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TMI Blog2008 (12) TMI 3X X X X Extracts X X X X X X X X Extracts X X X X ..... Section 195 have no extra territorial application. In an offshore transaction involving two non residents in respect of a capital asset (i.e. share capital) and payment outside the country, even assuming that such transaction is chargeable to tax, there is no obligation to withhold tax under Section 195. III. The 2008 amendment to the extent that they purport to be retrospective are unconstitutional. Under the unamended Sections 191 and 201 the Show Cause Notice is clearly without jurisdiction. IV. In any view of the matter the transaction in question is not chargeable to tax in India and the Petitioner accordingly was under no obligation to withhold tax as required under Section 195. I. Non-applicability of Section 201 2. With regard to the first proposition, Mr. Chagla, the learned Senior Counsel, very comprehensively submitted that the Income tax is a tax on the income payable by the recipient. Income tax of the recipient is payable by the payer only in certain limited circumstances, including when the legislature deems the payer to be an "assessee in default" ("AID for short). 3. Mr.Chagla, further submitted that Section 201 is one such provision which deems a person, not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... emedied only by legislation and not by judicial interpretation. To us, there appears no justification to depart from the normal rule of construction according to which the intention of the legislature is primarily to be gathered from the words used in the statute. It will be well to recall the words of Rowlatt J.in Cape Brandy Syndicate Vs. Inland Revenue Commissioners (1921) 1 KB 64 (KB) at page 71, that: . ".....in a taxing Act one has to look merely at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption as to a tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used." Once it is shown that the case of the assessee comes within the letter of the law, he must be taxed, however great the hardship may appear to the judicial mind to be. 6. The learned Senior Counsel further relied on a Division Bench judgment of our High Court in the case of Commissioner of Income Tax Vs. Khimji Nenshi 194 ITR 192 (Bom.), wherein our High Court had held that; Moreover, section 64(2)(b) contains a deeming provision and hence requires to be construed strictly. An income which is derived fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecial cases of Sections 194 and 200, the defaulting persons shall be deemed to be AID as referred to in Section 201. (NB: Prior to its amendment in 2002 Section 201 did not define "such person". The words "referred to in section 200" were inserted after "such person". A consequent amendment was made in 2003 by the addition of the Explanation to Section 191). iii. Failure to deduct or to withhold tax is visited with the penal consequences as provided in Section 271C, and by virtue of Section 273B no penalty shall be imposed if it is proved that "there was reasonable cause for the said failure". iv. Therefore, by reason of failure to deduct or withhold tax other than under Section 194, the payer is liable to be penalized under Section 271C but he does not become liable for the tax. That liability is and remains that of the payee who is the assessee, a position that is clarified by Section 191. v. A person who fails to deduct or withhold tax and who is not the assessee can be made liable for the tax only by a legal fiction, a legal fiction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the payee fails to pay the tax. e. It is the admitted position in the present case that the payee has not been called upon to pay the tax and the payee cannot be said to have failed to pay the tax, in which case the condition precedent to the applicability of the deeming provision is not fulfilled and the Petitioner cannot be deemed to be an assessee in default for the tax liability of the payee. f. The impugned Show Cause Notice, therefore, purporting to be under Section 201, asking the Petitioner why it should not be deemed to be an AID for failing to withhold the tax allegedly due by the payee is ex-facie without jurisdiction. II. Section 195 has no extra territorial operation: 10. With regard to second proposition that section 195 has no extra territorial operation, Mr.Chagla, the learned Senior Counsel submitted as under: 11. Although the Indian Parliament is competent to enact legislation which may have extra-territorial operation (Article 245 of the Constitution), such legislation, if it were to operate extra territorially, must require clear and cogent language to tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s held that Parliament's competence to legislate is plenary then, unless the language of the provision permits only one construction giving such provision extra territorial operation, there would be a presumption or a rule of construction that Parliament did not intend to exceed its territorial jurisdiction or violate the rules of international law. This presumption or rule of construction would apply more so in the case of a provision in respect of which a default thereunder entails penal consequences. To support this contention, Mr. Chagla, the learned Senior Counsel relied on a judgment in the case of Clarke (Inspector of Taxes) Vs. Oceanic Contractors Inc - (1983) 1 ALL ER 133,, wherein, it is held that; Put into the language of today, the general principle being there stated is simply that, unless the contrary is expressly enacted or so plainly implied that the courts must give effect to it, United Kingdom legislation is applicable only to British subjects or to foreigners who by coming to the United Kingdom, whether for a short or long time, have made themselves subject to British jurisdiction. Two points would seem to be clear: first, that the principle is a rule of construc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lation Act, Official Secrets Act, Information Technology Act, Indian Passport Act, etc. 18. In view of Section 1(2), provisions of the Income Tax Act must be assumed to operate territorially except where such provision permits only one construction that it is to operate beyond the boundaries of India or in respect of a person not resident within India. The learned Counsel for the Petitioner referred to Section 9, which deems certain income earned by a non-resident to be income earned within India. 19. The learned Senior Counsel submitted that the definition of "person" ex-facie includes a foreign company. In this behalf he referred to Section 2(31) r/w.2(17) which reads as under: 2[(17) "company" means - (i) any Indian company, or (ii) any body corporate incorporated by or under the laws of a country outside India, or (iii) any institution, association or body which is or was assessable or was assessed as a company for any assessment year under the Indian Income Tax Act,1922 (11 of 1922), or which is or was assessable or was assessed under this Act as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o such matter and interpret the meaning intended to be conveyed by the use of the words under the circumstances. 23. In that behalf, Mr. Chagla also relied on a decision of the Hon'ble Supreme Court in the case of Indian Handicrafts Emporium Vs. Union of India (2003) 7 SCC 569 especially paragraphs; 105. The words which are used in declaring the meaning of other words may also need interpretation and the legislature may use a word in the same statute in several different senses. In that view of the matter, it would not be correct to contend that the expression as defined in the interpretation clause would necessarily carry the same meaning throughout the statute. 107. The question which arose for consideration was as to whether the State Government would come within the purview of the said Act. This Court answered the said question in the negative, holding that the expression "management" must be read contextually in the following terms: (SCC P.599 Para 8) "We are therefore, of the opinion that the defined meaning of the expression 'management' cannot be assigned or attributed to the word 'management' occurring in Section 64 of the Act. The word 'management' if read in the conte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the payment of 'interest on securities' in Indian States or in foreign countries, or the payment of 'salaries' by foreign employers to residents in British India. It is for this reason that section 19 of the Act specifies that in any case where income-tax has not been deducted in accordance with the provisions of section 18, the tax is payable by the assessee direct. This provision covers, not only cases where the employer or the person paying 'interest on securities' does not reside in British India but also cases where owing to an assessee's salary being less than Rs.1000/- income-tax has not been deducted (Income tax Manual, para 59). 30. Mr.Chagla submitted that if Section 195 is to apply to a non-resident having no presence in India, the machinery of deduction and collection of tax as provided in Section 203A and Rules 30 and 31A would be unworkable. Provisions of law should be interpreted in a manner to make them workable. Mr. Chagla, the learned Senior Counsel referred to a judgment of the Hon'ble Supreme Court in the case of State of Bihar Vs. Sm. Charusila Dasi AIR 1959 SC 1002 especially paragraph 14. This Court has applied the doctrine of territorial connection or nexu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ain words are so clear to be in definace of the Constitution. These interpretations spring out because of concern of the Courts to salvage a legislation to achieve its objective and not to let it fall merely because of a possible ingenious interpretation. The words are not static but dynamic. This infuses fertility in the field of interpretation. This equality helps to save an Act but also the cause of attack on the Act. Here the courts have to play a cautious role of weeding out the wild from the crop, of course, without infringing the Constitution. For doing this, the Courts have taken help from the preamble, Objects, the scheme of the Act, its historical background, the purpose for enacting such a provision, the mischief, if any which existed, which is sought to be eliminated...... This principle of reading down, however, will not be available where the plain and literal meaning from a bare reading of any impugned provisions clearly shows that it confers arbitrary, uncanalised or unbridled power." 