Case Law Details

Case Name : Vodafone International Holdings B.V., Vs Union of India (Bombay High Court)
Appeal Number : Writ Petition No.2550 of 2007
Date of Judgement/Order : 03/12/2008
Related Assessment Year :
Courts : All High Courts (3656) Bombay High Court (657)

The very purpose of entering into agreements between the two foreigners is to acquire the controlling interest which one foreign company held in the Indian company, by other foreign company. This being the dominant purpose of the transaction, the transaction would certainly be subject to municipal laws of India, including the Indian Income Tax Act.

 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) situated in India. The choice of the Petitioner in selecting a particular mode of transfer of these right enumerated above will not alter or determine the nature or character of the asset.(Para 161)

A perusal of the show cause notice, the chronological list of dates and events, clearly reveals that the present case involves investigation into voluminous facts and perusal of numerous lengthy and complicated agreements. Based on the above, the question of chargeability of the transaction to tax and also the question of duty to deduct tax at source, can be determined. Based on the above, the question of chargeability of the transaction to tax and also the question of duty to deduct tax at source, can be determined. In the present case, the show cause notice, cannot be termed extraneous or irrelevant or erroneous on its face or not based on any material at all. (Para 182)

The present Petition totally lacks particulars as to the nature of agreement dated 11th February, 2007 and all other agreements preceding or following the same entered into by HTIL and/or the Petitioner. The essential facts supported by the necessary documents as proof of such facts, have been conveniently kept away from this Court. (Para 180)

The Petitioner has been requested to only show cause as to why it should not be treated as an assessee in default. The Petitioner was requested to produce certain documents for proper adjudication in the matter. One of the crucial documents required by the second Respondent was the primary agreement entered upon between the Petitioner and HTIL. The said agreement has not been produced by the Petitioner either before second Respondent or even before us. Without 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. (Para 177)

The Petitioner has admitted that HTIL has transferred their 67% interests in HEL qua their shareholders, qua the regulatory authorities in India (FIPB), qua the statutory authorities in USA and Hong Kong and the  Petitioner has also admitted acquiring 67% held by HTIL in HEL. This being the case, a different stand cannot be taken before the tax authorities in India and a different stand cannot be put forth by either HTIL or the Petitioner.(Para 168)

Petitioner has wilfully failed to produce the primary/original agreement dated 11th February, 2007 and other prior and subsequent agreements/documents entered into between the Petitioner and HTIL. In the absence of all relevant agreements and documents, it will be impossible to appreciate the true nature of the transaction. We agree with Mr.Parasaran, that in the absence of the said agreement and other relevant documents, constitutional validity of Income Tax provisions cannot be gone into.(Para 169)

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. (Para 170)

Petitioner’s rights are adequately safeguarded under Section 195(2), 195(3) and 197 of the Income Tax Act, and the only thing required to be done is to file an application before the Assessing Officer under those provisions. (Para 174)

IN THE HIGH COURT OF JUDICATURE AT BOMBAY

ORDINARY ORIGINAL CIVIL JURISDICTION

WRIT PETITION NO.2550 OF 2007

Vodafone International Holdings B.V.,
Versus

1. Union of India,Ministry of Finance, New Delhi.

2. Asstt. Director of Income Tax (International Taxation),

JUDGMENT PRONOUNCED ON: 3RD DECEMBER, 2008

J   U   D   G   M   E   N   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. With regard to the first proposition, Mr. Chagla, the learned Senior Counsel, very comprehensively submitted that the Income tax is a tax on the income payable by the recipient. Income tax of the recipient is payable by the payer only in certain limited circumstances, including when the legislature deems the payer to be an “assessee in default” (“AID for short).

3. Mr.Chagla, further submitted that Section 201 is one such provision which deems a person, not the person liable to pay the tax, to be an assessee in default (AID). In a fiscal statute there is no room for any implication or intendment, necessary or otherwise. Since it is a deeming provision and one contained in a fiscal statute, it must be construed strictly. In that behalf, the learned Senior Counsel relied on a decision in the case of A.V. Fernandez Vs. State of Kerala AIR 1957 SC 657, wherein the Hon’ble Supreme Court had held that :

29. It is no doubt true that in construing fiscal statutes and in determining the liability of a subject to tax one must have regard to the strict letter of the law and not merely to the spirit of the statute or the substance of the law. If the Revenue satisfies the Court that the case falls strictly within the provisions of the law, the subject can be taxed. If, on the other hand, the case is not covered within the four corners of the provisions of the taxing statute, no tax can be imposed by inference or by analogy or by trying to probe into the intentions of the legislature and by considering, what was the substance of the matter. We must of necessity, therefore, have regard to the actual provisions of the Act and the rules made thereunder before we can come to the conclusion Ta the appellant was liable to assessment as contended by the Sales Tax Authorities.”

4. The learned Senior Counsel further placed his reliance on the decision of the Hon’ble Supreme Court in the case of Sales Tax Commissioner Vs. Mods Sugar Mills AIR 1961 SC 1047, wherein it is held, that;

“In interpreting a taxing statute, equitable considerations are entirely out of place. Nor can taxing statutes be interpreted on any presumptions or assumptions. The Court must look squarely at the words of the statute and interpret them. It must interpret a taxing statute in the light of what is clearly expressed. It cannot imply anything which is not expressed; it cannot import provisions in the statutes 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 assessee comes within the letter of the law, he must be taxed, however great the hardship may appear to the judicial mind to be.

6. The learned Senior Counsel further relied on a Division Bench judgment of our High Court in the case of Commissioner of Income Tax Vs. Khimji Nenshi 194 ITR 192 (Bom.), wherein our High Court had held that; Moreover, section 64(2)(b) contains a deeming provision and hence requires to be construed strictly. An income which is derived from the profits of the firm and not from the capital contribued as such cannot be considered as income derived from the converted property.

7. He also relied on the decision in Mathuram Agrawal Vs. State of Madhya Pradesh AIR 2000 SC 109, wherein, the Hon’ble Supreme Court had held that;

The statute should clearly and unambiguously convey the three components of the tax law i.e. the subject of the tax, the person who is liable to pay the tax and the rate at which the tax is to be paid. If there is any ambiguity regarding any of these ingredients in a taxation statute then there is no tax in law. Then it is for the legislature to do the needful in the matter.

The position pre-2008 amendment:

8. Mr.Chagla, the learned Senior Counsel for the Petitioner states, that Section 201 on its plain language provides that a person is deemed an AID in only two specified cases viz. where under Section 194 there is a failure to deduct tax on dividend; or when under Section 200 there is a deduction of tax as required by any of the provisions but such tax is not paid to the credit of the Central Govt. Where, therefore, a person withholds tax under Section 195 but does not pay the same to the credit of the Central Govt., such person is deemed to be an AID. Equally, where a person fails to deduct tax on dividend under Section 194 then the very failure to make such deduction would render that person an AID. He further submitted that failure to deduct or to withhold tax in any other case does not render that person an AID.

