Citation Codes

Equivalent Citations

citation codes

Case Number

Writ Petition No. 8295 of 1982

Judges

Ramanujam
Ratnam, JJ.

Acts

FINANCE ACT 1972

See more information ...

Smart Summary

Judgment Summary — Ramanujam, J.

Factual and Procedural Background

The petitioner (a company) entered into a collaboration agreement dated 22 February 1965 with Vulcan Materials Company (a New Jersey company). Under that agreement the petitioner paid a lump sum of US$50,000 as a down payment for know‑how and agreed to pay recurring royalties at 2.5% of net sales value in India for six years, subject to conditions. Clause 6(vi) provided that taxes, if any, on royalty payments under Indian law would be borne by the foreign company. The Government of India approved terms by letters dated 12 August 1964 and 13 January 1965.

In performance of the agreement the petitioner remitted the US$50,000 on 12 March 1965, and thereafter remitted royalties, deducting income‑tax at source under section 195 of the Income‑tax Act and paying those deductions to the Department. Following a change in tax rates in the Finance Act, 1972, the petitioner paid an additional small sum (Rs. 3,957; with interest Rs. 4,408) at the respondent's request.

For the assessment year 1978–79 the petitioner was found entitled to a refund of Rs. 5,31,559. By letter dated 19 August 1982 the respondent informed the petitioner that this refund had been adjusted against a tax liability assessed on Vulcan Materials Company for the assessment year 1965–66 (computed at Rs. 6,57,550), and required the petitioner to pay the balance of Rs. 1,25,991. The impugned letter gave two reasons: (1) Vulcan's statement that the petitioner was liable to pay all taxes in India, and (2) that the petitioner had on two earlier occasions paid small sums on behalf of the foreign company.

The petitioner filed a writ petition (certiorari) challenging the validity of the respondent's letter of 19 August 1982 on jurisdictional and legal grounds.

Legal Issues Presented

Whether the respondent had jurisdiction and legal authority to adjust the petitioner's refund of Rs. 5,31,559 against the tax assessed on the foreign company and to call upon the petitioner to pay the foreign company's balance tax of Rs. 1,25,991.
Whether, and on what basis, non‑compliance with section 195 of the Income‑tax Act permits the Department to treat the remitting party as an "assessee in default" under section 201 and to adjust refunds without first issuing a written order under section 201.
Whether the two reasons given in the impugned letter (the foreign company's assertion that the petitioner is liable and the petitioner's prior small payments) legally sustain the adjustment and demand made by the respondent.

Arguments of the Parties

Petitioner's Arguments

The refund due to the petitioner could not be adjusted against the tax assessed on the foreign company.
The petitioner was not an agent of the foreign company and had not agreed to assume the foreign company's tax liability; clause 6(vi) of the collaboration agreement made the foreign company liable for taxes.
No tax was payable under the Income‑tax Act on the lump sum payment (US$50,000) made under the agreement.
The two earlier payments by the petitioner (Rs. 8,265 and Rs. 100) on behalf of the foreign company could not be used by the Revenue to fasten liability on the petitioner or to found a plea of estoppel.
Learned counsel for the petitioner also contended that the Department could not sustain the impugned letter by raising a ground in the counter‑affidavit (namely, non‑compliance with s.195 and consequent treatment as an assessee in default under s.201) that was not mentioned in the impugned letter itself.

Respondent's Arguments

In the impugned letter the respondent relied on (a) the foreign company's statement that the petitioner was to bear all taxes and (b) two prior payments by the petitioner on behalf of the foreign company, as justifying adjustment of the petitioner's refund and calling upon the petitioner to pay the balance tax.
In the counter‑affidavit the Department advanced an additional ground not stated in the impugned letter: that because the petitioner, as the remitting party, was obliged under section 195 to deduct tax at source, its failure to do so rendered it liable as an "assessee in default" under section 201, and therefore the Department could proceed against the petitioner and adjust its refund towards the tax payable by the foreign company.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Commissioner Of Income‑Tax, Madras (Central) v. Express Newspapers (P.) Ltd., [1978] 111 ITR 347 (Mad)	The principle that because an order under section 201 is appealable, a written order treating a person as an "assessee in default" is essential.	The court relied on this authority to conclude that the statute contemplates a written order under section 201 so that the person aggrieved may file an appeal under section 246; thus the impugned letter could not be treated as an order under section 201 when it did not proceed on that basis.

