TMI Blog2005 (2) TMI 445X X X X Extracts X X X X X X X X Extracts X X X X ..... ed CIT(A) has Dot considered the facts as well as the legal submission put forth in its proper prospective and has without application of mind upheld the stand of deducting tax at source. 3. The learned CIT(A) grossly erred in confirming the stand of Dy. Director of IT (International)-2(1), Mumbai, with regard to rejecting the application made for remitting the funds without deducting tax at source only on the ground that the power to grant exemption for withholding tax lies with Government of India, who vide letter dt. 5th Feb., 2002 have withdrawn the exemption granted earlier under s. 10(15)(iv)(f) of the Act. 4. The learned CIT(A) grossly erred in not giving direction to Dy. Director of IT (International Taxation)-2(1), Mumbai, with regard to taxability of interest payable on the loans. 5. The learned CIT(A) grossly erred in directing the appellant to deduct tax at the rate of 20 per cent of all future payment of interest on the said loan." 2. On careful reading of the above grounds, it emerges that the issue revolves around the appellant denying the liability to deduct withholding tax at the rate of 20 per cent directed vide an order under s. 195(2) on remittance to De ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for raising the foreign currency loan Through this letter it was conveyed that payment of interest, commission and fees in respect of the abovementioned loan was exempt from withholding tax under s. 10(15)(iv)(f) of the IT Act. The appellant was remitting interest on the borrowing till 5th Feb., 2002, Without deducting any withholding tax in India. Subsequently the Government of India, vide a letter dt. 5th Feb., 2002, has communicated to the appellant regarding withdrawal of exemption granted under s. 10(15)(iv)(f) in respect of above foreign borrowings. The appellant-company has narrated that the withdrawal of exemption by the Government of India, Ministry of Finance, was unjustified and legally incorrect. It was pleaded that the said section does not permit withdrawal of exemption granted earlier, accordingly prayed to allow the appeal. 4. On the basis of above brief background, learned CIT(A) has decided the issue in a cursory manner as follows: "4. I have considered the submission of the appellant's counsel and the order of the AO dt. 13th Feb., 2002. The AO has directed to withhold the tax as the power to grant the exemption on withholding tax under s. 10(15)(iv)(f) rest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Jamnagar Petro Chemical Complex. It was explained that the Hazira Petro Chemical Complex was nearing completion and on completion of Phase-II Project the production capacity of RIL was likely to increase upto 300 per cent. In this application it was reminded that to part finance the project cost for Hazira Phase-II Petro Chemical Complex, a permission to raise ECB had been given of US $ 914 million. The request for approval was as follows in the said letter dt. 29th Jan., 1997: "An application in the prescribed format duly filled is enclosed for your consideration and approval. As the project is ready to take off with all other required approvals already in place. we would now request your approval leading to financial closure to raise upto US $ 425 million by way of FRNs/syndicated loans/private placements/bond issues from the international capital markets through various currency options like US Dollar/Yen/Deutsche Mark/Pound Sterling, with a minimum average maturity of 7 years." The Ministry of Finance has communicated vide a letter dt. 6th/10th March, 1997 to approach the Department for the purpose of ECB only after fully utilizing the ECB already sanctioned for Hazira Phas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 31st Jan., 1997, we have further made payments of US $ 29.1 million towards Hazira Projects totalling to US $ 737.75 million upto 31st March, 1997. In addition, we have spent US $ 2.85 million towards procurement of indigenous equipment for captive power plant taking the total to US $ 75.67 million upto 31st March, 1997." It was requested by the company to process the application regarding raising US $ 425 million towards part-finance on Jamnagar Petro Chemical Complex. The Ministry has responded vide letter dt. 19th May, 1997 asking the assessee-company to submit a report regarding the physical and financial progress of Hazira Phase-II expansion project required in connection' with the further processing of foreign currency loan of US $ 425 million towards part finance of Jamnagar Petro Chemical Complex. In Compliance on 21st May, 1997 information were supplied. Finally on 21st July, 1997, Ministry has approved the sanction communicated through Dy. Director (ECB). The subject as mentioned in the approval was in respect of proposal for a foreign currency loan through Euro Sterling Bond issued and Private Placement Bond issued for part financing project. It was conveyed that the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 19th June, 1996, expressly permit utilization of ECB proceeds for financing capital expenditure incurred in rupees. As the expenditure incurred by us on captive power plants conforms to these guidelines, we requested you vide our letter of even reference dt. 8th Oct., 1996 to permit utilization of ECB proceeds for rupee related capital expenditure in respect of captive power plant. We hope you will accede to our request." Thereafter, the Dy. Director (ECB) has sought further clarification about the ECB aggregating to US $ 600 million for financing the import of capital goods and services for Hazira, Phase-II Project. It was directed to submit details on the draw down against the ECB as well as the purpose for which the amount had been utilized. It was also directed to submit a certificate from the auditor indicating purpose-wise utilization against the ECB raised till that date. Learned Authorised Representative has emphatically mentioned that, that was the turning point as well as the start of the dispute. The first objection raised by learned Authorised Representative is that once an approval has been granted and on the basis of that approval, borrowings have been made then