9. The learned Senior Counsel further submitted that the above is clear not only from the plain language of Section 201 but from the scheme of the Act.

i.          The provision for deduction and withholding are under the Chapter ‘COLLECTION AND RECOVERY OF TAX’. That Chapter does not contain charging provisions but only provides for a convenient machinery for the recovery of tax.

ii.         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. That liability is and remains that of the payee who is the assessee, a position that is clarified by Section 191.

v.          A person who fails to deduct or withhold tax and who is not the assessee can be made liable for the tax only by a legal fiction, a legal fiction that deems the payer to be an assessee in default when he is not. Such a legal fiction must be construed strictly and be applied to only such persons as are specifically mentioned and no others.

vi.         Section 201 creates the legal fiction that deems the person who has failed to deduct tax under Section 194 and the person who has deducted tax but failed to pay to the credit of the Central Government as required under Section 200 alone to be AID. That these are the only cases in which the legal fiction is applicable is clarified by the Explanation to Section 191.

vii.        All other persons failing to deduct tax, including those mentioned in Section 195, may be liable to be penalized but are not AID. POSITION POST 2008 AMENDMENT:

a.          Even assuming the Petitioner was under an obligation to withhold tax under Section 195, under Section 191 the primary liability to pay the tax remains that of the payee.

b.         The amended Section 191 provides for a cumulative test: to be an assessee in default the person should have failed to deduct tax and that the assessee has failed to pay the tax. In fact the amended provision reinforces and emphasizes that the primary obligation is of the assessee and that his failure to pay the tax is a condition precedent to the payer being deemed to be an assessee in default.

c.          Both before and after the amendments, the provisions of Section 191 and Section 201 are to be construed harmoniously so as to avoid any part of the provisions being rendered redundant. The condition precedent, therefore, of Section 191 to the imposition of liability on the payer must be read into Section 201. In other words, Section 201 can be invoked and a show cause notice issued only when the payee fails to make payment. In this behalf, the learned Senior Counsel for the Petitioner relied on a decision of the Hon’ble Supreme Court in the case of Sultana Begum Vs. Premchand Jain (1997) 1 SCC 373, wherein it is held, that;

d.         Therefore, by reason of failure to deduct or withhold tax, the Petitioner is liable to be penalized under Section 271C but his 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 has no presence in or nexus with India Parliament’s competence to legislate in respect of such person has been doubted. In this behalf, the learned Senior Counsel Mr.Chagla placed his reliance on the decision of the Hon’ble Supreme Court in the case of Electronics Corporation of India Ltd. Vs. Commissioner of Income Tax 183 ITR 43 (SC) 52, wherein it is held that;

The general principle, flowing from the sovereignty of States, is that laws made by one State can have no operation in another State. The apparent opposition between the two positions is reconciled by the statement found in British Columbia Electric Railway Co. Ltd. Vs. King (1946) AC 527 (PC).

“A Legislature which passes a law having extra-territorial operation may find that what it has enacted cannot be directly enforced, but the Act is not invalid on that account, and the courts of its country must enforce the law with the machinery available to them.”

In other words, while the enforcement of the law cannot be contemplated in a foreign State, it can, none the less, be enforced by the courts of the enacting State to the degree that is permissible with the machinery available to them. They will not be regarded by such courts as invalid on the ground of such extra-territoriality. But the question is whether a nexus with something in India is necessary. It seems to us that, unless such nexus exists, Parliament will have no competence to make the law. It will be noted that article 245(1) empowers Parliament to enact laws for the whole or any part of the territory of India. The provocation for the law must be found within India itself. Such a law may have extra-territorial operation in order to subserve the object and that object must be related to something in India. It is inconceivable that a law should be made by Parliament in India which has no relationship with anything in India. The only question then is whether the ingredients, in terms of the impugned provision, indicate a nexus. The question is one of substantial importance, specially as it concerns collaboration agreements with foreign companies and other such arrangements for the better development of industry and commerce in India. In view of the great public importance of the question, we think it desirable to refer these cases to a Constitution Bench, and we do so order.

13. Alternatively, if it is held that Parliament’s competence to legislate is plenary then, unless the language of the provision permits only one construction giving such provision extra territorial operation, there would be a presumption or a rule of construction that Parliament did not intend to exceed its territorial jurisdiction or violate the rules of international law. This presumption or rule of construction would apply more so in the case of a provision in respect of which a default thereunder entails penal consequences. To support this contention, Mr.Chagla, the learned Senior Counsel relied on a judgment in the case of Clarke (Inspector of Taxes) Vs. Oceanic Contractors Inc – (1983) 1 ALL ER 133,, wherein, it is held that; Put into the language of today, the general principle being there stated is simply that, unless the contrary is expressly enacted or so plainly implied that the courts must give effect to it, United Kingdom legislation is applicable only to British subjects or to foreigners who by coming to the United Kingdom, whether for a short or long time, have made themselves subject to British jurisdiction. Two points would seem to be clear: first, that the principle is a rule of construction only and, second, that it contemplates mere presence within the jurisdiction as sufficient to attract the application of British legislation. Certainly there is no general principle that the legislation of the United Kingdom is applicable only to British subjects or persons resident here. Merely to state such a proposition is to manifest its absurdity.

Presence, not residence, is the test. But, of course, the Income Tax Acts impose their own territorial limits. Parliament recognises the almost universally accepted principle that fiscal legislation is not enforceable outside the limits of the territorial sovereignty of the kingdom. Fiscal legislation is, no doubt, drafted in the knowledge that it is the practice of nations not to enforce the fiscal legislation of other nations. But, in the absence of any clear indications to the contrary, it does not necessarily follow that Parliament has in its fiscal legislation intended any territorial limitation other than that imposed by such unenforceability.

14. He further relied on a Governor General Vs. Raleigh Investment AIR 1944 FC 51 at page 60, If the language of the Constitution Act clearly indicates that the legislative power of the subordinate Legislature is subject to specified territorial limitations or if, on the other hand, the language authorizes expressly or by necessary implication extra-territorial legislation by the subordinate Legislature, the position is simple enough. Where, however, the language of the Constitution Act does not contain a sufficiently clear indication one way or the other, two views are possible : One is that the language of that statute should be construed conformably to a general presumption against authorizing extra-territorial legislation and the other view is that the statute should be construed on the basis that there is no such presumption or limitation.