32. The learned Senior counsel contended that if Section 195 is construed to apply to non-residents having no presence whatsoever in India, the same would amount to treating unequals ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e is really no substance in the grievance that the retroactivity imparted to the amendments is violative of article 19(1)(g). A competent Legislature can always validate a law which has been declared by courts to be invalid, provided the infirmities and vitiating factors noticed in the declaratory-judgment are removed or cured. Such a validating law can also be made retrospective. If, in the light of such validating and curative exercise made by the Legislature - granting legislative competence - the earlier judgment becomes irrelevant and unenforceable, that cannot be called an impermissible legislative overruling of the judicial decision. All that the Legislature does is to usher in a valid law with retrospective effect in the light of which the earlier judgment becomes irrelevant. (See Shri Prithvi Cotton Mills Ltd. Vs. Broach Borough Municipality (1971) 79 ITR 136 (SC); (1970) 1 SCR 388. Such legislative expedience of validation of laws is of particular significance and utility and is quite often applied in taxing statutes. It is necessary that the Legislature should be able to cure defects in statutes. No individual can acquire a vested right from a defect in a statute and se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Rajasthan, AIR 1966 SC 764; (1966) 1 SCR 890; Supreme Court Employees Welfare Association Vs. Union of India, AIR 1990 SC 334; (1989) 3 SCC 488, 517. The third is apposite where the legislation is introduced to overcome a judicial decision. Here the power cannot be used to subvert the decision without removing the statutory basis of the decision Shri.Prithvi Cotton Mills Ltd. V. Broach Borough Municipality (1971) 79 ITR 136 (SC), (1969) 2 SCC 283; Lalitaben V. Gordhanbhai Bhaichandbai (1987) Supp. SCC 750; Janapada Sabha, Chhindwara V. Central Provinces Syndicate Ltd. AIR 1971 SC 57; (1970) 1 SCC 509 and Indian Aluminium Co. V. State of Kerala (1996) 7 SCC 637; AIR 1996 SC 1431. There is no fixed formula for the expression of legislative intent to give retrospectivity to an enactment. "Sometimes this is done by providing for jurisdiction where jurisdiction had not been properly invested before. Some times this is done by re-enacting retrospectively a valid and legal taxing provision and then by fiction making the tax already collected to stand under the re-enacted law. Sometimes the Legislature gives its own meaning and interpretation of the law under which tax was collected and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ble as service providers. This is also clear from the Explanation to the valuation section which says that no act or acts on the part of any person shall be punishable as an offence which would not have been so punishable if the section had not come into force. The liability to pay interest would only arise on default and is really in the nature of a quasi punishment. Such liability although created retrospectively could not entail the punishment of payment of interest with retrospective effect. 40. He also relied on a decision of the Hon'ble Supreme Court in the case of C.I.T. Vs. Hindustan Elector Graphites Ltd. (2000) 3 SCC 595, wherein it is observed that; The decision of the Calcutta High Court in Modern Fibotex India Ltd (1992) 2 SCC 514: (1992) 195 ITR 1 squarely covers the issue involved in the present appeal. Then we have to see the law on the date of filing of the return. To attract penal provisions there has been same (sic has to be some) element of lack of bona fides unless the law specifically provides otherwise. 41. Mr. Chagla strongly contended that whereas in the present case the 2008 amendments to Sections 191 and 201 (hereinafter referred to as the "2008 amendm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... spective operation of the Act. It is conceivable that cases may arise in which the retrospective operation of a taxing or other statute may introduce such an element of unresonableness that the restrictions imposed by it may be open to serious challenge as unconstitutional; but the test of the length of time covered by the retrospective operation cannot, by itself, necessarily be a decisive test. 45. He also relied on D.Cawasji & Co. Vs. State of Mysore 150 ITR 648 (SC) 661, wherein it is observed by the Hon'ble Supreme Court, that; In our opinion, this is not a proper ground for imposing the levy at a higher rate with retrospective effect. It may be open to the Legislature to impose the levy at a higher rate with prospective operation but the levy of taxation at higher rate which really amounts to imposition of tax with retrospective operation has to be justified on proper and cogent grounds. 46. He further relied on a judgment in the case of Tata Motors Ltd. Vs. State of Maharashtra (2004) 5 SCC 783 paragraph 15. 15. It is no doubt true that the legislature has the powers to make laws retrospectively including tax laws. Levies can be imposed or withdrawn but if a particular le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... retrospectively, and can evolve its own policy, we do not think that in the present cases any material has been placed before the Court as to why the amendments were confined only to a period of eight years and no either before or subsequently and, therefore, we are of the view that the impugned provision, namely, Section 26 deserves to be quashed by striking down the words "not being waste goods or scrap goods or by-products" occurring in the said Section 26 of Maharashtra Act 9 of 1989 and the authorities concerned shall rework assessments as if that law had not been passed and give appropriate benefits according to law to the parties concerned. 47. Mr.Chagla contended that in the present case no reasons whatsoever have been supplied for the retrospective imposition of penalty. The facts disclose that only after the present Petition was filed and admitted and it was contended on behalf of the Petitioner that Section 195 and 201 did not apply to the Petitioner, and that the 2008 amendments came to be passed. The only explanation offered in the Notes on Clauses regarding the 2008 amendments is that the pre-existing provision "leaves room for an interpretation that a person requir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... p; that the 2008 amendments, including their retrospective operation, are constitutionally valid and binding. 49. Mr.Chagla submitted that the provisions of Section 195 have no extra territorial application. In an offshore transaction involving two non-residents in respect of property and payment outside the country, even assuming that such transaction is chargeable to tax, there is no obligation to withhold tax under Section 195. Note : This proposition is based on the assumptions that; (a) the sum paid by the Petitioner is a sum chargeable to tax in the hands of the payee; (b) that a default in making a deduction of tax under Section 195 is within the scope of Section 201; c) that there is no violation of the condition precedent that the payee must have failed to pay the tax; and (d) that the 2008 amendments, including their retrospective operation, are constitutionally valid and binding. 50. Mr.Chagla also contended that the 2008 amendment to the extent that they purport to be retrospective are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ived or deemed to be received in India. It is an undisputed position that the gain arising on the transfer of shares is chargeable to tax only if it is deemed to accrue or arise in India within the meaning of section 9. iv. Under Section 9 (which is a deeming provision) income accruing or arising "through the transfer of a capital asset situate in India" is deemed to accrue or arise in India. v. The transaction in the present case is the transfer of share capital of a non-resident company and is not a transfer of a capital asset situate in India. In this behalf, the learned Senior Counsel relied on a decision in the case of C.I.T. Vs.Qantas Airways Ltd. 256 ITR 84 (Del-DB). vi. The share capital in question is the share capital of CGP Investments (Holdings) Ltd. (hereinafter referred to as "CGP"). The share capital of the company would be at the place of its registered office which is in the Cayman Islands. He relied on Pfizer Corporation Vs. C.I.T. 259 ITR 391 (Bom-DB). vii. The controlling int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vi V. CIT (1981) 131 ITR 445, wherein also it was pointed out that the controlling interest in a company is an incident arising from holding of a particular number of shares in the company and that such controlling interest cannot be transferred without transferring shares. 55. Mr.Chagla, the learned Senior Counsel submitted that there is an indirect acquisition of the controlling interest in VEL the same has been achieved by acquiring control of CGP by the acquisition of its share capital outside India. There is, therefore, no transfer of a capital asset within India. In this behalf the learned Senior Counsel relied on Bacha F.Guzdar V. C.I.T. AIR 1955 SC 74, wherein it is observed that; The company is a juristic person and is distinct from the shareholders. It is the company which owns the property and not the shareholders. The dividend is a share of the profits declared by the company as liable to be distributed among the shareholders. There is nothing in the Indian law to warrant the assumption that a shareholder who buys shares buys any interest in the property of the company which is a juristic person entirely distinct from the shareholders. 56. He also relied on A.P.State ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the gain from the present transaction is chargeable to tax as amounting to income accruing or arising through or from a business connection in India, such contention would be untenable and without any basis. 