Court's Reasoning and Analysis

The court proceeded in several analytical steps, adhering closely to the statutory framework and to the contents of the impugned letter:

Preliminary position on respondent's new ground: The court acknowledged the petitioner's contention that the Department should not be permitted to rely on a ground first raised in the counter‑affidavit, but observed that it was unnecessary to decide that procedural point because, even if the new contention were available, the impugned letter could not be legally sustained on that basis.
On invocation of sections 195 and 201: The court held that even if section 195 (duty to deduct tax at source on remittances to a foreign company) could be invoked against the petitioner, that would not permit the Department to treat the petitioner as an "assessee in default" under section 201 without the statutory procedure being complied with. The court read section 246 and concluded the statute contemplates a written order under section 201 so that appeals lie; it relied on the Express Newspapers case to reinforce that a written order is essential where section 201 liability is alleged.
Character of the impugned letter: The court found that the impugned letter did not proceed on the basis that the petitioner had been treated as an "assessee in default" under section 201 for non‑compliance with section 195; therefore it could not be treated as an order under section 201, and the Department could not lawfully adjust the refund on that basis.
Evaluation of the two reasons given in the impugned letter:
- First reason (foreign company's assertion): The court described reliance on the foreign company's unilateral statement that the petitioner would pay all taxes as "quite absurd." Tax liability must be determined by the Act and by the collaboration agreement; the agreement prima facie indicated the foreign company was liable. The Department erred in shifting liability simply because the foreign company so asserted, without independent investigation.
- Second reason (prior small payments): The court held that two earlier small payments (Rs. 8,265 and Rs. 100) made by the petitioner could not be taken as conclusive proof of liability for the substantially larger assessed sum. The petitioner might have paid to "purchase peace" or because the amounts were small; the affidavit explained that the payments represented differences arising from s.195 deductions. Therefore those prior payments did not justify assuming liability or adjusting the petitioner's refund.
Relief and preservation of Department's rights: For the reasons above, the court concluded the impugned letter could not be legally sustained and quashed it. However, the court made clear that this quashing did not preclude the Department from conducting a proper investigation into liability and, if warranted, passing an order under section 201 to fasten income‑tax liability on the petitioner under sections 195 read with 201. The court expressly did not express an opinion on whether liability could ultimately be imposed under these provisions.

Holding and Implications

Final Holding: The writ petition is allowed and the impugned letter dated 19 August 1982 is quashed.

Implications and direct effects:

The Department's adjustment of the petitioner's refund of Rs. 5,31,559 against the tax assessed on the foreign company, and its demand that the petitioner pay the balance of Rs. 1,25,991, were invalid as effected by the impugned letter.
The Department remains free to make a proper independent investigation into the question of liability and, if it wishes to fasten liability on the petitioner under sections 195 and 201, to pass a formal written order under section 201 consistent with statutory appeal provisions.
The court did not decide whether the liability can in law be imposed on the petitioner under sections 195 and 201; no conclusive finding was made on the substantive question of ultimate tax liability.
No costs were awarded against the petitioner.

This summary is based exclusively on the content of the provided opinion and does not add or infer facts beyond that text.

Show full summary ...

Mettur Chemicals And Industrial Corporation Limited v. Inspecting Asst. Commr. Of I.T, Assessment Range-I, Salem.

Ramanujam, J.:— The petitioner herein seeks a writ of certiorari from this court quashing the order dated August 19, 1982, passed by the respondent on the ground that he has no jurisdiction to pass such an order and that even otherwise it is illegal and unsustainable in law.