15. He also relied on the State Vs. Narayandas AIR 1958 Bom 68 (FB) at page 71.

16. The learned Counsel for the Petitioner further placed his reliance on the decision of the Hon’ble Supreme Court in the case of Tolaram Vs. State of Bombay AIR 1954 SC 496.

17. The learned Senior Counsel submitted that Section 1(2) of the Income Tax Act provides that the Act “extends to the whole of India” and does not purport to give the Act extra-territorial operation unlike other statutes like FERA, FEMA, Foreign Contribution Regulation Act, Official Secrets Act, Information Technology Act, Indian Passport Act, etc.

18. In view of Section 1(2), provisions of the Income Tax Act must be assumed to operate territorially except where such provision permits only one construction that it is to operate beyond the boundaries of India or in respect of a person not resident within India. The learned Counsel for the Petitioner referred to Section 9, which deems certain income earned by a non-resident to be income earned within India.

19. The learned Senior Counsel submitted that the definition of “person” ex-facie includes a foreign company. In this behalf he referred to Section 2(31) r/w.2(17) which reads as under:

2[(17) “company” means –

(i)         any Indian company, or

(ii)        any body corporate incorporated by or under the laws of a country outside India, or

(iii)       any institution, association or body which is or was assessable or was assessed as a company for any assessment year under the Indian Income Tax Act,1922 (11 of 1922), or which is or was assessable or was assessed under this Act as a company for any assessment year commencing on or before the 1st day of April, 1970 or

(iv)       any institution, association or body, whether incorporated or not and whether Indian or non-Indian, which is declared by general or special order of the Board to be a company:

Provided that such institution, association or body shall be deemed to be a company only for such assessment year or assessment years (whether commencing before the 1st day of April, 1971, or on or after that date) as may be specified in the declaration;]

2(31) “person” includes –

(i)         an individual,

(ii)        a Hindu undivided family,

(iii)       a company,

(iv)       a firm,

(v)        an association of persons or a body of individuals, whether incorporated or not,

(vi)       a local authority, and

(vii)      every artificial juridical person, not falling within any of the preceding sub-clauses.

[Explanation – For the purposes of this clause, an association of persons or a body of individuals or a local authority or an artificial juridical person shall be deemed to be a person, whether or not such person or body or authority or juridical person was formed or established or incorporated with the object of deriving income, profits or gains.]

20. The learned Senior Counsel also contended that the definition must be read contextually.

21. Mr.Chagla pointed out that this is made clear by the opening words of section 2 “unless the context otherwise requires”.

22. In this behalf the learned Senior Counsel relied on V.F. & G Insurance Co. Vs. M/s.Fraser & Ross AIR 1960 SC 971 at para 6, wherein the Hon’ble Supreme Court had held that; But this is not inflexible and there may be sections in the Act where the meaning may have to be departed from on account of the subject or context in which the word has been used and that will be giving effect to the opening sentence in the definition section, namely, unless there is anything repugnant in the subject or context. In view of this qualification, the court has not only to look at the words but also to look at the context, the collocation and the object of such words relating to such matter and interpret the meaning intended to be conveyed by the use of the words under the circumstances.

23. In that behalf, Mr.Chagla also relied on a decision of the Hon’ble Supreme Court in the case of Indian Handicrafts Emporium Vs. Union of India (2003) 7 SCC 569 especially paragraphs; 105. The words which are used in declaring the meaning of other words may also need interpretation and the legislature may use a word in the same statute in several different senses. In that view of the matter, it would not be correct to contend that the expression as defined in the interpretation clause would necessarily carry the same meaning throughout the statute.

107. The question which arose for consideration was as to whether the State Government would come within the purview of the said Act. This Court answered the said question in the negative, holding that the expression “management” must be read contextually in the following terms: (SCC P.599 Para 8)

“We are therefore, of the opinion that the defined meaning of the expression ‘management’ cannot be assigned or attributed to the word ‘management’ occurring in Section 64 of the Act. The word ‘management’ if read in the 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 Tax Act is replete with provisions where the word “person” cannot be given its statutory definition to include every non-resident. At this stage, the learned Senior Counsel for the Petition referred to a decision of the Hon’ble Supreme Court in the case of Kapurchand Vs. Tax Recovery Officer AIR 1969 SC 682, where the contextual interpretation was preferred to the statutory definition of “person” in Section 2(31) of the Income Tax Act.

25. In Section 195 “person” must be read to mean a resident or a non resident having a presence in India i.e. the obligation to without tax even where the payee is chargeable to tax does not apply to a non resident who has no presence in India.

26. With regard to Section 195, Mr.Chagla referred to “The Law and Practice of Income Tax” by Kanga, Palkhivala and Vyas [Eighth Edition at page 1391], it is stated as follows:

3. Payments Abroad

27. This section does not apply to payments made outside India by one foreigner to another even if the other has rendered services in India. A country does not recognise or enforce the revenue laws of another country. Therefore, if a payer in a foreign country, bound to make the payment under a contract governed by the laws for that land, were to seek to deduct Indian income-tax, the payee would be entitled to object to the deduction on the ground that no deduction can be made in that country, which is not authorised by the laws of that country or by the terms of the agreement”.

28. In “The Law of Income-Tax in India” by V.S.Sundaram [Fourth Edition (1936) at page 506], with regard to Section 18 of the Indian Income-tax Act,1922 which provided for deduction of tax at source, including in respect of payments made by the “person responsible for paying” to a person residing outside British India, while referring to the Income-tax Manual it is stated as follows:

“Where tax cannot be deducted at source-

29. The provisions of this section, obviously, cannot apply to cases where the payments are made outside British India as, for example, the payment of ‘interest on securities’ in Indian States or in foreign countries, or the payment of ‘salaries’ by foreign employers to residents in British India. It is for this reason that section 19 of the Act specifies that in any case where income-tax has not been deducted in accordance with the provisions of section 18, the tax is payable by the assessee direct. This provision covers, not only cases where the employer or the person paying ‘interest on securities’ does not reside in British India but also cases where owing to an assessee’s salary being less than Rs.1000/- income-tax has not been deducted (Income tax Manual, para 59).

30. Mr.Chagla submitted that if Section 195 is to apply to a non-resident having no presence in India, the machinery of deduction and collection of tax as provided in Section 203A and Rules 30 and 31A would be unworkable. Provisions of law should be interpreted in a manner to make them workable. Mr.Chagla, the learned Senior Counsel referred to a judgment of the Hon’ble Supreme Court in the case of State of Bihar Vs. Sm.Charusila Dasi AIR 1959 SC 1002 especially paragraph 14.

This Court has applied the doctrine of territorial connection or 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 must be real and not illusory and (b) the liability sought to be imposed must be pertinent to that connection.