62. The learned Senior Counsel also pointed out that there are 3 requirements for income arising through or from a business connection in India to be chargeable to tax under Section 9 (1)(i) they are; (i) The non-resident assessee must have a business connection in India: ii) The income must arise through or from the business connection; and (iii) The non-resident assessee earning such income must have business operations in India. If no business operations are carried out in India, any income accruing or arising abroad through or from a business connection in India cannot be deemed to accrue or arise in India. In other words even though requirements (i) & (ii) above may be satisfied, absence business operations in India by the non-resident assessee, income is not chargeable to tax. 63 The learned Senior Counsel relied on the decision of the H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... profits and gains of business deemed to accrue in India through and from business connection in India shall be only such profits and gains as are reasonably attributable to that part of the operations carried out in the taxable territories. If no operations of business are carried out in the taxable territories, it follows that the income accruing or arising abroad through or from any business connection in India cannot be deemed to accrue or arise in India. (See C.I.T. Vs. R.D.Aggarwal & Co. and M/s.Carborandum Co. V. C.I.T., which are decided on the basis of Section 42 of the Indian Income Tax Act, 1922, which corresponds to Section 9(1)(i) of the Act. 66. He also pointed out Ishikawajima-Harima Heavy Industries Ltd. Vs. Director of Income Tax 288 ITR 408 (SC), wherein it is observed by the Hon'ble Supreme Court, that; The distinction between the existence of a business connection and the income accruing or arising out of such business connection is clear and explicit. In the present case, the permanent establishment's non-involvement in this transaction excludes it from being a part of the cause of the income itself and thus there is no business connection. 67. Mr.Chagla then ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r Counsel submitted that the matter involves complex questions arising out of disputed facts, lot of which are still un-disclosed and the same cannot be made the subject matter of a Writ Petition under Article 226 of the Constitution of India. 73. Mr.Parasaran submitted that the transaction in question is prima-facie chargeable to tax in India since it amounts to transfer of a Capital Asset in India. The transaction involved in the present case is prima facie liable to Capital Gains Tax and the Petitioner is prima facie liable for withholding Tax and that there was sufficient justification founded upon facts and law for the issuance of the impugned show cause notice. Both Section 195 and the impugned show cause notice are not extra-territorial in its operation, as the income is otherwise chargeable to tax in India under the provisions of the Indian Income Tax Act. The Petitioners prima facie are assessee in Default in terms of Section 195 read with Section 201 and Section 2(7)(c). The Amendments made in 2008 are not violative of Article 14 of the Constitution of India and they do not affect any rights of the Petitioner, much less any vested right, either pre or post amendment. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rit petitioner even at the threshold by the interim protection, granted. 75. He also relied on Kunisetty Sathyanarayana AIR 2007 SC 906, wherein it is held that; 13. It is well settled by a series of decisions of this Court that ordinarily no writ lies against a charge sheet or show-cause notice vide Executive Engineer, Bihar State Housing Board Vs. Ramdesh Kumar Singh and others JT 1995 (8) SC 331, Special Director and another Vs. Mohd. Ghulam Ghouse and another AIR 2004 SC 1467, Ulagappa and others Vs. Divisional Commissioner, Mysore and others 2001 (10) SCC 639, State of U.P. Vs. Brahm Datt Sharma and another AIR 1987 SC 943 etc. 14. The reason why ordinarily a writ petition should not be entertained against a mere show-cause notice or charge-sheet is that at that stage the writ petition may be held to be premature. A mere charge-sheet or show-cause notice does not give rise to any cause of action, because it does not amount to an adverse order which affects the rights of any party unless the same has been issued by a person having no jurisdiction to do so. It is quite possible that after considering the reply to the show-cause notice or after holding an enquiry the authority ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e resolved by fact finding authorities constituted under the relevant statute. In a series of recent cases, the Supreme Court has taken the aforesaid view. Some reported cases are : State of Goa Vs. Leukoplast (India) Ltd. 1997 (92) E.L.T. 19 (SC) = AIR 1997 SC 1875 ; Union of India Vs. Polar Marmo Aglomerates Ltd. - 1997 (96) E.L.T. 21 (SC) and Union of India Vs. Bajaj Tempo Ltd. - 1997 (94) E.L.T. 285 (S.C.). In State of U.P. Vs. Labh Chand - AIR 1994 SC 754, the Supreme Court befittingly illuminated the power as under: "When a statutory Forum or Tribunal is specially created by a statute for redressal of specified grievances of persons on certain matters, the High Court should not normally permit such persons to ventilate their specified grievances before it by entertaining petitions under Article 226 of the Constitution is a legal position which is too well settled......" In State of A.P. Vs. T.C. Lakshmaiah Setty & Sons AIR 1994 SC 2377, the above decision was reiterated by the Supreme Court and it was observed that the orders of assessment rendered under tax laws should be tested under the relevant Act and in no other way. In Shyam Kishore Vs. Municipal Corporation of Delhi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... I.T.Act, deductions are required to be made at the time of payment and all adjustments are to be made finally at the time of regular assessment of the recipient of the income. The ultimate assessment resulting in payment of any lesser or bigger amount as Income Tax in accordance with law in force, would not affect the duty to deduct tax at the time of payment in any manner. It has been categorically held by the Hon'ble Supreme Court in the case of Aggarwal Chamber of Commerce Ltd. Vs. Ganpat Rai Hira Lal AIR 1958 SC 269, that those persons who are bound under the act to make deduction at the time of payment of any income, profits or gains are not concerned with the ultimate result of the assessment. (Emphasis supplied) 79. Mr.Parasaran pointed out the provisions of Section 195, under which the deduction of income tax on the amount paid to a non-resident, is for a tentative deduction of income tax thereon, subject to regular assessment and by the deduction of Income Tax, the rights of the parties are not, in any manner, adversely affected. it is further submitted that the deduction of tax at source is only provisional and is subject to final assessment and hence, does not any right ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 82. Mr.Parasaran submitted that the Courts have refused to entertain the Writ Petitions challenging the show cause notice seeking to by-pass the statutory mechanism provided and in particular, notice issued alleging incomes taxable under Section 9 of the Income Tax Act. The Income Tax Act itself is a self-contained code and in cases like this, the Act provides sufficient safeguards to persons like the Petitioner, who have an effective and efficacious alternative remedy. in fact the Petitioner itself has availed such efficacious alternative remedies in the past. Under the Income Tax Act, the petitioner, apart from responding to the show cause notice, can seek for a determination as to whether any income is at all chargeable and as to whether it is under any obligation to deduct any tax. in fact, the Department had reminded the petitioner, even before the conclusion of the transaction, of the obligations prescribed under the Income Tax Act and the remedies that are available to the Petitioner under the Income Tax Act, which it has failed to avail. 83. Mr.Parasaran pointed out that incidentally, the Hon'ble Supreme court has held that the rights of a person like the Petitioner are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion that it is appropriate for the appellants to file a reply to the show cause notice and take whatever defence is open to them. While affirming the decision of the High Court, we, therefore, grant ten weeks' time to the appellants to file a reply to the aforesaid show-cause notice dated May 16, 1996. On the reply being so filed, the Income-tax Officer will take a decision, after giving an opportunity of hearing to the Appellants. The decision should be taken within four months of the reply being so filed. It will be open to the appellants to place on record the subsequent facts the effect of which will be for the Income Tax Officer to decide. b) Titaghur Paper Mills Co.Ltd. & Anr. Vs. State of Orissa & Ors. 142 ITR 663 SC. Under the scheme of the Act, there is a hierarchy of authorities before which the petitioners can get adequate redress against the wrongful acts complained of. The petitioners have the right to prefer an appeal before the prescribed authority under sub-s. (1) of s.23 of the Act. If the petitioners are dissatisfied with the decision in the appeal, they can prefer a further appeal to the Tribunal under sub-s.(3) o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ry,2007, entered into between the Petitioner and HTIL. The said agreement has not been produced by the Petitioner either before the department or before this Court. Mr.Parasaran strongly contended that the said agreement alone can aid this Court in finding out the true nature of the transaction and appreciate the controversy involved in the Writ Petition. Without producing this agreement and other relevant documents, the Petitioner cannot expect this Court to decide the merits of the matter. 