TMI Blog2008 (12) TMI 3X X X X Extracts X X X X X X X X Extracts X X X X ..... T P.C. 1. Mr.Chagla, the learned Senior Counsel appearing on behalf of the Petitioner broadly made the following four propositions: I. Assuming the validity of the 2008 amendments and further assuming that the transaction is chargeable to tax then nevertheless it is submitted that the Show Cause Notice is without jurisdiction as both before and after 2008 amendment the Petitioner is not deemed to be an assessee in default. II. The provisions of 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. Wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tatutes so as to supply any assumed deficiency." 5. He further placed his reliance on the judgment of the Hon'ble Supreme Court in the case of Smut. Tabulate Shyam Vs. Commissioner of Income Tax 108 ITR 345 (SC), wherein, the Hon'ble Supreme Court had held that; "There is no scope for importing into the statute words which are not there. Such importation would be, not to construe, but to amend the statute. Even if there be a casus omissus, the defect can be remedied 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Section 191 provides that even where there is failure to deduct tax in accordance with the provisions of that Chapter, "income-tax shall be payable by the assessee direct". In other words, the liability to pay tax is that of the assessee and not of any other person. The Explanation, however, is the counter-part of Section 201: for the removal of doubts it declares that in the special 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. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s liability to pay the tax arises only when 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 that effect. 12. Where a non-resident ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce 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 construction only and, second, that it c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s 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 a company for any assessment year commencing on or before the 1st day of April, 1970 or (iv) any institution, associat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 context of the provisions of Section 64 of the Act, means anyone else excepting the State Government applying to a State Government for permission to establish the proposed medical college at proposed location to be decided by the State Government." 108. The doctrine of purposive construction, thus, must be applied in a situation of this nature. 24. The Income Ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee 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 nexus to income-tax legislation, sales tax legislation and also to legislation imposing a tax on gambling. In Tata Iron and Steel Co. Ltd. Vs. State of Bihar, AIR 1958 SC 452 at P.461, the earlier cases were reviewed and it was pointed out that sufficiency of the territorial connection involved a consideration of two elements, namely, (a) the connection m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is 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 equally by imposing upon them the same onerous compliance obligations as person resident or having a presence in India, thereby violating Article 14 of the Constitution. 33. With regard to third proposition, Mr.Chagla, the learned Senior Counsel for the Petitioner advanced his arguments as under: III. Invalidity of the 2008 amendment to the ext ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ating 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 seek a windfall from the Legislature's mistakes. Validity of legislations retroactively curing defects in taxing statutes is well-recognised and Courts, except under extraordinary circumstances, would be reluctant to override the legislative judgment as to the need for, and the wisdom of, the retrospective legislation. In Empire Industries L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 by legislative fiat makes the new meaning binding upon courts. The Legislature may follow any one method or all of them - Shri Prithvi Cotton Mills Ltd. V. Broach Borough Municipality (1971) 79 ITR 136 (SC); (1969) 2 SCC 283." 38. The learned Senior Counsel further submitted that the decision of the National Agricultural Cooperative ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 amendments") retrospectively impose not taxation but a penalty upon the Petitioner by way of payment of tax which is the liability of another. The tax liability which may be fastened on the Petitioner by the said amendments cannot be sustained by the provisions of Chapter II of the Act which provides the "Basis of Charge". Hence, the sai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trospective 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 levy is sought to be imposed only for a particular period and not prior or subsequently it is open to debate whether the statute passes the test of reasonableness at all. In the present case, the High Court sustained the enactment by adverting to Rai Ramkrishna case AIR 1963 SC 1667 : (1964) 1 SCR 897 when the benefit of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 required to deduct tax at source but not deducting the same will not be deemed an assessee in default under section 201" and that this was "contrary to legislative intent" and therefore a "clarification" became necessary. Mr.Chagla submitted that the purported explanation is indefensible for the following reasons:- (i) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aid 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 unconstitutional. Under the un-amended Sections 191 and 201 the Show Cause Notice is clearly without jurisdiction. 