31. He further relied on Calcutta Gujarati Education Society Vs. Calcutta Municipal Corpn. (2003) 10 SCC 533 paragraph 35.

35. The rule of “reading down” a provision of law is now well recognized. It is a rule of harmonious construction in a different name. It is resorted to smoothen the crudities or ironing out the creases found in a statute to make it workable. In the garb of “reading down”, however, it is not open to read words and expressions not found in it and thus venture into a kind of judicial legislation. The rule of reading down is to be used for the limited purpose of making a particular provision workable and to bring it in harmony with other provisions of the statute. It is to be used keeping in view the scheme of the statute and to fulfil its purposes. See the following observations of this Court in the case of B.R.Enterprises Vs. State of U.P. (SCC pp.764-66 para 81) “First attempt should be made by the Courts to uphold the charged provision and not to invalidate it merely because one of the possible interpretations leads to such a result, however, attractive it may be. Thus, where there are two possible interpretations, one invalidating the law and the other upholding, the latter should be adopted. For this, the courts have been endeavouring, sometimes to give restrictive or expansive meaning keeping in view the nature of legislation, maybe beneficial, penal or fiscal etc. Cumulatively it is to subserve the object of the legislation. Old golden rule is of respecting the wisdom of legislature that they are aware of the law and would never have intended for an invalid legislation. This also keeps courts within their track and checks individual zeal of going wayward. Yet in spite of this, if the impugned legislation cannot be saved the courts shall not hesitate to strike it down. Similarly, for upholding any provision, if it could be saved by reading it down, it should be done, unless plain words are so clear to be in definace of the Constitution. These interpretations spring out because of concern of the Courts to salvage a legislation to achieve its objective and not to let it fall merely because of a possible ingenious interpretation. The words are not static but dynamic. This infuses fertility in the field of interpretation. This equality helps to save an Act but also the cause of attack on the Act. Here the courts have to play a cautious role of weeding out the wild from the crop, of course, without infringing the Constitution. For doing this, the Courts have taken help from the preamble, Objects, the scheme of the Act, its historical background, the purpose for enacting such a provision, the mischief, if any which existed, which is sought to be eliminated…… This principle of reading down, however, will not be available where the plain and literal meaning from a bare reading of any impugned provisions clearly shows that it confers arbitrary, uncanalised or unbridled power.”

 

32. The learned Senior counsel contended that if Section 195 is construed to apply to non-residents having no presence whatsoever in India, the same would amount to treating unequals 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 extent of its retrospective operation:

34. A sovereign legislature, like the Indian Parliament has plenary power to legislate prospectively as well as retrospectively, including in the field of taxation. Such legislation may be assailed on the ground of want of legislative competence or may be rendered invalid if the same offends Article 14,20 or other provisions of the Constitution.

35. In considering the validity of retrospective legislation imposing a tax it may become necessary to consider whether such retrospective legislation is reasonable or not. Mr.Chagla, the learned Senior Counsel relied on a decision of the Hon’ble Supreme Court in the case of Jawaharmal Vs. State of Rajasthan, AIR 1966 SC 764 paragraph 18.

18. It is well recognised that the power to legislate includes the power to legislate prospectively as well as retrospectively, and in that behalf, tax legislation is no different from any other legislation. If the Legislature decides to levy a tax, it may levy such tax either prospectively or even retrospectively. When retrospective legislation is passed imposing a tax, it may, in conceivable cases, become necessary to consider whether such retrospective taxation is reasonable or not. But apart from this theoretical aspect of the matter, the power to tax can be competently exercised by the legislature either prospectively or retrospectively; and that is precisely what S.2 has done in the present case. Therefore, there is no substance in the argument that S.2 of the Act is invalid.

36. It was submitted that legislation casts a new and substantial burden on the assessee with retrospective effect such legislation would not satisfy the touchstone of Article 14. He relied on Escorts Ltd. Vs. Union of India 199 ITR 43 (SC).

37. Mr.Chagla contended that the retrospective operation of legislation must be reasonable and not excessive or harsh, otherwise it runs the risk of being struck down as unconstitutional. In this behalf, Mr.Chagla relied on Ujagar Prints Vs. Union of India 179 ITR 317 (SC) 347.

There is really no substance in the grievance that the retroactivity imparted to the amendments is violative of article 19(1)(g). A competent Legislature can always validate a law which has been declared by courts to be invalid, provided the infirmities and vitiating factors noticed in the declaratory-judgment are removed or cured. Such a validating law can also be made retrospective. If, in the light of such validating and curative exercise made by the Legislature – granting legislative competence – the earlier judgment becomes irrelevant and unenforceable, that cannot be called an impermissible legislative overruling of the judicial decision. All that the Legislature does is to usher in a valid law with retrospective effect in the light of which the earlier judgment becomes irrelevant. (See Shri Prithvi Cotton Mills Ltd. Vs. Broach Borough Municipality (1971) 79 ITR 136 (SC); (1970) 1 SCR 388.

Such legislative expedience of validation of laws is of particular significance and utility and is quite often applied in taxing statutes. It is necessary that the Legislature should be able to cure defects in statutes. No individual can acquire a vested right from a defect in a statute and 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 Ltd. Vs. Union of India (1986) 162 ITR 846 at 873; (1985) Suppl. 1 SCR 292, 327, this Court observed:

“….. not only because of the paramount governmental interest in obtaining adequate revenues, but also because taxes are not in the nature of a penalty or a contractual obligation but rather a means of apportioning, the costs of government among those who benefit from it.”

In testing whether a retrospective imposition of a tax operates so harshly as to violate fundamental right under article 19(1)(g), the factors considered relevant include the context in which retroactivity was contemplated such as whether the law is one of validation of a taxing statute struck down by courts for certain defects : the period of such retroactivity, and the defects and extent of any unforeseen or unforeseeable financial burden imposed for the past period, etc. Having regard to all the circumstances of the present case, this Court in Empire Industries’ case (1986) 162 ITR 846 held that the retroactivity of the amending provisions was not such as to incur any infirmity under article 19(1)(g). We are in respectful agreement with that law.