86. Mr.Parasaran submitted that non-production/ non-disclosure of vital documents should result in this Court drawing an adverse inference against the Petitioner since it amounts to withholding of the best evidence, even assuming that the onus of proof does not lie on the Petitioner. At this juncture, Mr.Parasaran relied on a Supreme Court judgment in the case of Gopal Krishnaji Ketkar Vs. Mohamed Haji Latif & Ors. AIR 1968 SC 1413, wherein the Hon'ble Supreme Court has observed that; Even if the burden of proof does not lie on a party the Court may draw an adverse inference if he withholds important documents in his possession which can throw light on the facts at issue. It is not, in our op ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re the Court, the Writ Court may refuse to entertain the Petition and dismiss it without entering into merits of the matter." "33. The object underlying the above principle has been succinctly stated by Scrutton, LJ in R.V.Kinsington Income Tax Commissioners (1917) 1 KB 486: 86b LJ KB 257: 116 LT 136, in the following words: "It has been for many years the rule of the Court, and one which it is of the greatest importance to maintain, that when an applicant comes to the Court to obtain relief on an ex parte statement he should make a full and fair disclosure of all the material facts - facts, not law. He must not misstate the law if he can help it - the Court is supposed to know the law. But it knows nothing about the facts, and the applicant must sate fully and fairly the facts, and the penalty by which the Court enforces that obligation is that if it finds out that the facts have not been fully and fairly stated to it, the Court will aside, any action which it has taken on the faith of the imperfect statement". 34. It is well settled that a prerogative remedy is not a matter of course. In exercising extraordinary power, therefore, a Writ Court will indeed bear in mind the cond ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rti Vs. State of Punjab AIR 1988 SC 485 = (1988) 1 SCC 366. It must, however, be mentioned that the petition is lacking in particulars as to what premises the appellant owned and in respect of which premises the appellant is making the grievances. On this ground it is not possible to decide the question of vires canvassed before the High Court and repeated before us. A petition challenging the constitutional validity of certain provisions must be in the context of certain facts and not in abstract or vacuum. The essential facts necessary to examine the validity of the Act are lacking in this appeal. On this ground the petition was rightly rejected and we are not inclined to interfere with the order of the High Court on this ground alone. Re. Proposition 1(e) Disputed facts: 90. Mr.Parasaran pointed out that the very reading of the show cause notice issued as also the chronological list of dates and events filed herewith, would reveal that the present case involves investigation into voluminous facts and perusal of numerous lengthy and complicated agreements, to determine the question of chargeability of the transaction to tax and also the question of duty to deduct tax at source. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 9(1) of the Act or not is not within the scope of this application. This Court has only to be satisfied that the impugned notices are on their face erroneous and/or that the issuing Income Tax Officer had no material for his belief that any income has escaped assessment due to any omission or failure on the part of the assessee either to file its returns or to disclose the primary material facts necessary for such assessment. in this case there is no dispute that apart from the assessment year 1958-59 no returns were filed by the assessee. Whether the Income Tax Officer should have made enquiries on the basis of the information received in connection with the assessments of the Indian company is not germane to the present question. it is for the assessee to file returns and furnish the necessary particulars. Very difficult questions of the interpretation and application of the provisions of Section 9(1) of the Act have been raised and issues have been joined in respect thereof. These are matters for decision by competent tribunals and courts cannot conveniently be decided by this Court in its writ jurisdiction. however, the case of the impugned notice for the assessment year 1958 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch has its source in India under Section 5(2). The non-residents should have either received or deemed to have received the income in India or the income should have arisen or accrued in India or should be deemed to have accrued or deemed to have arisen in India. The deeming provision is enumerated in section 9 of the Income Tax Act. It is the submission of the Revenue that the income or capital gains of HTIL is deemed to have accrued or arisen in India and therefore, it squarely falls within the ambit of Section 9 and is hence chargeable to Income Tax. b. It was submitted that the transaction is prima facie, liable to Income Tax in India. HTIL, by reason of this transaction, has earned income liable for Capital Gains Tax in India as the income was earned towards sole consideration of transfer of its business/economic interests as a group, in favour of the Petitioner. c. For this purpose, certain vital points of the case have necessarily to be examined and before examining the same, the Revenue would place reliance upon the definition of the 'Capital Asset' in Section 2(14), the defini ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g several interested buyers two Groups, namely Reliance and Hinduja also offered their bids and these interested buyers were asked to determine the price of its' interests by reference to the enterprise value of Hutch Essar. 11th February,2007: Agreement between Petitioner and HTIL for acquisition of Indian interests of HTIL by the Petitioner. 12th February,2007: Petitioner's disclosure to SEC, USA for acquisition of 67% stock of HTIL in HEL, for a consideration of US$ 11.1 billion, which confirms the total enterprises value of US# 18.8 billion. 20th February,2007: Circular of HTIL to its share holders that the Company was selling its 67% stock in India for US$ 11.1 billion, based on an enterprise value of HEL of US/$ 18.8 billion and was expected to realize an estimated 'before tax gain' of approximately US$ 9.6 billion from the transaction. 20th February,2007: Petitioner's application to the FIPB for approval of direct acquisition of 51.96% stock in HEL. 15th March,2007: Settlement agreement between HTIL and Essar Group disclosing HTIL's agreement to dispose off its "HTIL interests" to the Petitioner. "HTIL's interests" has been defined as HTIL's direct and indirect equ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... asaran, the learned Additional Solicitor General of India relied on the following judgments: CIT Vs. B.C.Srinivas Setty (1981) 128 ITR 294 (SC). Blue Bay Fisheries Pvt. Ltd. Vs. CIT (1987) 166 ITR 1 (Ker). Associated Cement companies Ltd. Vs. Commissioner of Customs AIR 2001 SC 862. Tata Consultancy Services Vs. St. of A.P. air 2005 SC 371 CIT Vs. D.P.Sandu Bros (2005) 273 ITR 1 (SC). Bharat Sanchar Nigam Ltd. Vs. Union of India AIR 2006 SC 1383. Century Finance Corporation Vs. State of Maharashtra AIR 2006 SC 2436. Mr. Parasaran, also referred to the definition of term 'Transfer" given in Blacks Law Dictionary. b. Substitution of the Petitioner as a successor in interest to HTIL in a joint venture under a license agreement with Department of Telecommunications:- The expression joint venture had come up for consideration before the Hon'ble Supreme Court in New Horizons Ltd. Vs. Union of India & Ors. 1995(1) SCC 478. The Hon'ble Supreme Court held that a joint venture is essentially in the nature of a quasi partnership where different companies, foreign and Indian come together to share risks in management and profits jointly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the time of transfer. Mr.Parasaran referred to the decision of the Company law Board in the case of Air Touch International (Mauritius) Ltd. Vs. RPG Cellular Investments and Holdings P.Ltd. 2004(121) Comp Cas-0647-CLB a) Samayanallur Power Investment Private Ltd. Vs. Coventa Energy India (Balaji) Ltd. (b) 1976 (3) All E.R. 462 DHN Food Distributors Ltd. Vs. London Borough of Tower Hamlets.) d) Transfer of Controlling Interest in Indian Companies: d. The Petitioner themselves have not disputed that the transaction involves transfer of controlling interest. If any transaction involves a transfer of controlling interest in a company or a group of companies, such a transfer has to be viewed both from the point of view of transferor and transferee. It is inconceivable as to how HTIL can transfer its controlling interest in HEL without extinguishing its rights in the shares of the Indian group and without which, a transferee cannot acquire a controlling interest. A divestment or extinguishment of right, title or interest must necessarily prec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hares of a Cayman Island Company, but the assets (as stated supra) situated in India. The choice of the Petitioner in selecting a particular mode of transfer of these right enumerated above will not alter or determine the nature or character of the asset. Mr.Parasaran, the learned Additional Solicitor General of India relied on the decision of Gujarat High Court in the case of Mul Shankar Kunverji Gor Vs. Juvansinhji Shivubha Jadeja AIR 1980 Guj.62. 95. He also relied on the decision of our High Court in the case of Hanuman Vitamins Foods Pvt.Ltd. Vs. State of Maharashtra AIR 1980 Bom 204. 96. It was further submitted, that apart from the acquisition of controlling interest, the Petitioner has acquired other interests and intangibles rights. The Petitioner accordingly became a successor in interest in the joint venture between HTIL and the Essar group and became a co-licensee with the Essar group to operate mobile telephony in India. It is submitted that the joint venture by itself confers an enduring benefit to the Petitioner. Alternatively, the Respondent states that the interest which the Petitioner has acquired in India should nevertheless be construed as a capital asset inas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terest of 67% in HEL. The Petitioner itself has disregarded the maze of subsidiaries in the matter of ownership, receipt of of sale consideration and signing and execution of agreement for transfer (See Pg.4 of the List of dates). 