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 Section 195 has no territorial limitation and that the Petitioner was obliged to deduct tax before making payment; and (c) that there is no violation of the condition precedent that the payee must have failed to pay the tax. 51. The learned Senior Counsel submitted that in any view of the matter the transaction in question is not chargeable to tax in India an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The controlling interest is not an asset separate and distinct from the shares but is an incidence arising from the holding of a particular number of shares in a company. In the instant case it is by virtue of the acquisition of the share capital of CGP that the Petitioner has acquired control of CGP directly and of VEL (the Indian Company) indirectly. In support of his contention, the learned Senior Counsel relied on a decision of the Hon'ble Supreme Court in the case of I.T.Commissioner Vs. Jeewanlal Ltd. AIR 1953 SC 473; When a shareholder holding the majority of shares authorises an agent to vote for him in respect of the shares so held by him, the agent acquires no interest, legal or beneficial, in the shares. The title in the shares remains vested in the shareholder. The shareholder may revoke the authority of the agent at any time. In spite of the appointment of the agent the shareholder may himself appear at the meeting and cast his votes personally. Therefore, the shares being always subject to his will and ordering, the controlling interest which the holder of the majority of shares has never passes to the agent. 53. Mr.Chagla, then relied upon Maharani Ushad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 56. He also relied on A.P.State Road Transport Corporation Vs. I.T.O. 52 ITR 524 (SC), The corporation, though statutory, has a personality of its own and this personality is distinct from that of the State or other shareholders. It cannot be said that a shareholder owns the property of the corporation or carries on the business with which the corporation is concerned. The doctrine that a corporation has a separate legal entity of its own is so firmly rooted in our notions derived from common law that it is hardly necessary to deal with it elaborately; and so, prima facie, the income derived by the Appellant from its trading activity cannot be claimed by the State which is one of the shareholders of the corporation. 57. He further relied on a decision in the matter of Carrasco Investments Vs. Special Director (1994) 79 Company Cases 631 (Del-DB). 58. Mr.Chagla pointed out that the expression "directly or indirectly" in section 9 relates to income accruing or arising and not to the transfer of a capital asset. The language of the aforesaid provision may be contrasted with the language in section 64(1) which provides that "In computing the total income of any individual, there s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al Co. AIR 1965 SC 1526, wherein the Hon'ble Supreme Court has observed, that; The expression "business connection" postulates a real and intimate relation between trading activity carried on outside the taxable territories and trading activity within the territories, the relation between the two contributing to the earning of income by the non-resident in his trading activity. In this case such a relation is absent. 64. He further relied on Carborandum Co. Vs. C.I.T. (1977) 2 SCC 862, wherein it is held that; It has rightly been pointed out by the Bombay High Court in C.I.T. Vs. Tata Chemicals Ltd (1974) 94 ITR 85 (Bom HC) with reference to the similar or almost identical provisions in Section 9(1) of the Income Tax Act, 1961 that in order to rope in the income of a non-resident under the deeming provision it must be shown by the Department that some of the operations were carried out in India in respect of which the income is sought to be assessed. 65. Mr.Chagla then referred to C.I.T. Vs. Toshoku Ltd. 1980 (Supp) SCC 614, wherein it is observed as under in paragraph 12; 12. The second aspect of the same question is whether the commission amounts credited in the books ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at HTIL was carrying on any operations in India having regard to the provisions of the Indian Telegraph Act,1885. In this behalf the learned Senior Counsel referred to the definition of the term 'telegraph'. REPLY OF RESPONDENTS 68. In reply to the arguments advanced at length by the learned Senior Counsel Mr.Chagla for the Petitioner, Mr.M.Parasaran, Additional Solicitor General of India appearing for the Respondent Union of India submitted his propositions mainly in the following manner:- (a) The Writ Petition is not maintainable at the stage of show cause notice. (b) The Writ Petition is premature inasmuch as no rights of the Petitioner, much less any vested rights, are affected, by the aforesaid show cause notice. (c) The Petitioner has an efficacious alternate remedy. (d) Discretion under Article 226 of the Constitution of India should not be exercised in favour of the Petitioner. 69. Mr.Mohan Parasaran, the learned Additional Solicitor General submitted that the reliefs sought in the above Petition are two fold: (i) Challenge to the legality and propriety of the show-cause notice alleging the Petitioner for withholding tax u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be totally non-est in the eyes of law for absolute want of jurisdiction of the authority to even investigate into the facts, Writ Petitions against show cause notices should not be entertained. Whether the show cause notice was founded on any legal premises raising a jurisdictional issue, which may be urged by the recipient of the notice. Such issues also can be adjudicated by the authority issuing the very notice initially, before the aggrieved could approach the Court. In this behalf Mr.Parasaran, the learned Additional Solicitor General of India, placed his reliance on the decision of the Hon'ble Supreme Court in the case of The Special Director Another Vs. Mohd. Ghulam Ghouse Anr. (2004) 120 Comp.Cas.467(SC), wherein the Hon'ble Supreme Court has held that; 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 notices stalling enquiries as proposed and retarding investigative process to find actual facts with the participation and in the presence of the parties. Unless, the High Court is satisfied that the show cause notice was totally non est in the eye of law for abs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 76. The learned Senior Counsel further relied on the decision of our High Court in the case of Jayanthi Lal Thankar Co. Vs. Union of India (2006) 195 ELT 9 (Bom.), wherein this Court had held that; 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, the High Court is satisfied that the show cause notice was totally non est in the eye of law for absolute want of jurisdiction of the authority to even investigate into facts, writ petitions should not be entertained f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urisdiction should be exercised with caution when statutory remedy is sought to be by-passed. 