National Agricultural Co-operative Marketing Federation Vs. Union of India 260 ITR 548 (SC). The legislative power either to introduce enactments for the first time or to amend the enacted law with retrospective effect, is not only subject to the question of competence but is also subject to several judicially recognized limitations with some of which we are at present concerned. The first is the requirement that the words used must expressly provide or clearly imply retrospective operation – S.S.Gadgil V. Lal and Co. (1964) 53 ITR 231 (SC); AIR 1965 SC 171, 177 ; J.P.Jani, ITO V. Induprasad Devshanker Bhatt (1969) 72 ITR 595 (SC); AIR 1969 SC 778, 781. The second is that the retrospectivity must be reasonable and not excessive or harsh, otherwise it runs the risk of being struck down as unconstitutional Rai Ramkrishna V. State of Bihar (1963) 50 ITR 171 (SC); (1964) 1 SCR 897, 915 ; Jawaharmal Vs. State of Rajasthan, AIR 1966 SC 764; (1966) 1 SCR 890; Supreme Court Employees Welfare Association Vs. Union of India, AIR 1990 SC 334; (1989) 3 SCC 488, 517. The third is apposite where the legislation is introduced to overcome a judicial decision. Here the power cannot be used to subvert the decision without removing the statutory basis of the decision Shri.Prithvi Cotton Mills Ltd. V. Broach Borough Municipality (1971) 79 ITR 136 (SC), (1969) 2 SCC 283; Lalitaben V. Gordhanbhai Bhaichandbai (1987) Supp. SCC 750; Janapada Sabha, Chhindwara V. Central Provinces Syndicate Ltd. AIR 1971 SC 57; (1970) 1 SCC 509 and Indian Aluminium Co. V. State of Kerala (1996) 7 SCC 637; AIR 1996 SC 1431. There is no fixed formula for the expression of legislative intent to give retrospectivity to an enactment. “Sometimes this is done by providing for jurisdiction where jurisdiction had not been properly invested before. Some times this is done by re-enacting retrospectively a valid and legal taxing provision and then by fiction making the tax already collected to stand under the re-enacted law. Sometimes the Legislature gives its own meaning and interpretation of the law under which tax was collected and 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 Marketing Federation (Supra) has been followed in the case of Virendra Singh Hooda Vs. State of Haryana (2004) 12 SCC 588; 65. Reliance was also placed upon observations made in National Agricultural Coop. Marketing Federation of India Ltd. Vs. Union of India (2003) 5 SCC 23 to the effect that the power to amend the law with retrospective effect is subject to several judicially recognised limitations, one of which being that the retrospectivity must be reasonable and not excessive or harsh, otherwise it runs the risk of being struck down as unconstitutional and another being that where the legislation is introduced to overcome a judicial decision, the power cannot be used to subvert the decision without removing the statutory basis thereof. There can be no quarrel with these propositions. If we had come to the conclusion that the retrospectivity is unreasonable, harsh or excessive or the basis of Virendra S.Hooda Vs. State of Haryana (1999) 3 SCC 696 SCC (L&S) 824 has not been removed, in the present case, too, the position would have been different.

39. It was pointed out further, the limitation on the power of Parliament to legislate retrospectively is that such retrospectivity cannot impose “quasi punishment.” In this behalf, he relied on Star India Pvt.Ltd. Vs. Commissioner of Central Excise 280 ITR 321 (SC), wherein it is held that; In any event, it is clear from the language of the validation clause, as quoted by us earlier, that the liability was extended not by way of clarification but by way of a amendment to the Finance Act with retrospective effect. It is well established that while it is permissible for the Legislature to retrospectively legislate, such retrospectivity is normally not permissible to create an offence retrospectively. There were clearly judgments, decrees or orders of courts and Tribunals or other authorities, which required to be neutralised by the validation clause. We can only assume that the judgments, decree or orders etc. had in fact, held that persons situate like the appellants were not liable as service providers. This is also clear from the Explanation to the valuation section which says that no act or acts on the part of any person shall be punishable as an offence which would not have been so punishable if the section had not come into force. The liability to pay interest would only arise on default and is really in the nature of a quasi punishment. Such liability although created retrospectively could not entail the punishment of payment of interest with retrospective effect.

40. He also relied on a decision of the Hon’ble Supreme Court in the case of C.I.T. Vs. Hindustan Elector Graphites Ltd. (2000) 3 SCC 595, wherein it is observed that;

The decision of the Calcutta High Court in Modern Fibotex India Ltd (1992) 2 SCC 514: (1992) 195 ITR 1 squarely covers the issue involved in the present appeal. Then we have to see the law on the date of filing of the return. To attract penal provisions there has been same (sic has to be some) element of lack of bona fides unless the law specifically provides otherwise.

41. Mr.Chagla strongly contended that whereas in the present case the 2008 amendments to Sections 191 and 201 (hereinafter referred to as the “2008 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 said liability is penal or quasi-punishment in nature. The three fold penalty/quasi-punishment imposed by the 2008 amendments are:

I. the tax liability of the payee;

II. a penalty under Section 221(1) which may be up to the amount of such tax; and

III. interest under Section 201(1A) at 12% per annum on the amount of such tax from the date on which such tax was deductible till the date of payment thereof.

42. Therefore, Mr.Chagla submitted, clearly a new and substantial burden is cast upon the Petitioner which is unreasonable, excessive and harsh. The aforesaid three-fold penalty/quasi punishment is in addition to the penalty equal to the amount of tax which may have been imposed under Section 271 C under the Act as it stood prior to the 2008 amendments.

43. It was submitted that the 2008 amendments are unreasonable and arbitrary and create a differential classification which has no rational basis for the same, and are, therefore, violative of Article 14 of the Constitution. After the 2008 amendments, a person failing to deduct tax at source prior to 1st June,2002 under a provision other than Section 194 would not be deemed to be an assessee in default under Section 201, whereas a person failing to deduct tax at source on or after 1st June,2002 under the very same provision would be deemed to be an assessee in default under Section 201 and would be liable for various penalties/quasi-punishments set out hereinabove. There is, and can be, no rationale for creating such an arbitrary classification and no such rationale has even purported to be supplied.

44. He also submitted that the retrospective imposition of tax must be justified on proper and cogent grounds to avoid the charge of unreasonableness, arbitrariness and also being discriminatory and, therefore, in violation of Article 14. Mr.Chagla, the learned Senior Counsel relied on a decision in the case of Rai Ramkrishna Vs. State of Bihar 50 ITR 171 (SC), wherein it is held that, We do not think that such a mechanical test can be applied in determining the validity of the retrospective operation of the Act. It is conceivable that cases may arise in which the retrospective operation of a taxing or other statute may introduce such an element of unresonableness that the restrictions imposed by it may be open to serious challenge as unconstitutional; but the test of the length of time covered by the retrospective operation cannot, by itself, necessarily be a decisive test.

45. He also relied on D.Cawasji & Co. Vs. State of Mysore 150 ITR 648 (SC) 661, wherein it is observed by the Hon’ble Supreme Court, that; In our opinion, this is not a proper ground for imposing the levy at a higher rate with retrospective effect. It may be open to the Legislature to impose the levy at a higher rate with prospective operation but the levy of taxation at higher rate which really amounts to imposition of tax with retrospective operation has to be justified on proper and cogent grounds.