99. Mr.Parasaran submitted in relation to a foreigner, jurisdiction can be exercised by the executive, legislature and judiciary in India, if either the foreigner is actually present in the Indian Territory or if any interest in any of his property is within the Indian Territory. A foreigner cannot enter into a transaction which has an effect on Indian properties and still contend that the executive, legislature or judiciary in India cannot exercise extra territorial jurisdiction. Moreover, in the present case, it is fallacious to contend that extra territorial jurisdiction is being exercised as it would be begging the question. 100. Mr.Parasaran referred to the American principle of 'Effects Doctrine' is as follows: "Any state may impose liabilities, even upon persons not within its allegiance, for conduct outside its borders that has consequences within its borders which the state represents." In this behalf Mr.Parasaran referred to the discussion in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ould be disregarded in order to do that very thing is an extravagance to which this House will, I hope, give ear." 102. Mr.Parasaran pointed out that the very purpose of entering into agreements between the two foreigners is to acquire the controlling interest which one foreign company held in the Indian company, by other foreign company. This being the dominant purpose of the transaction, the transaction would certainly be subject to municipal laws of India, including the Indian Income Tax Act. The Petitioner has admitted that HTIL has transferred their 67% interests in HEL qua their shareholders, qua the regulatory authorities in India (FIPB), qua the statutory authorities in USA and Hong Kong and the Petitioner has also admitted acquiring 67% held by HTIL in HEL. This being the case, a different stand cannot be taken before the tax authorities in India and a different stand cannot be put forth by either HTIL or the Petitioner. 103. With regard to third proposition, Mr.M.Parasaran, the Additional Solicitor General of India, states that Section 195 and the impugned show cause notice are not extra territorial in their operations and he also made following submissions; a. &n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eal with the various acts of omissions and commissions i.e. conduct of persons or entities in India as well as outside India. The Indian Income Tax Act on the other hand is concerned with either residence of the person in India or the source of income or the economic activity which has to be carried out in India. Further, the meaning of words used in one section of the IT Act itself, cannot be used to interpret the meaning of words used in another section of the same Act, since the words used derive their meaning from the context in which they are used. (1997) 237 ITR 17 (SC) e. Merely because non-residents are subject to Indian Income Tax act for transactions entered into outside India if the transaction has a clear nexus to income or property or asset in India, the provisions cannot be said to be extra territorial. In this behalf he relied on Pannalal Nandlal Bhandari Vs. CIT (1961) 41 ITR 76 (SC). f. Mr. Parasaran also referred to a speech of the United States Attorney General Griffen Bell to the Law Council of Australia on 17th July,1978 in the book titled 'Extra Territorial ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at even the Petitioner had a nexus with India by reason of factors already set out its equity held in Bharti Airtel. i. The moment the Petitioner signed the agreement to acquire interests in India on 11th February, 2007, it automatically acquired nexus to a source of income in India and significantly, the said agreement was conditional upon the approval of the Indian regulatory authorities, only after the grant of which, the payment was made for acquiring Indian interest. Therefore, the nexus was clearly established even before the payment was made on 8th May, 2007. j. It is not as though the FIPB approval was not required as stated by the Petitioner. The FIPB approval is mandatory even as per Petitioner's own case, whereby they have reserved the right to cancel the agreement in case the FIPB does not grant approval (page 272) and the said terms have been acted upon and is a binding document. In terms of the FIPB approval, the Petitioner is bound to comply with all Indian laws including Indian Income Tax Act. It is respectfully submitted that the principle of reading down a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t. if there is no provision for tax deduction in respect of certain sources of income there will be no TDS on such income and recovery will have to be made through other modes of collection. ii) Section 190(2) falls in Chapter XVII (dealing with TDS) and sub-section (2) thereof provides that the provisions of the said Chapter shall not prejudice the charge of tax on income under section 4(1) thereby ensuring that the assessee who is charged with the liability of tax on his total income does not get away by taking defence of the provisions contained in Chapter XVII, thus while section 4(2) empowers the enforcement of machinery provisions for TDS, section 190(2) protects the charge created on the assessee (deductee under section 4(1). iii. In this backdrop, section 191 has always been a more express safety valve provided by law to protect the right of collection of taxes from the assessee (deductee). The provision never provided any slippery ground in the scheme of collection/recovery of taxes to suggest that the deductor has the liberty of not deducting the tax and getting away wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 191 provides a cumulative test and so long as the second condition viz. the failure of the assessee (deductee) to pay the tax has not arisen, it cannot be construed to be an assessee in default. This submission is unacceptable as the liability of the deductor and deductee are not linked and inter dependent, as held in judicial pronouncements. Even assuming without admitting that the petitioner's submissions are correct, even then condition stands fulfilled as the deductee has failed to pay taxes due within the time prescribed under the Income Tax Act and has failed to make payments by way of advance tax or by any other prescribe mode till date. The conditions of non-payment of the tax by the payee cannot be read in a manner to render it uncertain in point of time so as to put the tax authorities in an unending wait. The situation cannot be uncertain and the law cannot be interpreted in such a fashion. ix) Further, on the date of the issuance of the show cause notice in the present case, "the deductor' admittedly had not paid its taxes and in any event the second condition which the Petitioner says should be fulfilled, has nevertheless ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he operation of the charging provision, which is impermissible in the eyes of law. The judgments cited by the Petitioner with regard to the intepretation of Section 201 are therefore, inapplicable and distinguishable in the light of the principles of case cited above. xiii) According to the Petitioner, the position pre of deductor and (ii) under Section 200 where there is a deduction of tax as required under any of the provisions in Chapter XVII but such tax after such deduction, was not paid to the Central Government. Therefore, accordingly to the Petitioner, where a person, who on the threshold, is guilty of a gross failure to deduct or to withhold tax at the time of payment, could not be considered as an assessee in default. In other words, according to the Petitioner, an interpretation should be placed so as to consider the expression 'assessee in default', to apply to only persons falling under Section 194 and to persons who deduct taxes but who do not remit it to the Government, but not to apply to cases where the person fails to deduct tax. The Petitioner wants to place a premium upon persons committing gross default in deducting tax at t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng goes, "if any such person deducting the tax fails to deduct tax........." and it would not alter the effect. The "person" deducting the tax would necessarily encompass the person obliged to deduct tax. Any other interpretation would lead to absurd consequences and has to be avoided. xviii) Thus, both under the pre-amended provisions of sections 201 and 199 and post the amendment made in 2002 or 2003, the Petitioner is liable to be treated as assessee in default under Section 201. xix) The provisions of Section 191 and 201 continue on the statute from the 1922 Act. The settled position of law has all along been that where the payer (of income) fails to deduct or after deduction fails to pay such tax to the Central Government, he shall be treated as an assessee in default in respect of such tax. This was despite the fact that Section 191 remained on the statute but its scope was limited to protect the interest of revenue and ensure the collection from the assessee directly as well without even diluting the rigour of section 201. In this behalf Mr.Parasaran relied on the judgment of our High Court in the case of Yashpal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te itself through the opening words "for the removal of doubts". The notes on clauses and explanatory memorandum reiterated the same position. xxiii) Any explanation added to the section can only explain what is stated in the main provision. The main provision of Section 191 deals with only two situations (i) where there is no provision of deduction of tax and (ii) where the tax has not been deducted. it could never have been the intention of the parliament to add an explanation that would travel beyond the scope of the main provision by adding a third situation viz., where the tax was deducted but not paid to the Central Government. xxiv) The Explanation used the same language as was employed in section 201 by the amendment of 2002 i.e. "referred to in Section 200". Here also the reference was to persons required to deduct and pay the tax under various provisions of the chapter and not merely to persons who made the deduction but did not make the payment. "persons referred to in Section 200" cannot be interpreted