77. It is further submitted by Mr.Parasaran that in cases of this nature, where the question involved is one of determination of taxability of a transaction or when the question involved is whether an activity comes within the purview of the tax net, the same has to be gone into only by the concerned authorities and cannot be determined on the basis of affidavits and counter affidavits in a proceeding under Article 226 of the Constitution of India. In support of the said contention he relied on AVM Studio Vs. UOI (Mad) 2008 (10) STR 353, We do not find any merits in this case as the learned single judge is very categoric and the show cause notice is also very categoric in its terms and it only directed the appellant to show cause as to why the sum of Rs.44,26,741 cannot be recovered as service tax on consideration that the activity of the petitioner in leasing out the studio would come within the definition of "video production agency" as defined in the Finance Act. If the activity of the appellant does not come within the purview, it is well open to the appellant to explain the activity ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 999) 239 ITR 587 (SC), wherein the Hon'ble Supreme Court has observed that; The purpose of sub-section (1) of Section 195 is to see that the sum which is chargeable under Section 4 of the Act for levy and collection of income-tax, the payer should deduct income-tax thereon at the rates in force, if the amount is to be paid to a non-resident. The said provision is for 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. Further, the rights of the payee or recipient are fully safeguarded under sections 195(2), 195(3) and 197. 80. Mr.Parasaran also relied on the A.Sanyasi Rao Anr. Vs. Govt. of A.P. (1989) 178 ITR 31 (AP); By way of illustration, we may refer to section 194C. Sub-section (1) of section 194C, in so far as it is relevant, reads: "any person responsible for paying any sum to any resident (hereafter in this section referred to as the contractor) for carrying out any work .......in pursuance of a contract...... shall, at the time of credit of such sum to the account of the contractor or at the time of payment thereof in cash or by issue of a chequ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 246 A (ha) of the Income Tax Act, with a further right of Appeal to the Appellate Tribunal and then a reference to the High Court. In Transmission Corporation, 239 ITR 587 (SC), the Hon'ble Supreme Court has affirmed that the rights of parties are adequately safeguarded under Section 195(2), 195(3), 197 of the Act and the only thing required to be done by them is to file an application before the Assessing Officer under the section. 84. Mr.Parasaran also relied on the following decisions which would be relevant in support of the proposition that Court would not interfere in these circumstances:- a) Indo Asahi Glass Company Ltd. Anr. Vs. ITO Ors. 2002 (254) ITR 210 Equivalent to 2002 (10) SCC 444; The aforesaid show-cause notice was issued 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 taxa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot by a petition under Article 226 of the Constitution. It is now well recognised that where a right or liability is created by a statute which gives a special remedy for enforcing it, the remedy provided by that statute only must be availed of. This rule was stated with great clarity by Willes J., in Wolverhampton New Water Works Co. V. Hawkesford (1859) 6 CB (NS) 336 at p.356 in the following passage; "There are three classes of cases in which a liability may be established founded upon statute...... But there is a third class, viz., where a liability not existing at common law is created by a statute which at the same time gives a special and particular remedy for enforcing it..... 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 Stat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dara Sannadhi, 44 Ind. App. 98 at P.103 = (AIR 1917 PC 6 at p.8) Lord Shaw observed as follows: "A practice has grown up in Indian procedure of those in possession of important documents or information lying by, trusting to the abstract doctrine of the onus of proof, and failing, accordingly, to furnish to the Courts the best material for its decision. With regard to third parties, this may be right enough - they have no responsibility for the conduct of the suit, but with regard to the parties to the suit it is, in their Lordships's opinion, an inversion of sound practice for those desiring to rely upon a certain state of facts to withhold from the Court the written evidence in their possession which would throw light upon the proposition." This passage was cited with approval by this Court in a recent decision - Biltu Ram V. Jainandan Prasad, Civil Appeal No.941 of 1965, D/- 15-4-1968 (SC). 87. Mr.Parasaran submitted that the above conduct also warrants the dismissal of the Writ Petition by refusing to exercise discretion. The Hon'ble Supreme Court and this Court have refused to exercise discretion in several cases based on the conduct of the parties and since issuance of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deter unscrupulous litigants from abusing the process of Court by deceiving it. The very basis of the writ jurisdiction rests in disclosure of true, complete and correct facts. If the material facts are not candidly stated or are suppressed or are distorted, the very functioning of the writ courts would become impossible. 