46. He further relied on a judgment in the case of Tata Motors Ltd. Vs. State of Maharashtra (2004) 5 SCC 783 paragraph 15.

15. It is no doubt true that the legislature has the powers to make laws retrospectively including tax laws. Levies can be imposed or withdrawn but if a particular 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 rule had been withdrawn for a specific period. The learned Counsel for the State contended that the amendments had been made to overcome certain defects arising on account of the decision of the Tribunal in regard to the modalities of working out the relief. But, the impugned amendment brought about by Section 26 is not for that purpose. Assuming that it was the legislative policy not to grant set-off in respect of waste or scrap material generated, it becomes difficult to appreciate the stand of the State in the light of the fact that the original rule continued to be in operation (with certain modifications) subsequent to 1-4-1988. The reason for withdrawal of the benefit retrospectively for a limited period is not forthcoming. It is no doubt true that the State has enormous powers in the matter of legislation and in enacting fiscal laws. Great leverage is allowed in the matter of taxation laws because several fiscal adjustments have to be made by the Government depending upon the needs of the Revenue and the economic circumstances prevailing in the State. Even so an action taken by the State cannot be so irrational and so arbitrary so as to introduce one set of rules for one period and another set of rules for another period by amending the laws in such a manner as to withdraw the benefit that had been given earlier resulting in higher burdens so far as the assessee is concerned, without any reason. Retrospective withdrawal of the benefit of set-off only for a particular period should be justified on some tangible and rational ground, when challenged on the ground of unconstitutionality. Unfortunately, the State could not succeed in doing so. The view of the High Court that the impugned amendment of Rule 41-E was of clarificatory nature to remove the doubts in interpretation cannot be upheld. In fact, the High Court did not elaborate as to how the impugned legislation is merely clarificatory. In that view of the matter, although we recognise the fact that the State has enormous powers in the matter of legislation, both prospectively and retrospectively, and can evolve its own policy, we do not think that in the present cases any material has been placed before the Court as to why the amendments were confined only to a period of eight years and no either before or subsequently and, therefore, we are of the view that the impugned provision, namely, Section 26 deserves to be quashed by striking down the words “not being waste goods or scrap goods or by-products” occurring in the said Section 26 of Maharashtra Act 9 of 1989 and the authorities concerned shall rework assessments as if that law had not been passed and give appropriate benefits according to law to the parties concerned.

47. Mr.Chagla contended that in the present case no reasons whatsoever have been supplied for the retrospective imposition of penalty. The facts disclose that only after the present Petition was filed and admitted and it was contended on behalf of the Petitioner that Section 195 and 201 did not apply to the Petitioner, and that the 2008 amendments came to be passed. The only explanation offered in the Notes on Clauses regarding the 2008 amendments is that the pre-existing provision “leaves room for an interpretation that a person 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)         It is not the Government to speak of what is the legislative intent but the same can only be a matter for judicial decision. Indeed in Sanjeev Coke Manufacturing Company Vs. M/s.Bharat Coking Coal Ltd. and Anr. (1983) 1 SCC 147, the Constitution bench of the Hon’ble Supreme Court has declared “No one may speak for Parliament and Parliament is never before the Court. After Parliament has said what it intends to say, only the Court may say what Parliament meant to say. None else. Once a statute leaves Parliament House, the Court is the only authentic voice which may echo (interpret) Parliament.”

(ii)        The 2008 amendments are ex facie not a “clarification” but a substantive reversal of the position as it obtained prior to the amendments. They impose a penalty/quasi-punishment where none existed earlier. Further, if indeed it is a clarification then there was no question of relating the same back only to 2002 and 2003. In support of the said contention, Mr.Chagla also relied on Virtual Soft Systems Ltd. Vs. C.I.T. (2007) 9 SCC 665.

(iii)       The legislative intent was already “clarified” by the 2002 amendment to Section 201 and the 2003 amendment inserting the Explanation to Section 191.

48. Mr.Chagla, the learned Senior Counsel submitted that even assuming the validity of the 2008 amendments and further assuming that the transaction is chargeable to tax the nevertheless it is submitted that the Show Cause Notice is without jurisdiction as both before and after the 2008 amendment the Petitioner is not deemed to be an assessee in default.

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 the 2008 amendments, including their retrospective operation, are constitutionally valid and binding.

49. Mr.Chagla submitted that the provisions of Section 195 have no extra territorial application. In an offshore transaction involving two non-residents in respect of property and payment outside the country, even assuming that such transaction is chargeable to tax, there is no obligation to withhold tax under Section 195.

Note : This proposition is based on the assumptions that;

(a)        the sum paid by the Petitioner is a sum chargeable to tax in the hands of the payee;

(b)        that a default in making a deduction of tax under Section 195 is within the scope of Section 201;

c)         that there is no violation of the condition precedent that the payee must have failed to pay the tax; and

(d)        that the 2008 amendments, including their retrospective operation, are constitutionally valid and binding.

50. Mr.Chagla also contended that the 2008 amendment to the extent that they purport to be retrospective are 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 and the Petitioner accordingly was under no obligation to withhold tax as required under Section 195.

Note : This proposition is based on the assumptions that;

(a)        that Section 195 has no territorial limitation and that the Petitioner was obliged to deduct tax before making payment; and

(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.

(d)        that the 2008 amendments, including their retrospective operation, are constitutionally valid and binding.

CHARGEABILITY :

 

52. Mr.Chagla made the following submissions with regard to chargeability to tax :

i.          Under section 195 a person responsible for paying to a non-resident any sum “chargeable under the provisions of this Act” is liable to deduct income tax thereon at the rate in force.

ii.         Whether the sum paid by the Petitioner to the non-resident payee was chargeable under the provisions of the act is to be determined having regard to the scope of total income contemplated in section 5(2) of the Act.

iii.        As admittedly, the payee is a non-resident it is chargeable to tax in India only in respect of income that accrues or arises or is deemed to accrue or arise in India or income that is received or deemed to be received in India. It is an undisputed position that the gain arising on the transfer of shares is chargeable to tax only if it is deemed to accrue or arise in India within the meaning of section 9.

iv.         Under Section 9 (which is a deeming provision) income accruing or arising “through the transfer of a capital asset situate in India” is deemed to accrue or arise in India.

v.          The transaction in the present case is the transfer of share capital of a non-resident company and is not a transfer of a capital asset situate in India. In this behalf, the learned Senior Counsel relied on a decision in the case of C.I.T. Vs.Qantas Airways Ltd. 256 ITR 84 (Del-DB).

vi.         The share capital in question is the share capital of CGP Investments (Holdings) Ltd. (hereinafter referred to as “CGP”). The share capital of the company would be at the place of its registered office which is in the Cayman Islands. He relied on Pfizer Corporation Vs. C.I.T. 259 ITR 391 (Bom-DB).

vii.        The controlling 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 Ushadevi Vs. C.I.T. 131 ITR 445 (MP-DB), wherein a Division Bench of the Madhyapradesh High Court observed that controlling interest in a company is an incidence arising from holding particular number of shares in the company. It cannot be separately acquired or transferred.