to have a restrictive meaning as it would lead to absurd consequences. xxv) The tax ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rior to the amendments made by the Finance Act,2008; and v) the amendments made by the Finance Act,2008 are not violative of Article 14 of the Constitution. Rejoinder to submission (i) of the Respondents 108. It is submitted by the learned Senior Counsel for the Petitioner, that having submissions already made in the course of the hearing, this is a fit case for the exercise of jurisdiction under Article 226 of the Constitution of India. it is submitted that it is now well settled, and even the decisions relied upon by the Respondents support the contention that if the High Court is satisfied that the show cause notice was totally non est in the eye of law for absolute want of jurisdiction a writ petition could be entertained. In fact the judgment of the Constitution Bench of the Hon'ble Supreme Court in Calcutta Discount Company Vs. Income Tax Officer (AIR 1961 SC 372) Pages 379-380), clearly establishes that the High Court would have the power to issue an appropriate writ prohibiting an executive authority from acting without jurisdiction and where the action of an executive authority acting without jurisdiction subjects or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s according to the Petitioner it was not obliged to deduct tax at source, the question of invoking one of these remedies does not arise. In any event the failure to opt for such an alternative would not enable the Respondents to urge that the Petitioner should be precluded from invoking jurisdiction under Article 226 at this stage. Availing of an alternative remedy is not a condition precedent to invoking the writ jurisdiction of this Hon'ble court. 112. It was repeatedly argued that the Petitioner has not produced vital documents that are crucial to the determination of the issue of chargeability to tax in India of the sum paid by the Petitioner to Hutchison Telecommunications International (Cayman) Holdings Ltd. and, therefore, this Hon'ble Court should refuse to exercise its discretion under Article 226. It is submitted that as rule has already been issued, albeit subject to the issue of maintainability of the writ Petition, the question of the exercise of discretion by this Hon'ble Court to entertain the writ petition could not be disputed at this stage. There is a distinction in law between the exercise of discretion by a Court to entertain a Writ Petition and the maint ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the challenge to the constitutional validity of the amendments made to sections 191 and 201 of the Act by the Finance Act,2008 is not maintainable in the absence of any facts which are pleaded and proved by evidence in the form of documents on record, is unsustainable. The only fact required to be pleaded and proved in the present case to entitle the Petitioner to challenge the constitutional validity of the 2008 amendments is the issuance of a show cause notice by Respondent No.2 purporting to treat the Petitioner as an assessee in default under Section 201 of the Act. The issuance of the show cause notice dated 19th September,2007 is admitted and the same is annexed to the Writ Petition as Exhibit-"E". With regard to the third reply of the Respondents, the learned Senior Counsel for the Petitioner submits, that; 115. It is submitted that submission (iii) above deals with the Petitioner's case in respect of section 195 of the Act. This case of the Petitioner is a stand-alone argument, in the sense that it assumes that the gains accruing as a consequence of the transaction is chargeable to tax, but nevertheless, there is no obligation to withhold tax under section 195 of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so contending, the Respondents have relied only upon their ipse dixit and have ignored the judgment cited by the Petitioner in this regard. 119. Mr.Chagla for the Petitioner submitted that the Respondents have completely ignored the decision of the Hon'ble Supreme Court in the case of Kapurchand V. Tax Recovery Officer (AIR 1969 SC 682), where, in the absence of any provision by the Legislature in this regard, the Court preferred a restricted contextual interpretation of the very word "person" to the wider statutory definition thereof in Section 2(31) of the Act. It is submitted that the absurdity of reading "person" in the manner sought to be canvassed by the Respondents has already been demonstrated and it was pointed out how such an interpretation would render several provisions of the Act unworkable, and accordingly the expression, as used n section 195 of the Act, must be construed in the context in which it appears, and so construed cannot include within its scope an entity like the Petitioner, i.e. a non-resident having no presence in India. 120. In support of its contention that the requirement to deduct tax at source was not envisaged when a payment is made b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an Indian company and a mere financial investment in an Indian company would not constitute a "presence", taxable or otherwise, which would give rise to an obligation to deduct tax at source in terms of section 195 of the Act. Neither the signing of the agreement on 11th February,2007 nor the Foreign Investment Promotion Board (FIPB) approval is indicative of any nexus with, or constitutes any presence of the Petitioner in India. When the annual inflow of foreign investment has reached approximately US$ 28 billion, it would be absurd to contend that each and every financial investor has a presence in India. 123. An application under section 197 of the Act sought to be relied on by the Respondents (which was not referred to in any affidavit filed by the Respondents) is totally irrelevant and misplaced as the said application was not made by the Petitioner but another company in respect of transfer of shares in an Indian company, and not a foreign company. The adjustment in the consideration by way of a "Retention Amount" of approximately US$ 352 million was not on account of any potential tax liability as falsely contended by the Respondents. When the Respondent allege a tax liabi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a. The Respondents, however, have not categorically asserted as to what is the specific asset situated in India which stands transferred to the Petitioner. According to the Respondents what is transferred is the interest, tangible and intangible, in Indian operating companies of the "Hutchison Group" in favour of the petitioner, a nebulous term to say the least. It is submitted that the only capital asset transferred is the entire share capital of CGP. This capital asset admittedly was situated outside India. As a consequence of the transfer of this capital asset the Petitioner has acquired indirect control over companies of which CGP or its subsidiaries were a shareholder, including Hutchison Essar Ltd. (now Vodafone Essar Ltd.) and its subsidiaries. However, there has been no change in or transfer of the shareholding of any of the Indian companies or of the controlling interest (assuming while denying that the same is an intangible asset existing independent of shareholding) of the Indian companies inasmuch as the controlling interest of the Indian companies continue to remain vested in its shareholders and exercised by them. Therefore, it is submitted that there is no transfer o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act as a separate right by itself independent of the shares in such company, or where the right of shareholders of a company to manage its affairs was taken over by the Government, which case emphasize that "controlling interest" is an incidence e of shareholding and can only be separated therefrom by express legislation. In this behalf, the learned Senior Counsel for the Petitioner placed his reliance on the decision in the case of CIT Vs. National Insurance Co. Ltd. 113 ITR 37 and Lakshmi Insurance Co. Ltd. Vs. C.I.T. 80 ITR 575 and CIT Vs. New India Assurance Co.Ltd. 122 ITR 633. None of these decisions support the proposition that the controlling interest in a company is an asset independent of the shares. 130. The Respondents have relied upon the public statements made by Hutchison Telecommunications International Ltd. (HTIL) and the Petitioner to their respective shareholders and other regulatory authorities to contend that the Petitioner has acquired 67% of HTIL's interest in the Indian operating companies. It is submitted that the liability to pay tax in India is not dependent upon such statements or what may in commercial parlance be regarded as having been acquired. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cause notice and there has been no reference in the show cause notice to a transfer of a Joint Venture interest, the question of going into it at this stage would not arise. From the agreements relied on by the Respondents, it is evident that it is only the direct shareholders of Hutchison Essar Ltd. who have a right to nominate the directors, Chairman and CEO of Hutchison Essar Ltd. 134. The Petitioner submits that the reliance on the judgment of the Hon'ble Supreme Court in the case of New Horizon Ltd. Vs. Union of India & Ors. (1995) 1 SCC 478 is completely misplaced. In that case the issue before the Court was whether in determining whether a bidder could qualify for a tender the experience of one of its shareholders could be considered for complying with the requirement that "the tenderer should have the experience in compiling, printing and supplying of telephone directories of large telephone systems with the capacity of more than 50,000 lines." The observations of the Court must be read having regard to this specific issue that it was called upon to consider. The Court was not called upon to consider whether the rights of a "joint venture partner" are a "capital asset" or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng company and the subsidiary constituted a single economic unit. This was a case where the Court was of the view that the Company was seeking to resile from its obligation under the shareholders agreement by adopting a device. This decision has not considered the judgment of the Division Bench of this Court in CDS Financial Services (Mauritius) Ltd. Vs. BPL Communications Ltd. & Ors. 121 Comp. Cases 374 (relied on by the Respondents) which rejected the contention that the business of the subsidiary is the business of the holding company, and also held that the sale of shares cannot be equated with the sale of undertaking or any part thereof. 