89. Mr.Parasaran pointed out that it has been held by the Hon'ble Supreme Court in the case of Bharat Singh Ors. Vs. State of Haryana AIR 1988 SC 2181 = (1988) 4 SCC 534, that when a point, which is ostensibly a point of law, is required to be substantiated by facts, the party raising the point, if he is the writ petitioner, must plead and prove such facts by producing evidence in support of such facts and if such evidence in support of such facts is not annexed, the Court will not entertain the point. Until facts are discovered establishing that the Petitioner has the rights that it claims if cannot assert those rights for the very purpose of preventing the discovery of facts by this Petition. The Hon'ble Supreme Court further held that there is a clear distinction between a writ petition and a pleading under the C.P.C. and that while evidence need not be ple ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 99 (Cal), especially paragraph Nos.15 and 19 which read as under: "15. Section 9(1) of the Act is a complicated provision applying to all income accruing or arising whether directly or indirectly, through or from (a) a business connection in India; (b) and money lent at interest and brought into India in cash or in kind; (e) a transfer of a capital asset situated in India. This being a deeming provision, it is not enough merely to say that the income does not arise directly through or from any of the sources mentioned in the section. The words of the Section are of the widest amplitude, namely accruing directly, accruing indirectly, arising directly or arising indirectly. The Petitioner has tried to sever the two transaction, namely, the transaction of the loan and the transaction of the transfer. Mr.Gupta contended that the interest arising from the unsecured loan stock may be held to arise from either a business connection in India or from the transfer of a capital asset in India. In this case the loan was part of the consideration for the transfer and the interest accruing on such a loan can be assessed under either of the above three heads. As a result of this transaction cer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt year 1958-59 while it would be discharged in respect of the notices for the other years. The interim orders, if any, except for those applicable to the assessment year 1958-59, are vacated. There will be no order as to costs of this application. Operation of this order is stayed till a week after the long vacation." It has further been held by the Hon'ble Supreme Court of India that where the question involved is as to the nature of the transaction depending on construction of documents, the same is a mixed question of fact and law and it is for the fact finding authorities to go into the same, particularly when the law prescribes a particular procedure for ascertaining those facts and the same cannot be subject matter of a writ petition. To support the contentions of Mr.Parasaran, he placed his reliance on the decision of the Hon'ble Supreme Court in the case of M/s.Sri Tirumala Venkateswara Timber and Bamboo Firm Vs. Commercial Tax Officer AIR 1965 SC 784, wherein it is observed that; 5. It is manifest that the question as to whether the transactions in the present case are sales or contracts of agency is a mixed question of fact and law and must be investigated with refer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stion that arises for consideration in the present case is; i) What was the subject matter of the transaction. ii) whether the subject matter can be said to be capital asset. iii) Whether the transaction involved transfer of a capital asset situate in India. f. 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. g. From the chronological sequence of events which have been furnished by the Revenue and from the pleadings on record, it is evident that; . 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 (Indian partner) and obtained telecom license to provide cellular service in different circles in India from November 1994. The existence of joint venture structure between Hutchinson group and the Essar Group in mobile telephony services is clearly stated, recognis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ur 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. 93. Mr.Parasaran pointed out that from the facts and material available as of now, it is demonstrable that a strong prima facie case has been made out to show that the transaction entered by the Petitioner amounts to transfer of capital asset situated in India. In the submission of Revenue, the above transfer is a transfer of a capital asset and not merely a transfer simplicitor of controlling interest ipso facto in a corporate entity. It is ; a. A transfer of a bundle of interests in various entities viz. Interest in Telecom License Jointly held with the Essar Group; use of Brand ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es the existence of a corporation as a joint venture entity. In the submission of the revenue, the acquisition of interest in a Quasi-Partnership/Joint Venture, itself amounts to acquisition of a Capital Asset. Therefore, the Petitioner, once having become a joint venture partner, virtually acquires a new dimension. The Indian entity and the petitioner cannot be divorced or disassociated while examining the nature of wholesomeness of the transaction in the present case. The Petitioner cannot contend that they merely acquired share holding rights in a foreign company since the acquisition of a bundle of interests as demonstrated above would certainly tantamount to acquisition of property in India. The arrangements agreed upon by the joint ventures in their respective term sheet agreements before and after the transfer amply prove this. The present transaction is not as simplistic as put forth by the Petitioner and involves a deeper scrutiny of substantive facts, a number of which have not yet been disclosed by the Petitioner. c. Transfer of interest held by one group (Hutch Group) in HEL (India) to the Vodafone Group. This Group