t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e balance proceeds of approximately $ 1.3 billion had been retained offshore. It was mentioned that considerable cost savings have been achieved in the implementation of the project. So the financing pattern of the project had also been altered. Due to this reason ECB proceeds were stated to be no longer required for the specified end-uses as the projects for which the borrowings were made have been implemented with rupee resources. In that situation a request was made, seeking approval for permission for pre-payment/buy-back of outstanding ECB $ 1.3 billion. This proposal was with the intention to preserve the available foreign exchange reserve. However, the same was not approved and vide a letter dt. 12th April, 1999, Dy. Director (ECB) has rejected the same in the following words: "Please refer to your letter No. RIL:DLH:305(a) dt. 21st Jan., 1998 and letter dt. 16th Dec., 1998, on the abovementioned subject for prepayment of 20 per cent and 100 per cent of outstanding ECBs, respectively, by utilizing ECB proceeds parked abroad. The matter has been examined. Since the above requests for the prepayment from ECB proceeds held abroad were not found to be in conformity . with the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ory of exemption on any monies borrowed by it in foreign currency from sources outside India under a loan agreement approved by the Central Government having regard to the need for industrial development in India. Clause (f) provides the approval and prescribes interest rate approved by the Central Government but does not provide the end-use of the monies borrowed in foreign currency. Learned Authorised Representative has argued that, since there is no clause specifying the end-use of the money borrowed, therefore, the withdrawal of exemption by the authorities was beyond their scope. He has also argued that as far as the approval was concerned the same remained unaffected and stood as it was granted, however, only exemption was withdrawn. In this regard he has submitted that several other clauses of s. 10 provides end-use of the funds or money and some of the clauses do not prescribe such limitations. Referring to s. 10(15)(iv)(c) learned Authorised Representative has mentioned that the legislature has chosen such words to specify the usage of moneys borrowed to be in respect of purchase outside India of raw material. Likewise in the same section cl. (e) states that where the mone ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entire amount to the foreign re-insurers and then receiving remittance from the said insurers the commission due to it, entered into an agreement with the foreign reinsurers that while remitting reinsurance premia, the appellant would retain the fee due to it for the technical services rendered and this arrangement stated to be effected only with the concurrence or the permission of the RBI. So the Court has observed that a two-way traffic was unnecessary. The Court has directed the Board to process the agreement in the light of the principle laid down in the said judgment. 10. The next contention of learned Authorised Representative was in respect of the powers exercised by the Government of withdrawal of exemption. In this regard, he has vehemently argued that once the approval was granted and the specific condition regarding the need for industrial development in India having been fulfilled along with the rates approved by the Central Government then there was no occasion to withdraw the said exemption. He has vehemently argued that s. 10(15)(iv)(f) does not prescribe the condition of "end-user", therefore, the Central Government cannot go beyond the provisions of the IT Act, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contended that the doctrine of "reading down" has been accepted in principle by several Courts according to which if there is conflict between substantive provision of Act and Rules then it is the rule which must give way to the provisions of the Act. Before concluding his arguments, learned Authorised Representative has again reiterated that once a lender of money is entitled for a deduction under s. 10(15)(iv)(f) then he should not be penalized by withdrawing the exemption on the ground that the borrower has not complied with certain conditions. The application before the Government authorities were only in respect of pre-payment of loan which resulted into withdrawal of exemption granted to the lender. In this manner, the lenders were penalized without any fault on their part. The action of the withdrawal of exemption was illegal, improper, unwarranted and against the provisions of the IT Act, learned Authorised Representative has concluded. 11. On behalf of the Revenue, learned Departmental Representative, Shri O.P. Sharma appeared and also strongly supported the withdrawal of exemption. At first he has challenged the jurisdiction of the Tribunal of entertaining this appeal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed. In relation to the initial approval dt. 21st Jan., 1997, it was submitted that the terms and conditions applied to the approval and not to the exemption and that the exemption was not granted subject to any terms and conditions and could be withdrawn by the Government at any time. It was submitted that the refusal to give the approval for repayment of ECB because of non-utilization was within the ambit and policy relating to the "monitoring" and its object of keeping a vigil on the utilization. The learned Departmental Representative relied on the decision of the Supreme Court in Bannari Amman Sugars Ltd. vs. CTO (2004) 3 RC 622 (SC). It was submitted that it was not open to the appellant to rely on the principle of promissory estoppel. In nutshell, learned Departmental Representative has argued that the validity of withdrawal of exemption under s. 10(15)(iv)(f) by the Central Government cannot be challenged at the stage of appeal before the Tribunal and the right forum where it can be challenged, had already been exhausted by the assessee. The order passed under s. 195(2) is only a consequential order not to be challenged again independently. According to learned Departmental ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... don, without