137. In the present case, in response to a specific query from this Hon'ble Court it has been categorically asserted by the learned Additional Solicitor General that it is not the case of the Respondents that the transaction entered into by HTIL and the Petitioner is a colourable device or that there has been any attempt at evasion of tax, and hence the decision of the Madras High Court (referred to in the preceding paragraph) would also not have any application. In view of the aforesaid assertion by the learned Additional Solicitor Gen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uming that he was obliged to do so, would be visited with penal consequences as provided for under section 271C of the Act but a person who has failed to pay over the tax after deducting the same would be visited with prosecution as provided for in section 276B of the Act. it is thus apparent that a failure to remit tax deducted at source as opposed to a failure to deduct tax at source is viewed by the Legislature as a far more serious default. 140. The Petitioner submits that the Legislature has provided that if a person deducts tax at source and fails to pay it over to the Government he should be proceeded against under Section 201 of the Act and recovery of the tax be made from such person because under section 205 of the Act the Revenue would be precluded from recovering such tax from the recipient of the income. on the other hand if the payer has failed to deduct tax at source there is no bar against the Revenue recovering it from the recipient, and in fact section 191 of the Act provides that tax would be recovered directly from the assessee, as he is the person primarily responsible for the payment of tax. Therefore, the assertion that the Petitioner wants to place a premiu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ings under Section 201 of the Act could only be taken against the two classes of persons referred to in paragraph 35 hereinbefore. On a literal reading of these penal provisions, therefore, a person who has failed to deduct tax at source as required in terms of a section other than section 194 of the Act could not be proceeded against under section 201 of the Act. It was by the Finance Act, 2008 that section 201 of the Act has been substantively amended, and the interpretation to the contrary that has been urged by the Respondents in its reply is without any basis and contrary to well-settled principles of construing a penal provision. 144. It is submitted that the Respondent's interpretation of section 191 of the Act is also fallacious. The Explanation to section 191 of the Act makes it clear that the Revenue can proceed against the payer only after the assessee who actually receives the income fails to pay the tax -a position reinforced by the 2008 amendments. Undoubtedly the obligation to deduct tax at source is at a point of time prior to the assessee being obliged to pay the tax in its own hands. Nevertheless, on a proper interpretation of the Act, it must follow that the rec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e not violative of Article 14 is without any substance. It is submitted that as explained hereinbefore on a plain construction of section 201 of the Act, as it stood before the 2008 amendments, no proceedings could be taken against the Petitioner to treat it as an assessee in default. it is only by virtue of the amendments that Respondent No.2 may be able to contend that a default under section 195 of the Act is now within the purview of section 201 of the Act and, therefore, the Petitioner's vested right has been affected and it is imperative that this Court strike down the impugned amendments to the extent that they operate retrospectively. The judgments relied on by the Petitioner in support of its submission to strike down the impugned retrospective amendments of 2008 have not been dealt with by the Respondents. 147. The arguments that section 201 of the Act is a procedural provision and, therefore, the amendments made thereto can have retrospective effect is totally misconceived. Section 201 of the Act empowers the Assessing Officer to treat a person as an assessee in default thereby visiting such person with severe penal consequences viz., an obligation to pay over the tax o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or Capital Gains Tax in India as the income was earned towards sole consideration of transfer of its business/economic interests as a group, in favour of the Petitioner. 153. Under Section 9(1)(i), income is deemed to accrue or arise in India whether directly or indirectly, through or from (a) business connection in India (b) property in India (c) any asset (d) any source of income in India, and (e) through the transfer of a capital asset situated in India. 154. The subject matter of the present transaction between the Petitioner and HTIL is nothing but transfer of interests, tangible and intangible, in Indian companies of the Hutch Group in favour of the Petitioner and not an innocuous acquisition of shares of some Cayman Islands Company, M/s. CGP Investments (Holdings) Ltd. 155. In this context, it is vital to note the chronological sequence of events in the above matter, as under: HTIL owned 67% interests in HEL (India) directly and indirectly; HEL was a joint venture company of the Hutch group (foreign investor) with the Essar Group partner) and obtained Telecom license to cellular service in different circles in India November 1994. The existence of joint structure betwee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion payable by it to HTIL to meet certain specific liabilities which the Petitioner may incur for a period of up to 10 years. June/July,2007 . The names of 8 operating companies undergo change. 13th June,2007. HTIL announces a special dividend of HK $ 6.75 per share or approximately US $ 12.94 per ADS out of the proceeds from sale of its interests in HEL. 24th August,2007 . Restated term sheet entered in India between Petitioner and essar group, confirming substitution of joint venture by the Petitioner in India and conferment of valuable rights and interests on the Petitioner, including Tag along rights and the right of first refusal and appointments of majority Directors. 156. VODAFONE AND ESSAR AGREE TO PARTNERSHIP TERMS: Vodafone and Essar have reached an agreement under which they will work to continue the growth of Hutchison Essar Limited ("Hutchison Essar"), one of India's leading mobile operators. This follows Vodafone's announcement on 11 February 2007 that it had agreed to acquire Hutchison Telecommunications International Limited's ("HTIL") controlling interest in Hutchison Essar, in which Essar is and will continue to be a 33% shareholder. The partners have ag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... national Limited. CGP owns a 51.95 indirect shareholding in Hutchison Essar Limited ("Hutchison Essar"), a mobile telecommunications operator in the Indian market. As part of its acquisition of CGP, Vodafone acquired a less than 50% equity interest in Telecom Investments India Private Limited ("TII") and in Omega Telecom Holdings Private Limited ("Omega"), which in turn have a 19.54% and 5.11% indirect shareholding in Hutchison Essar. The Group was granted call options to acquire 100% of the shares in two companies which together indirectly own the remaining shares of TII for, if the market equity value of Hutchison Essar at the time of exercise is less than US$25 billion, an aggregate price of US$431 million or, if the market equity value of Hutchison Essar at the time of exercise is greater than US$25 billion, the fair market value of the shares as agreed between the parties. The Group also has an option to acquire 100% of the shares in a third company, which owns the remaining shares in Omega. In conjunction with the receipt of these options, the Group also granted a put option to each of the shareholders of these companies with identical pricing which, if exercised, would req ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndian group and without which, a transferee cannot acquire a controlling interest. A divestment or extinguishment of right, title or interest must necessarily precede the divestment of the controlling interest and it would be impossible to dissociate one from the other and any divestment by one of any interest of enormous value in shares of such high intensity would certainly amount to acquisition of enduring benefit to the other, resulting in acquisition of a capital asset in India. The transaction also results not only in extinguishment of HTIL's rights in HEL but relinquishment of its asset viz., its interest in the Hutchison -Essar Group, so as to fall within the ambit of transfer as defined in Section 2(47) of the Income Tax Act (qua the transferor). 160. It is clear from the various declarations made supra by HTIL, that the purpose of transfer of its Interest in HEL was to enable the Petitioner to acquire controlling interest in HEL by acquiring 67% direct and indirect equity and loan interest, held by HTIL through its subsidiaries, in HEL and thus acquire the right to manage HEL by appointing its own directors on the board. The object of the transaction in the present ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iring shares in GDP was to acquire the controlling interest of 67% in HEL. 165. Another aspect to be noted is the American principle of "Effects Doctrine" which is as follows: "Any state may impose liabilities, even upon persons not within its allegiance, for conduct outside its borders that has consequences within its borders which the state represents." In International Law 4th Edition by Malcolm N.Shaw at pages 483 to 490 and also Page 456, which reads as follows: "International law accepts that a state may levy taxes against persons nor within the territory of that state, so long as there is some kind of real link between the state and the proposed taxpayer, whether it be, for example, nationality or domicile." 