Concept, as discernible from one of the cond ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eements, HTIL has earned income/profit from a property/asset in India and also from its business connection in India, which now stands transferred to the Petitioner. e) Transfer of Management Rights: 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 case was also to enable the Petitioner to successfully pierce the Indian mobile market to enlarge its global presence. In this behalf the learned Additional Solicitor General of India, placed his reliance on Ram Narain Sons Pvt. Ltd. Vs. CIT (1961) 41 ITR 534 (SC), CIT Vs. National Insurance Co.Ltd. (1978) 113 ITR 37 (Cal), CIT Vs. National Finance Ltd. (1962) 44 ITR 788 (SC) The Lakshmi Insurance Co. Vs. CIT (1971) 80 ITR 575 (Del) CIT Vs. New India Assurance Co.Ltd. (1980) 122 ITR 633 94. Mode of transfer of an asset, is not determinative of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... istributed to the share holders of HTIL in Hong Kong at the rate of Hong Kong $ 6.15 per share. Therefore, the recipient of the sale consideration was none other than HTIL and this was a consequence of divestment of its Indian interests in Hutchinson Essar Group, liable for capital gains. The learned Additional Solicitor General of India placed his reliance on the decision of the Hon'ble Supreme Court in the case of CIT Vs. Sri.Meenakshi Mills Ltd. 63 ITR 609 (SC). He further relied on the decision in the case of McDowell Co. Ltd. Vs. CTO 154 ITR 148 (SC). He also referred to the judgment in the case of State of U.P. Vs. Renusagar Power Co. AIR 1988 SC 1737. He further relied on CDS Financial Services (Mauritius) Ltd. Vs. BPL Communications Ltd. and Ors. (2004) 121 COMP CAS -0374 (Bom.). 98. Mr.M.Parasaran, Additional Solicitor General of India, further submitted that the present is a case where the real entities involved in the transaction are apparent and it is clear that what was transferred by HTIL to the Petitioner was its entire interest in the 8 companies in India. This is a case where there is no even a need or necessity for this Court to lift or pierce the corporate ve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on under Section 37(1), the Hon'ble Supreme Court has upheld the 'Effects Doctrine'. It has been followed in (2004) 7 SCC 447. In the present case, there may be no doubt that the transaction has effect on a property in India and involves transfer of controlling interest in an Indian company. The principle has been very well enunciated by Viscount Siminds in Collco Dealings Ltd. Vs. Inland Revenue Commissioners 1961 (1) LL ER 762, especially page Nos.763 and 765. Page 763 reads as under: "These transactions, which might seem strange to those unversed in the devious ways of tax avoidance, had their natural sequel in a claim for repayment of the tax that had been deducted. It was this claim and its rejection that led to these proceedings." The Learned House of Lords point out that such evasion transaction might seem strange only to unversed in devious ways of tax avoidance. In the present is a case of tax evasion and not tax avoidance. It may noted that the House of Lords rules in favour of the Revenue and against the tax payer. Page 765 reads as under: "I am not sure on which of these high-sounding phrases the Appellant company chiefly reliefs. But I would answer that neither ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... non-residents cannot be taxed under the Income Tax Act in India, if some source of income arises or accrues or is deemed to arise or accrue to them in India or if they acquire a capital asset situate in India, directly or indirectly. Therefore, the principle of extra territorially would ex facie be inapplicable on in-apposite. c. As mentioned earlier, the Income Tax is levied on a twin basis (a) On a resident/domicile basis and (b) on the source of income which accrues or arises in India or is deemed to arise or accrue in India. If any person, by virtue of his residence or source of income falls within the wide net cast by the Income Tax Act through the "whole of India" and if there is a nexus, then all the provisions of the Income Tax Act would apply. d. Section 1(2) cannot be read in isolation and has necessarily to be read with other provisions of the Act and in particular sections 4(1), 42), 5,9, and a host of other relevant provisions including the machinery provisions like those contained in section 173, 195 and other provisions. The reference to other enactments such as FERA, FEMA , Indian Official Secrets Act, which specifically provide for the applicab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eability or construing Section 195 of the Income Tax Act, in the respectful submission of the Revenue, neither the payment nor the residential status of the payer or the payee are relevant. The only consideration is whether the transaction in question is chargeable to tax in India in the light of the principles aforementioned. Whenever a restrictive meaning has been sought to be given to the expression 'person' under the Income Tax Act, the legislature has so provided it clearly and unambiguously in various other parts of the Income Tax Act (Sections 194,194C,194-I, 196A, 196B, 19C refer to Annexure A). Mr.Parasaran submitted that a charging provision cannot be defeated or rendered futile by reading down the machinery provision so as to ineffectuate the charging section. Such a submission is impermissible and misconceived. The lack of machinery for enforcement cannot be a valid ground for holding that law itself is not valid or alterantively that the law is unworkable or that the provisions should be read down. It is further submitted that 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 P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of rules for a non resident and another set of rules for residents, on the ground of any administrative inconvenience. In any event to expand the horizons of international trade and commerce, the concept of national boundaries are becoming redundant and nations are coming together in assisting each other in collection of taxes for their mutual benefit. The argument that the scheme qua non resident is impracticable cannot be accepted. 