2. The circumstances under which the writ petition has been filed are these:

The petitioner-company entered into a collaboration agreement dated February 22, 1965, with Messrs Vulcan Materials Company, a company incorporated in the State of New Jersey, U.S.A Under the collaboration agreement, the petitioner has to make a down payment of 50,000 U.S dollars for the processes, engineering drawings, etc., called the know-how package and a recurring payment of a royalty at the rate of 2.5% of the net sales value in India on all the materials produced in the petitioner's plant for a period of six years, subject to certain conditions. Clause 6(vi) of the collaboration agreement provided that all tax or taxes, if any, under the laws and rules in force in the Union of India on all payments of royalty by the petitioner-company to Vulcan Materials Company shall be borne by the latter. The Government of India, by their letters dated August 12, 1964, and January 13, 1965, approved the terms of the said collaboration agreement and these letters seem to proceed on the basis that only the royalty payment will be subject to Indian taxes. The petitioner in pursuance of the terms of the collaboration agreement remitted 50,000 U.S dollars on March 12, 1965, to Vulcan Materials Company through the State Bank of India for the know-how package. Subsequently, the petitioner has been remitting from time to time 2.5% commission on the net sales value of the products manufactured in its plant and while making those remittances, the petitioner has been deducting income-tax at source and paying the sum so deducted to the Department under s. 195 of the I.T Act. In respect of the previous year relevant to the assessment year 1972–73, the petitioner has deducted tax at source at the time of payment of the royalty to Vulcan Materials Company and remitted the amounts deducted to the Department. However, there was a change in the rates of tax in the Finance Act, 1972, in payment of taxes on royalty and the difference came to Rs. 3,957. At the request of the respondent, the petitioner paid the said sum together with interest accrued aggregating to Rs. 4,408 to the Department.

3. The petitioner had paid advance tax in respect of the tax payable by it under the I.T Act. As a result of the final assessment made, it has been found that a sum of Rs. 5,31,559 was due to be refunded to the petitioner by the Department. When the petitioner sought the refund of the said amount of Rs. 5,31,559, he was informed by the respondent herein by a letter dated August 19, 1982, that the refund of Rs. 5,31,559 due to him for the assessment year 1978–79 has been adjusted towards the tax due by the Vulcan Materials Company for the assessment year 1965–66, which has been computed at Rs. 6,57,550. In the impugned letter dated August 19, 1982, the respondent has not only adjusted the refund of Rs. 5,31,559 as against the tax due by the Vulcan Materials Company, but also called upon the petitioner-assessee to pay the balance of tax of Rs. 1,25,991 due by the said foreign company. It is in these circumstances the petitioner has filed the writ petition challenging the validity of the letter dated August 19, 1982, directing the adjustment of the refund due to the petitioner and calling upon the petitioner to pay the tax due by the foreign company. In the impugned letter two reasons had been given for adjusting the refund and making a further demand for payment of Rs. 1,25,991. One reason is that the foreign company has stated that it is the petitioner who is liable to pay all the taxes in India and, therefore, the petitioner is liable to pay the amount assessed on the foreign company. The second reason is that on two earlier occasions, the petitioner made two payments towards the tax due by the foreign company in respect of the assessment year 1972–73.

4. The petitioner's case as set out in the affidavit filed in support of the writ petition is that the refund due to the company cannot be adjusted against the tax due by the foreign company, that the petitioner is not an agent of the foreign company, that in fact the terms of the collaboration agreement make only the foreign company liable for the tax, that no tax is payable under the I.T Act on the lump sum payment made under the terms of the agreement and that the assessee's payment of two amounts of Rs. 8,265 and Rs. 100 towards tax due by the foreign company for the assessment year 1972–73 cannot be taken advantage of by the Revenue nor could it be taken as the basis for raising the plea of estoppel. Thus, the petitioner has challenged the jurisdiction of the respondent to adjust the refund due to it as against the tax due from the foreign company and to call upon it to pay the balance of tax.

5. In the counter-affidavit filed by the respondent, the adjustment of the refund amount due to the petitioner towards the dues of the foreign company has been justified on a new ground which had not been set out in the impugned letter. The new ground set out is that the petitioner as a person remitting the income to a foreign company is liable to make deduction towards the tax payable under s. 195 of the I.T Act and since the petitioner has not deducted the tax payable under the Act at source, the Department can proceed against the petitioner as an “assessee in default” under s. 201 and straightaway adjust the refund amount due to the petitioner towards the tax payable by the foreign company.

6. Learned counsel for the petitioner contends that it is not open to the Department to put forward a new ground in the counter-affidavit, which has not been mentioned in the impugned letter to sustain the validity of the same and that the validity of the impugned letter should be tested with reference to the grounds set out therein and not with reference to the grounds set out for the first time in the counter-affidavit. Though we feel that there is some force in the contention advanced by the learned counsel for the petitioner, it is not necessary for us to go into that question, as we are of the view that even if such a new contention should be urged in the counter-affidavit and the Department could seek to sustain the validity of the impugned letter on the basis of the new contention, the impugned letter cannot be legally sustained.