166. The above "Effects Doctrine" has been upheld and followed by our Hon'ble Supreme Court in the case of Shyama Charan Agarwala & Sons Vs. Union of India (2002) 6 SCC 201. . In the above case, it was held that even if an agreement is executed outside India or the parties to the agreement are not in India and the agreement may not be registrable under Section 33 of the MRTP Act, being an outside agreement, nevertheless, if there is a restrictive trade practice ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itioner. 169. We are also clearly of the view that the Petitioner has wilfully failed to produce the primary/original agreement dated 11th February, 2007 and other prior and subsequent agreements/documents entered into between the Petitioner and HTIL. In the absence of all relevant agreements and documents, it will be impossible to appreciate the true nature of the transaction. We agree with Mr.Parasaran, that in the absence of the said agreement and other relevant documents, constitutional validity of Income Tax provisions cannot be gone into. 170. Under the aforesaid facts and circumstances, the Petitioner has not been able to demonstrate the show cause notice to be totally non-est in the eyes of law for absolute want of jurisdiction of the authority to even investigate into the facts, by issuing a show cause notice. In this context, the following observations of the Hon'ble Supreme Court in The Special Director & Anoter Vs. Mohd. Ghulam Ghouse & Anr. (2007) 120 Comp.Cases 467 (SC) would be relevant: 5. This Court in a large number of cases has deprecated the practice of the High Courts entertaining writ petitions questioning legality of the show cause n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an enquiry the authority concerned may drop the proceedings and/or hold that the charges are not established. It is well settled that a writ lies when some right of any party is infringed. A mere show-cause notice or charge-sheet does not infringe the right of any one. It is only when a final order imposing some punishment or otherwise adversely affecting a party is passed, that the said party can be said to have any grievance. 16. No doubt, in some very rare and exceptional cases the High Court can quash a charge-sheet or show-cause notice if it is found to be wholly without jurisdiction or for some other reason if it is wholly illegal, however, ordinarily the High Court should not interfere in such a matter. 172. On similar lines, this Court in Jayanthi Lal Thankar & Co. Vs. Union of India (2006) 195 ELT 9 (Bom.), has held as under; 9. It is true that in large number of cases, the Apex Court has deprecated the practice of the High Courts entertaining writ petitions questioning legality of the show cause notices stalling enquiries as proposed and retarding investigative process to find actual facts with the participation and in the presence of the parties. Unless, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. 1997 (94) E.L.T. 285 (S.C.). In State of U.P. Vs. Labh Chand -AIR 1994 SC 754, the Supreme Court befittingly illuminated the power as under: "When a statutory Forum or Tribunal is specially created by a statute for redressal of specified grievances of persons on certain matters, the High Court should not normally permit such persons to ventilate their specified grievances before it by entertaining petitions under Article 226 of the Constitution is a legal position which is too well settled......" In State of A.P. Vs. T.C. Lakshmaiah Setty & Sons AIR 1994 SC 2377, the above decision was reiterated by the Supreme Court and it was observed that the orders of assessment rendered under tax laws should be tested under the relevant Act and in no other way. In Shyam Kishore Vs. Municipal Corporation of Delhi AIR 1992 SC 2279, it was observed that recourse to writ petition is not proper, when more satisfactory solution is available on the terms of the statute itself. The position is, therefore, clear that extraordinary and discretionary power under writ jurisdiction should be exercised with caution when statutory remedy is sought to be by-passed. 173. Another important aspec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed on the allegation that salary had been paid to four employees who were working with the appellants in India. These employees were Japanese and the salary in question had been paid by a Japanese-company in Japan. In addition thereto, the appellants had also paid salaries to these four employees but tax had been deducted at source. The show-cause notice stated that what was paid to these four employees in Yen currency was also taxable under Section 9 of the Income-tax Act and-tax should have been deducted at source. Instead of filing a reply to the show-cause notice, the appellants chose to file a writ petition. The singe judge dismissed the writ petition on the ground that alternative remedy was available to the appellants. In appeal, the Division Bench took the same view. Hence, this appeal by special leave. It is contended by Dr. Pal, on behalf of the appellants, that during the pendency of this appeal, taking advantage of the Voluntary Disclosure Scheme, Asahi Glass Co. Ltd. Japan, had filed returns of income in respect of the four employees in question and had paid the entire amount of income-tax payable in respect of what was paid to these four employees in Yen curren ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the remedy provided by the statute must be followed, and it is not competent to the party to pursue the course applicable to cases of the second class. The form given by the statute must be adopted and adhered to." The rule laid down in this passage was approved by the House of Lords in Neville Vs. London "Express" Newspaper Ltd. (1919) AC 368 (HL) and has been reaffirmed by the Privy Council in Attorney-General of Trinidad and Tobago Vs. Gordon Grant & Co. (1935) AC 532 (PC) and Secretary of State Vs. Mask & Co., AIR 1940 PC 105. It has also been held in to be equally applicable to enforcement of rights, and has been followed by this Court throughout. The High Court was, therefore, justified in dismissing the writ petitions in limine. 177. In the present case, the Petitioner has been requested to only show cause as to why it should not be treated as an assessee in default. The Petitioner was requested to produce certain documents for proper adjudication in the matter. One of the crucial documents required by the second Respondent was the primary agreement entered upon between the Petitioner and HTIL. The said agreement has not been produced by the Petitioner either before ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arely apply in the present case: "32. It is thus clear that though the Appellant-Company had approached the High Court under Article 226 of the Constitution; it had not candidly stated all the facts to the Court. The High Court is exercising discretionary and extraordinary jurisdiction under Article 226 of the Constitution. Over and above, a Court of Law is also a Court of Equity. It is, therefore, or utmost necessity that when a party approaches High Court, he must place all the facts before the Court without any reservation. If there is suppression of material facts on the part of the Applicant or twisted facts have been placed before the Court, the Writ Court may refuse to entertain the Petition and dismiss it without entering into merits of the matter." "33. The object underlying the above principle has been succinctly stated by Scrutton, LJ in R.V.Kinsington Income Tax Commissioners (1917) 1 KB 486: 86b LJ KB 257: 116 LT 136, in the following words: "It has been for many years the rule of the Court, and one which it is of the greatest importance to maintain, that when an applicant comes to the Court to obtain relief on an exparte statement he should make a full and fai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d repeated before us. A petition challenging the constitutional validity of certain provisions must be in the context of certain facts and not in abstract or vacuum. The essential facts necessary to examine the validity of the Act are lacking in this appeal. On this ground the petition was rightly rejected and we are not inclined to interfere with the order of the High Court on this ground alone. 182. A perusal of the show cause notice, the chronological list of dates and events, clearly reveals that the present case involves investigation into voluminous facts and perusal of numerous lengthy and complicated agreements. Based on the above, the question of chargeability of the transaction to tax and also the question of duty to deduct tax at source, can be determined. In the present case, the show cause notice, cannot be termed extraneous or irrelevant or erroneous on its face or not based on any material at all. 183. In this context, the following observations of the Calcutta High Court in Assam Consolidated Tea Estates Ltd. Vs. ITO 'A' Wards & Ors. 1981 ITR 699 (Cal), would be relevant: "15. Section 9(1) of the Act is a complicated provision applying to all income accruin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er to file its returns or to disclose the primary material facts necessary for such assessment. in this case there is no dispute that apart from the assessment year 1958-59 no returns were filed by the assessee. Whether the Income Tax Officer should have made enquiries on the basis of the information received in connection with the assessments of the Indian company is not germane to the present question. it is for the assessee to file returns and furnish the necessary particulars. Very difficult questions of the interpretation and application of the provisions of Section 9(1) of the Act have been raised and issues have been joined in respect thereof. These are matters for decision by competent tribunals and courts cannot conveniently be decided by this Court in its writ jurisdiction. however, the case of the impugned notice for the assessment year 1958-89 is quite different. The point is covered by the decision of the Supreme Court in Ranchhoddas's case and it must be held that the Income Tax Officer exceeded his jurisdiction in issui ..... X X X X Extracts X X X X X X X X Extracts X X X X
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