105. With regard to fourth proposition, Mr.Parasaran submitted that the Petitioners are Assessees in default under Section 201 read with Section 195 of the Act and made his submissions as under; i) Section 4(1) creates a charge of tax on the total income of an assessee. Section 4(2) provides of recovery of such tax by way of tax deduction at source or payment of advance tax in accordance with the provisions contained in the Act. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0 and 201) stood at different points of time is given as Annexure. viii) However, the submission of the Petitioner was that in any event, even going by the law as it stood pre or post 2008 Amendment, they could not be construed to be an assessee in default by reason of the Explanation to section 191. The petitioner has argued that the condition precedent before construing the Petitioner as an assessee n default is that not only the deductor should have failed to deduct the tax but that the assessee (deductee) should have also failed to pay the tax on the income arising to it. According to the Petitioner, Section 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... atena of decisions of the Hon'ble Supreme Court that while a provision in a tax statute containing a charging section should be construed strictly the same principle would not apply to a machinery provision which has to be construed liberally in order to effectuate the machinery provision. The machinery provision should not be so construed to frustrate the operation of the charging provision. The petitioner by its interpretation of Section 195 is only seeking to frustrate the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (Ker) v. Traco Cables Ltd. Vs. CIT (Ker) 166 ITR 278 xvii) If one were to substitute the words of section 200 after the word 'person' used in section 201, the reading 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 dil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t was clarificatory was stated in the statute 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 deduction at source, fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 is likely to subject a person to lengthy proceedings and unnecessary harassment the High Court will issue appropriate orders or directions to prevent such con sequences. 109. The learned Counsel Mr.Chagla for the Petitioner submits that before an order u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urisdiction 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 maintainability of a Writ Petition. Both are areas which would have to be gone into at the threshold itself i.e. when the rule is issued and, hence, it is not open to the Respondent to urge at this belated stage that this Hon'ble court should not exercise its discretion to quash an illegal assumption of jurisdiction. 113. Without prejudice to the aforesaid it is submitted that the Petitioner has not suppressed any vital do ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Act. The Petitioner, accordingly, proposes to deal with submission (iii) first. 116. The Petitioner submits that the Respondents have in their Proposition 3 failed to appreciate the exact scope of the Petitioner's argument regarding extra-territorial operation of Section 195 of the Act and consequently failed to answer the same. 117. What the Petitioner has contended was that although Section 195 of the Act cast ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ourt 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 by one non-resident to another outside India, the learned Senior Counsel for the Petitioner has relied upon the judgment of the House of Lords in Clark Vs. Oceanic Contractors Inc (1983) 1 ALL ER 133. This judgment too has not been dealt with by the Respondent except for referring to a subsequent judgment of the Court of Appeal in Paramount Airways Ltd (1993) Ch.223, which judgment reiterates the principle enunciated by the Hou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 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 liability of around US$2 billion it is incomprehensible that the Petitioner would retain such a negligible amount towards such potential tax liability. 124. It is further submitted that the reply proceeds on an erroneous presumption that the Petitioner has not challenged the vires of section 195 of the Act and, therefore, there can be no question of "reading down" the said provision, when in fact the same is the subject matter of G ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntire 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 of a capital asset in India. The Respondents have not replied to the Petitioner's submissions and authorities relied upon in Proposition IV that "controlling interest" is but an incidence of shareholding and is inseparable from the share. 127. There may be an indirect transfer of the controlling interest in the Indian companies as a consequence of the aforesaid transfer of share capital of CGP outside India, but such indirec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 tax liability would have to be determined based entirely on well recognized legal concepts and on the legal effect of the transaction viz. the transfer of the share capital of a foreign company outside India. 131. It is submitted that there is no transfer of any of the telecom licenses or the goodwill or any of the other assets of the Indian operating companies inasmuch as the telecom licenses and all other assets conti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 whether such "partner" has any interest in the property of the joint venture company. It is therefore submitted that this decision would have no application when determining the taxability of an amount, more so when such taxability is dependent upon a legal fiction. 