7. Assuming that the Department is entitled to invoke s. 195 of the I.T Act, that will not enable the Department to treat the petitioner as an “assessee in default” as provided in s. 201 of the Act. Without treating the petitioner as an “assessee in default”, the amounts due to the petitioner by way of refund cannot straightaway be adjusted as has been done in this case in the impugned letter. Though s. 201 does not refer to a written order treating the petitioner as an assessee in default, a reading of s. 246 will indicate that the statute normally contemplates a written order under s. 201 so that the person aggrieved can file an appeal under s. 246: Unless there is a written order, it is not possible for the petitioner to challenge the same by filing an appeal under s. 246. As a matter of fact in Commissioner Of Income-Tax, Madras (Central) v. Express Newspapers (P.) Ltd., [1978] 111 ITR 347 (Mad), it has specifically been held that since an order under s. 201 is appealable, a written order is essential. Even if the impugned letter dated August 19, 1982, is treated as a written order, we find that that letter does not proceed on the basis that the petitioner is an assessee in default for non-compliance with the provisions of s. 195. Therefore, the impugned letter cannot at all be taken as an order passed under s. 201.

8. We have already stated that the impugned letter dated August 19, 1982, is mainly sought to be sustained by the Department on the basis of s. 195 read with s. 201 of the Act. Since we are of the view that the noncompliance of s. 195 will not enable the Department to impose a liability on the petitioner for the tax due by the foreign company without passing an order under s. 201, it is not possible to sustain the impugned letter as having been passed in accordance with law.

9. On the two reasons given in the impugned letter, its legality cannot also be sustained. The first reason is, the foreign company has stated that all dues are to be settled by the petitioner-company and, therefore, the petitioner-company is liable to pay the tax due by the foreign company. This reasoning, to say the least, is quite absurd. The tax liability of the foreign company has to be determined with reference to the provisions of the I.T Act and the terms and conditions contained in the collaboration agreement. In this case, the collaboration agreement prima facie indicates that the tax due under the I.T Act has to be paid by the foreign company and the petitioner-company has not agreed to meet such a liability. Merely because the foreign company understood the terms of the collaboration agreement in a particular manner, the liability cannot be shifted from the foreign company to the petitioner-company. Therefore, the respondent is in error in proceeding on the basis of the assertion made by the foreign company that all the taxes are payable only by the petitioner-company without an independent investigation as to who is liable. Therefore, the said reasoning cannot at all be sustained. The next reason given is that the petitioner-company has paid two amounts, viz., Rs. 8,265 and Rs. 100, on earlier occasions on behalf of the foreign company and that, therefore, the petitioner-company should also be held liable for the amount of Rs. 6,57,550 which has been assessed on the foreign company. Merely because there are two earlier payments by the petitioner-company, that cannot be taken as final or conclusive on the question of its liability to pay the tax due by the foreign company. It may be that the petitioner felt that the amounts claimed are too small and with a view to purchase peace with the Department, it thought of paying the same. In this case, the petitioner's affidavit has stated that the amounts which came to be paid represents the difference in the rates of tax towards the deductions made by the petitioner under s. 195. We think it unnecessary to go into the details as to why the petitioner has made the payments on two earlier occasions, for, in our view, merely from those payments, the liability of the petitioner-company to pay the sum of Rs. 6,57,550 assessed on the foreign company for the assessment year 1965–66 cannot be assumed and the refund due to the petitioner-company cannot be adjusted. In this view of the matter, we hold that the impugned letter, as it is, cannot legally be sustained. We, therefore, quash the said letter. This order will not, however, prevent the Department from making a proper investigation on the question of liability and then pass an order under s. 201 if it wants to fasten the income-tax liability on the petitioner under s. 195 read with s. 201. It is, however, made clear that we are not expressing any opinion as to whether the liability can be imposed on the petitioner on the basis of s. 195 read with s. 201.

10. Accordingly, this writ petition is allowed. No costs.

Mettur Chemicals And... v. Inspecting Asst. Com...