deduction of withholding tax at source. This request was rejected by the concerned authority, i.e., Dy. Director of IT (International Taxation), Mumbai vide impugned order under s. 195(2) of the IT Act on the ground that the exemption under s. 10(15)(iv)(f) in respect of interest payment had already been withdrawn by Government of India, vide its communication dt. 5th Feb., 2000. So the interest was held to be liable to withholding tax in India. The first appellate authority has also dismissed the plea of the assessee and affirmed the action of the AO in a brief order, relevant portion already reproduced supra. We have also narrated in above paras the facts and figures of the External Commercial Borrowings (in short ECB) availed in respect of a project of Petro Chemical Complex at Hazira and Jamnagar. To resolve this issue it is in the interest of justice to first of all streamline the question to be answered by us which according to us are as follows: (1) What is the implication of Hon'ble Delhi High Court decision as well as the Special Leave Petition filed before the Hon'ble apex Court on the jurisdiction of the Tribunal? (2) What is the scope of s. 10(15)(iv)(f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt, it is implicit that the Court was aware of the fact that vide an order under s. 195(2) dt. 13th Feb., 2002, the application of the assessee had been rejected. Further, the Hon'ble Court was also aware that an appeal had been preferred by the appellant against the said rejection before the first appellate authority, i.e., learned CIT(A). Vide para 13, the Hon'ble Court in the said order has clearly mentioned about these facts. Being fully aware of the entire situation and the circumstances under which the exemption was withdrawn resulting into direction of 20 per cent deduction of tax, the Hon'ble Court at p. 159 placitum "H" has observed as follows: "The question which survives for consideration now is as to whether by reason of the impugned order the Central Government issued any direction to the statutory authorities. In the instant case no action had been taken as a result whereof the quasi judicial authorities became denuded of their quasi judicial power. Merely communicating the impugned judgment to the effect that such exemption had been withdrawn is communication of a foundation of fact. If, according to the petitioner, the order of the quasi judicial authority suffers ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us that an Act is the supreme considering the hierarchical tends i.e., the supreme is the Act, then comes the rules made thereunder, next is the position of notification and the last is letters or approvals. It was argued with supporting case laws that the rules must be sub-servient to the provision of the section enacted in a statute. In the case of New Citizen Bank of India, Hon'ble Bombay High Court has also observed, "when a rule is made under a particular section it is the section which controls and governs the rule and the rule must be construed in the light of the decision and not vice versa" So the basic question is that once because of the letter or notification the provisions of the statute have been negated or diminished by an executive order then what is the course left to a taxpayer. Naturally the answer is that a taxpayer has no option but to knock the door of the judiciary. In a plethora of decisions, it was unequivocally held that the full effect of the provision has to be given in preference to supporting legislation such as rules, notifications, approvals, etc. Some of the decisions in this regard are worth quoting as follows: (i) Abdul Hussein Essaji Arsiwalla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te legislature is to carry out the statutory provisions effectively and not to neutralize or contradict them. The rules made under the rule-making power should strictly conform with the intendment of the main provisions of the statute and be consistent therewith......................" (iv) Bombay State Transport Corporation's case wherein vide p. 405 observed as under: "It would appear to us that there is much to be said in favour of the view that this is not within the competence of the rule-making authority. To put it in other words, a rule made in this manner which provides for a nil percentage of depreciation on a certain class of assets, or in a class of cases, to use the language of s. 1O(2)(vi), cannot be accepted as a rule made for carrying out the purposes of the Act; indeed, such a rule may be regarded as patently violative of the purposes of the Act, i.e., of s. 10(2)." (v) Hyderabad Asbestos Cement Products Ltd.'s case, wherein the Hon'ble Court at page Nos. 775 and 776 has observed as under: "Learned counsel for the assessee invited our attention to the decision of the Supreme Court in CIT vs. S. Chenniappa Mudaliar (1969) 74 ITR 41 (SC). Relying on this decisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made and it must be so granted. The second and third conditions aforesaid are not valid." 17. The purpose of above discussion by reproduction of relevant extracts of certain precedents is to ascertain whether the Tribunal has its role in deciding the issue cropped up on account of a rule or notification or any such decision taken by subordinate quasi judicial authority. On careful reading of the above decisions it is implicit that the Tribunal does have the power to deal with the validity of such rules or notification and by applying the doctrine of 'reading down' can strike down such rules if held to be in contradiction with the provisions of the statute itself. The gist of all the above decisions is that the rules are made only for the purpose of carrying out the provisions of the Act which cannot be taken away or whittle down the effect conferred by the statute. With the result we hereby agree with the contentions of learned Authorised Representative that the Tribunal has both, the power and duty, to deal with such rules or notification and decide whether the same are in agreement with the main provisions of the statute. In view of above discussion, in the present appeal, now ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... above paras of this order and