135. It was urged that in effect the transaction has resulted in shares and all other interest of the eight Indian companies that were controlled by HTIL " ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 General the decisions relied upon in the Respondent's Proposition 2 with regard to evasion of tax are not being dealt with. 138. Mr. Chagla, the learned Senior Counsel for the Petitioner submitted that the "effects doctrine" is irrelevant and cannot be relied on in determining the incidence of taxation in view of the well-settled principle of strict interpretation of a charging provision, the scope of which cannot be expanded to cover presumed legislative ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oner 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 premium upon a person committing a gross default is not warranted. 141. The interpretation of section 201 of the Act by the Respondents is contrary to the plain language of the section. The decisions relied upon by the Respondents in support by this contention are cases which construed the provisions of section 201 of the Act as they stood before the amendment of the Finance Act, 2002. Therefore, the same would not enable the Respondents to urge that after the 2002 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 recovery from the payer can be enforced only after the Revenue has failed to recover the tax from the recipient. If the contrary interpretation of the Respondents is to be accepted it would leave a payer with no recourse against the payee unlike section 162 of the Act which specifically provides for a remedy if a person other than an assessee is called upon to pay the tax of the assessee. 145. The argument of the Respondents that the payee in the present case h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct 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 of another, a liability for interest, liability to penalty under section 221 of the Act and a further liability to penalty under section 271C of the Act. Such a provision imposing penalty/quasi-punishment cannot be enacted with retrospective effect, and the same is unconstitutional. 148. It is therefore submitted by Mr.Chagla that this Court may be pleased to quash the impugned notice and make the rule absolute with costs. CONSIDERATION: 149. The main ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ia. 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 between Hutchison group and the Essar in mobile telephony services is clearly recognised and affirmed if one looks at the term sheet of dated 24th August,2007. Term sheet dated 5th July,2003 and agreement dated 2nd May,2000, the Hutch group was controlling 8 companies in India and operating in joint venture with Essar and others providing cellular service in India. 22nd December,2006: HTIL discloses that it had been approached by potential regarding a p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 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 agreed that Hutchison Essar will be renamed Vodafone Essar and, in due course, that the business will market its products and services under the Vodafone brand. With penetration levels of around 13%, both partners believe that there are substantial growth opportunities in the Indian mobile telecommunications market. Vodafone is the leading international mobile operator with an extensive range of products and services, many of which are not currentl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... p 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 require Vodafone to purchase 100% of the equity in the respective company. These options can only be exercised in accordance with Indian law prevailing at the time of exercise. In conjunction with the acquisition, Vodafone assumed guarantees over US$450 million and INR10 billion (Pound 21 million) of third party financing of TII and Omega and received investments in preference shares of TII and its subsidiaries amounting to INR 25 billion (Pound ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cquisition 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 case was also to enable the Petitioner to successfully pierce the Indian mobile market to enlarge its global presence. 161. Shares in themselves may be an asset but in some cases like the present one, shares may be merely a mode or a vehicle to transfer some other asset(s). In the instant case, the subject matter of transfer as contracted between the parties is not actually the shares of a Cayman Island Company, but the assets (as stated supra) s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eads 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 as a consequence of outside agreement is carried out in India, then the Monopolies Restrictive Trade Practices Commission in India will have jurisdiction. The above principle is reiterated in Man Roland Druckimachinen AG Vs. Multicolour Offset Ltd. and Another (2004) 7 SCC 447. 167. The principle has been very well enunciated by Viscount Siminds in Collco Dealings Ltd. Vs. Inland Revenue Commissioners 1961 (1) LL ER 762, especially page Nos.763 and 765. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vant 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 notices stalling enquiries as proposed and retarding investigative process to find actual facts with the participation and in the presence of the parties. Unless, the High Court is satisfied that the show cause notice was totally non est in the eye of law for absolute want of jurisdiction of the authority to even investigate into facts, writ petitions should not be entertained for the mere asking and as a matter of routine and the writ petitioner should invariably be directed to res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, the High Court is satisfied that the show cause notice was totally non est in the eye of law for absolute want of jurisdiction of the authority to even investigate into facts, writ petitions should not be entertained for the mere asking and as a matter of routine and the writ petitioner should invariably be directed to respond to the show cause notice and take all stands highlighted in the writ petition. 