having to file a return in order to .....

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ductible. This amount should be adjusted against the existing tax liability under any of the Direct Tax Acts. After meeting such liability, the balance amount, if any, should be refunded to the person responsible for deduction of tax at source. Decisions cited by the Respondent 52. As far as the decisions cited by the learned counsel for the Respondents are concerned, it is true that in BASF (India) Ltd. (supra) as well as Mardia Chemicals Ltd. (supra), it has been held that a subsequent circula .....

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(A), which substituted the order of rejection by the ITO advised the Petitioner to approach the CBDT. In fact, even the CIT advised the Petitioner likewise. It was pursuant to both these orders, the Petitioner approached the CBDT. At the time of making of the application to the CBDT on 21st August, 1998, the circular dated 6th August, 1998 had been issued. The whole idea was to provide a remedy for excessive or wrongful deduction of TDS, the refund of which was sought. This circular was benefici .....

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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 .....

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ning such breach. The impugned order of the CBDT, therefore, proceeds on an erroneous interpretation of the clauses of the Agreement. 56. The order of the CBDT does not state that the Petitioner otherwise does not satisfy the conditions contained in the CBDT s circular dated 6th August, 1998. It also does not state that the said circular would not apply to the Petitioner s application for refund. This is yet another reason why the Court is not prepared to entertain the plea of the Revenue to the .....

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sing Board (supra) are distinguishable on facts. The first case concerned the question whether bid amount which was to be distributed amongst the members of the chit fund would be considered to be interest . The second case involved a question whether interest paid by the housing loan allottees for delay in completion of construction of flats was interest within the meaning of Section 2(28A) of the Act. On the facts of that case it is clear that the allottees of the flat had not given money to t .....

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