54. He further relied on Venkatesh Vs. C.I.T. 243 ITR 367 (Mad-DB), wherein it is observed by the Madras High Court that;

The argument for the assessees that the controlling interest in the company is capable of being transferred separately, apart from the transfer of shares is wholly untenable. The fact that the vendor has controlling interest and is in a position to place the vendee in control of the company by transferring all his shares or such part as would enable the vendee to exercise control over the company with the aid of the shares so transferred wold only enhance the value of the shares transferred. The price paid by the vendee for acquisition of such shares remains the price of those shares though the price so paid is higher than the market price. Controlling interest is but an incidence of the shareholding and has no independent existence. Similar view was taken by the Madhya Pradesh High Court in the case of Smt.Maharani Ushadevi V. CIT (1981) 131 ITR 445, wherein also it was pointed out that the controlling interest in a company is an incident arising from holding of a particular number of shares in the company and that such controlling interest cannot be transferred without transferring shares.

55. Mr.Chagla, the learned Senior Counsel submitted that there is an indirect acquisition of the controlling interest in VEL the same has been achieved by acquiring control of CGP by the acquisition of its share capital outside India. There is, therefore, no transfer of a capital asset within India. In this behalf the learned Senior Counsel relied on Bacha F.Guzdar V. C.I.T. AIR 1955 SC 74, wherein it is observed that;

The company is a juristic person and is distinct from the shareholders. It is the company which owns the property and not the shareholders. The dividend is a share of the profits declared by the company as liable to be distributed among the shareholders. There is nothing in the Indian law to warrant the assumption that a shareholder who buys shares buys any interest in the property of the company which is a juristic person entirely distinct from the shareholders. 56. He also relied on A.P.State 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 shall be included all such income as arises directly or indirectly – ……. (iv) subject to the provisions of clause (i) of section 27, to the spouse of such individual from asset transferred directly or indirectly to the spouse by such individual otherwise than for adequate consideration or in connection with an agreement to live apart.” (emphasis supplied). To support his contention, the learned Senior Counsel referred to a judgment in the case of C.I.T. Vs. Framji H.Commissariat 64 ITR 588 (Bom-DB).

59. In other words, Mr.Chagla contended that the income may arise directly or indirectly through the transfer of a capital asset but such capital asset must be situated in India. One cannot bring to tax any gain that arises to a non resident on all alleged indirect transfer of an asset in India. Where, therefore, there is no direct transfer of a capital asset situate in India, hence section 9 can have no application whatsoever.

60. Mr.Chagla then submitted that it is well settled that a taxing statute must be construed strictly and there is no room for intendment. (In this behalf the learned Senior Counsel referred to the cases cited in Proposition-I).

61. Mr.Chagla contended that in the event it is contended that the gain from the present transaction is chargeable to tax as amounting to income accruing or arising through or from a business connection in India, such contention would be untenable and without any basis.

62. The learned Senior Counsel also pointed out that there are 3 requirements for income arising through or from a business connection in India to be chargeable to tax under Section 9 (1)(i) they are;

(i)         The non-resident assessee must have a business connection in India:

ii)         The income must arise through or from the business connection; and

(iii)       The non-resident assessee earning such income must have business operations in India. If no business operations are carried out in India, any income accruing or arising abroad through or from a business connection in India cannot be deemed to accrue or arise in India. In other words even though requirements (i) & (ii) above may be satisfied, absence business operations in India by the non-resident assessee, income is not chargeable to tax.

63 The learned Senior Counsel relied on the decision of the Hon’ble Supreme Court in the case of I.T.Commissioner Vs. R.D.Aggarwal & 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 of the statutory agent can be treated as incomes accrued, arisen, or deemed to have accrued or arisen in India to the non-resident assessees during the relevant year. This takes us to Section 9 of the Act. It is urged that the commission amounts should be treated as incomes deemed to have accrued or arisen in India as they, according to the Department, had either accrued or arisen through and from the business connection in India that existed between the non-resident assessees and the statutory agent. This contention overlooks the effect of clause (a) of the Explanation to clause (i) of sub-section (1) of Section 9 of the Act which provides that in the case of business of which all the operations are not carried out in India, the income of the business deemed under that clause to accrue or arise in India shall be only such part of the income as is reasonable attributable to the operations carried out in India. If all such operations are carried out in India, the entire income accruing therefrom shall be deemed to have accrued in India. If, however, all the operations are not carried out in the taxable territories, the profits and gains of business deemed to accrue in India through and from business connection in India shall be only such profits and gains as are reasonably attributable to that part of the operations carried out in the taxable territories. If no operations of business are carried out in the taxable territories, it follows that the income accruing or arising abroad through or from any business connection in India cannot be deemed to accrue or arise in India. (See C.I.T. Vs. R.D.Aggarwal & Co. and M/s.Carborandum Co. V. C.I.T., which are decided on the basis of Section 42 of the Indian Income Tax Act, 1922, which corresponds to Section 9(1)(i) of the Act.

66. He also pointed out Ishikawajima-Harima Heavy Industries Ltd. Vs. Director of Income Tax 288 ITR 408 (SC), wherein it is observed by the Hon’ble Supreme Court, that; The distinction between the existence of a business connection and the income accruing or arising out of such business connection is clear and explicit. In the present case, the permanent establishment’s non-involvement in this transaction excludes it from being a part of the cause of the income itself and thus there is no business connection.

67. Mr.Chagla then contended that in the instant case, it cannot be contended that 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 under Section 195 of the Income Tax Act based on substantial materials;

(ii)        Challenge to the Constitutional validity of Amendment to Section 191 and Section 201 of the Income Tax Act made by the Finance Act,2008.

70. Mr.Parasaran submitted the above challenges should not be entertained owing to the conduct of the Petitioner in having failed to produce the primary/original agreement dated 11th February,2007 and other prior and subsequent agreements/documents entered into between the Petitioner and HTIL. The said agreements/documents alone can aid this Court to find out the true nature of the transaction and appreciate the controversy involved in the Writ Petition.

71. The learned Additional Solicitor General also submitted that the Constitutional validity of the provisions of the I.T. Act cannot be determined in the absence of the said agreement and merely on hypothetical considerations.