10. The position regarding the course to be adopted by the Courts when alter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... estion involved is one of determination of taxability of a transaction or when the question involved is whether the activity comes within the purview of the tax, net the same has to be gone into only by the concerned authorities and cannot be determined on the basis of affidavits and counter affidavits in a proceeding under Article 226 of the Constitution of India. The following observations would be relevant and opt as made in AVM Studio Vs. UOI (Mad) 2008 (10) STR 353, We do not find any merits in this case as the learned single judge is very categoric and the show cause notice is also very categoric in its terms and it only directed the appellant to show cause as to why the sum of Rs.44,26,741 cannot be recovered as service tax on consideration that the activity of the petitioner in leasing out the studio would come within the definition of "video production agency" as defined in the Finance Act. If the activity of the appellant does not come within the purview, it is well open to the appellant to explain the activity carried on the appellant so as to have a finding to that effect. It is well-settled and well established principle that a classification or whether an activity co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot be taken up for consideration by this Court for the first time. In our opinion, the High Court was right in coming to the conclusion 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. 176. Similarly, in Titaghur Paper Mills Co. Ltd. Anr. Vs. State of Orissa Ors. 142 ITR 663 SC, the Hon'ble Supreme Court has held as under: 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the said agreement and other relevant documents, it will be impossible for us to find out the true nature of the transaction. Inspite of repeated demands by the Respondents, the same have not been produced, leaves us with no option but to draw an adverse inference against the Petitioner, since it clearly amounts to withholding of the best evidence, even assuming that the onus of proof does not lie on the Petitioner. 178. In this context, the following observations of the Hon'ble Supreme Court in the case of Gopal Krishnaji Ketkar Vs. Mohamed Haji Latif Ors. AIR 1968 SC 1413, would be very relevant; 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 opinion, a sound practice for those desiring to rely upon a certain state of facts to withhold from the Court the best evidence which is in their possession which could throw light upon the issues in controversy and to rely upon the abstract doctrine of onus of proof. In Murugesam Pillai Vs. Gnana Sambhanda Pandara Sannadhi, 44 Ind. App. 98 at P.103 = (AIR 1917 PC 6 at p.8) Lor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd 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 conduct of the party who is invoking such jurisdiction. If the Applicant does not disclose full facts or suppresses relevant materials or is otherwise guilty of misleading the Court, the Court may dismiss the action without adjudicating the matter. The rules has been evolved in larger public interest to deter unscrupulous litigants from abusing the process of Court by deceiving it. The very basis of the writ jurisdiction rests in disclosure of true, complete and correct facts. If the material facts are not candidly stated or are suppressed or are distorted, the very functioning of the writ courts would become impossible. 180. When the Petitioner has challenged the constitutional validity of the Amendment to Sections 191 and 201 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... set situated in India. This being a deeming provision, it is not enough merely to say that the income does not arise directly through or from any of the sources mentioned in the section. The words of the Section are of the widest amplitude, namely accruing directly, accruing indirectly, arising directly or arising indirectly. The Petitioner has tried to sever the two transaction, namely, the transaction of the loan and the transaction of the transfer. Mr.Gupta contended that the interest arising from the unsecured loan stock may be held to arise from either a business connection in India or from the transfer of a capital asset in India. In this case the loan was part of the consideration for the transfer and the interest accruing on such a loan can be assessed under either of the above three heads. As a result of this transaction certain rights have been exchanged between the Petitioner and the Indian company. The loan was granted to enable the Indian company to pay for the assets which were in India and it may very well be argued that as a result of the transaction assets in India have been transferred. Serious questions as to the scope and effect of Section 9(1) are involved whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vacation." 184. The Hon'ble Supreme Court has held that where the question involved is as to the nature of the transaction depending on the construction of documents, the same is a mixed question of facts and law and it is for the fact finding authorities to go into the same, particularly when the law prescribes a particular procedure for ascertaining those facts and the same cannot be subject matter of a Writ Petition. In this context, the following observations of the Hon'ble Supreme Court in M/s.Sri Tirumala Venkateswara Timber and bamboo Firm Vs. Commercial Tax Officer AIR 1965 SC 784, would be very relevant; 5. It is manifest that the question as to whether the transactions in the present case are sales or contracts of agency is a mixed question of fact and law and must be investigated with reference to the material which the appellant might be able to place before the appropriate authority. The question is not one which can properly be determined in an application for a writ under Art.226 of the Constitution. 185. Under the aforesaid facts and circumstances and for the various reasons set out hereinabove, Rule stands discha ..... X X X X Extracts X X X X X X X X Extracts X X X X
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