the paper book contains the copies of all those letters and approvals. To finance its project of Jamnagar Petro Chemical Complex, external borrowings were made in terms of the policy of Government of India granting permission for ECB to be utilized by industrial undertakings in India. Under this plan, the company had made several applications to Government of India from time to time and obtained permission to raise ECB loans in foreign exchange. Further an application was moved to raise the loans upto US $ 4.25 million. In this regard, Dy. Director (ECB) vide a letter dt. 6th Oct., 1997 has raised a question about the utilization of ECB already sanctioned in the Hazira Phase-II Expansion Project. The utilization of ECB was explained by the company that out of the US $ 914 million ECB received, US $205.35 million was yet to be utilized as on 31st Jan., 1997. The explanation was given in respect of the said unutilized ECB that there were letters of credit to the tune of US $ 224.88 million. So at that time it was mentioned that the conditions were satisfied as the entire amount of ECB obtained for Hazira Phase-II Project was either utilized in the proje ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ule or any such direction should not be imposed which happened to be in contradiction of the main governing section, in this regard several case laws were cited. The provision of the statute provides in an unambiguous term to grant exemption in respect of interest payable to an international investor who has lent money to industrial undertaking in India under a loan agreement as approved by the Central Government. The counsel from the side of the appellant has emphasized the phrase "having regard to the need for industrial development in India" used in the said provision. The Government of India has properly regarded the need for industrial development only thereafter issued the notification and floated this scheme of ECB. The arguments have further been advanced that whenever or wherever the legislation decides to ascertain the usage of money the suitable language is used in the body of the statute itself. For example s. 10(15)(iv)(c) has mentioned the end-use of money borrowed and specifically directed to be "in respect of the purchase outside India of raw material or capital plant and machinery". So the end-use in the said section is categorically specified. Few more sections ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ertain letters addressed to the Dy. Director (ECB) giving details of the utilization of ECB. For the sake of brevity there is no need to reiterate again the submissions in this regard. On p. 40 of the compilation there is a letter dt. 26th Nov., 1996 issued by Ministry of Finance seeking details of utilization of ECB proceeds and therein para (ii) was specifically mentioned, verbatim reproduced hereinabove, through which it was indicative that the authorities were aware about the utilization of ECB by adopting two modes, i.e., funding through foreign currency and also utilization of own resources. In para (i) of the said letter dt. 26th Nov., 1996, the Dy. Director (ECB) has indicated the utilization of foreign currency expenditure. Learned Authorised Representative has informed that Director (ECB) has made it clear that the foreign currency expenditure incurred after the date of application but before the date of borrowing was considered as eligible expenditure for utilization of ECB. The subsequent para also approved as per learned Authorised Representative, the expenditure incurred on item for which ECB was proposed which had been made from the appellant's own resources incurred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ange in a lawful and permissible manner. 21. On relying upon these decisions the alternate plea as made before us is that even assuming that end-user restriction could have been imposed by the Central Government ex post facto even then the appellant-company had in fact invested or utilized far more foreign currency in US dollar for capital goods and services in respect of the Jamnagar Petro Chemical Complex. To establish the total utilization of funds certain facts and figures in the form of charts have been placed before the concerned authorities and it was argued that the figures shown were not in dispute. It is also argued that the undisputed and unchallenged factual position was that the total utilization of funds was much more the ECB availed under the scheme. Let it remain undisputed and without entering into dispute which is more in the nature of findings of fact we have to concentrate on the core issue of withdrawal of exemption. The legislature has granted exemption to the lender, i.e., the foreign institution and not to the borrower, i.e., the appellant-company. If there was a mistake, for arguments, if at all committed by the borrower even then the lender cannot be pun ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) was passed which was challenged by invoking the provisions of s. 248 before the first appellate authority, i.e., learned CIT(A) and on rejection of appeal the matter was carried further, so the jurisdiction of the Tribunal does lie to adjudicate upon this appeal. An ancillary issue of withdrawal of exemption was raised and it was necessary to first settle that issue to arrive at a right conclusion to get this appeal decided. As We have already observed the executive has changed the rules of the scheme in midway which had already been followed as well as acted upon and the change was such to alter its outcome altogether. As we have observed supra the issue of utilization of ECB funds was for the first time raised when the entire scheme was at its fag end. According to the company the time had come for repayment or buy-back of the outstanding loans. It was a commercial decision taken by the company in the capacity of a prudent businessman. At that juncture the clock could not be set into reverse motion. Certain steps already taken by the appellant-company which were well within the knowledge of the concerned authority could not be retracted. As the facts indicate retrospectively th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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