 

72. The learned Senior Counsel submitted that the matter involves complex questions arising out of disputed facts, lot of which are still un-disclosed and the same cannot be made the subject matter of a Writ Petition under Article 226 of the Constitution of India.

73. Mr.Parasaran submitted that the transaction in question is prima-facie chargeable to tax in India since it amounts to transfer of a Capital Asset in India. The transaction involved in the present case is prima facie liable to Capital Gains Tax and the Petitioner is prima facie liable for withholding Tax and that there was sufficient justification founded upon facts and law for the issuance of the impugned show cause notice. Both Section 195 and the impugned show cause notice are not extra-territorial in its operation, as the income is otherwise chargeable to tax in India under the provisions of the Indian Income Tax Act. The Petitioners prima facie are assessee in Default in terms of Section 195 read with Section 201 and Section 2(7)(c). The Amendments made in 2008 are not violative of Article 14 of the Constitution of India and they do not affect any rights of the Petitioner, much less any vested right, either pre or post amendment. The amendments must be read in the proper context and are only clarificatory.

Re. Proposition 1(a) : Show cause notice

74. Mr.Mohan Parasaran, emphatically submitted that it is well settled in the eyes of law that unless the show cause notice can be demonstrated 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 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. Whether the show cause notice was founded on any legal premises is a jurisdictional issue which can even be urged by the recipient of the notice and such issues also can be adjudicated by the authority issuing the very notice initially, before the aggrieved could approach the Court. Further, when the Court passes an interim order it should be careful to see that the statutory functionaries specially and specifically constituted for the purpose are not denuded of powers and authority to initially decide the matter and ensure that ultimate relief which may or may not be finally granted in the writ petition is accorded to the writ petitioner even at the threshold by the interim protection, granted.

75. He also relied on Kunisetty Sathyanarayana AIR 2007 SC 906, wherein it is held that;

13. It is well settled by a series of decisions of this Court that ordinarily no writ lies against a charge sheet or show-cause notice vide Executive Engineer, Bihar State Housing Board Vs. Ramdesh Kumar Singh and others JT 1995 (8) SC 331, Special Director and another Vs. Mohd. Ghulam Ghouse and another AIR 2004 SC 1467, Ulagappa and others Vs. Divisional Commissioner, Mysore and others 2001 (10) SCC 639, State of U.P. Vs. Brahm Datt Sharma and another AIR 1987 SC 943 etc.

14. The reason why ordinarily a writ petition should not be entertained against a mere show-cause notice or charge-sheet is that at that stage the writ petition may be held to be premature. A mere charge-sheet or show-cause notice does not give rise to any cause of action, because it does not amount to an adverse order which affects the rights of any party unless the same has been issued by a person having no jurisdiction to do so. It is quite possible that after considering the reply to the show-cause notice or after holding an enquiry the authority concerned may drop the proceedings and/or hold that the charges are not established. It is well settled that a writ lies when some right of any party is infringed. A mere show-cause notice or charge-sheet does not infringe the right of any one. It is only when a final order imposing some punishment or otherwise adversely affecting a party is passed, that the said party can be said to have any grievance.

16. No doubt, in some very rare and exceptional cases the High Court can quash a charge-sheet or show-cause notice if it is found to be wholly without jurisdiction or for some other reason if it is wholly illegal, however, ordinarily the High Court should not interfere in such a matter.

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 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 alternate remedy is available is also fairly well-settled. If a show cause notice is issued by a statutory authority relying upon some facts, the said notice can be challenged before the Writ Court only on the ground that even if the facts are assumed to be correct no case has been made out against the noticee. If a prima facie case has been made out in the show cause notice, it is for the adjudicating authority to finally decide all the questions including the questions of fact. It has also been laid down in series of cases by the Supreme Court that the High Court should not interfere at the stage of show cause notice to take over the fact finding investigation which is to be resolved by fact finding authorities constituted under the relevant statute. In a series of recent cases, the Supreme Court has taken the aforesaid view. Some reported cases are : State of Goa Vs. Leukoplast (India) Ltd. 1997 (92) E.L.T. 19 (SC) = AIR 1997 SC 1875 ; Union of India Vs. Polar Marmo Aglomerates Ltd. – 1997 (96) E.L.T. 21 (SC) and Union of India Vs. Bajaj Tempo Ltd. – 1997 (94) E.L.T. 285 (S.C.). In State of U.P. Vs. Labh Chand – AIR 1994 SC 754, the Supreme Court befittingly illuminated the power as under:

“When a statutory Forum or Tribunal is specially created by a statute for redressal of specified grievances of persons on certain matters, the High Court should not normally permit such persons to ventilate their specified grievances before it by entertaining petitions under Article 226 of the Constitution is a legal position which is too well settled……”

In State of A.P. Vs. T.C. Lakshmaiah Setty & Sons AIR 1994 SC 2377, the above decision was reiterated by the Supreme Court and it was observed that the orders of assessment rendered under tax laws should be tested under the relevant Act and in no other way. In Shyam Kishore Vs. Municipal Corporation of Delhi AIR 1992 SC 2279, it was observed that recourse to writ petition is not proper, when more satisfactory solution is available on the terms of the statute itself. The position is, therefore, clear that extraordinary and discretionary power under writ jurisdiction should be exercised with caution when statutory remedy is sought to be by-passed.

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 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 comes within the purview of the tax net has to be done by the authorities only, which cannot be determined on the basis of an affidavit and counter-affidavit in a proceeding under article 226 of the Constitution of India. Useful reference can be had to the judgment of the Supreme Court in the case of State of Goa Vs. Leukoplast (India) Ltd. reported in (1997) 105 STC 318 (SC). hence, we are not able to take a view different than the one taken by the learned single judge.

Re Proposition 1(b) : Writ Petition is premature.

78. Mr.Parasaran submitted that the Petitioner has been asked to show cause as to why it should not be treated as an assessee in default, for not withholding tax at the time of payment made to HTIL. It is submitted that as per the scheme of Chapter XVII of the I.T.Act, deductions are required to be made at the time of payment and all adjustments are to be made finally at the time of regular assessment of the recipient of the income. The ultimate assessment resulting in payment of any lesser or bigger amount as Income Tax in accordance with law in force, would not affect the duty to deduct tax at the time of payment in any manner. It has been categorically held by the Hon’ble Supreme Court in the case of Aggarwal Chamber of Commerce Ltd. Vs. Ganpat Rai Hira Lal AIR 1958 SC 269, that those persons who are bound under the act to make deduction at the time of payment of any income, profits or gains are not concerned with the ultimate result of the assessment. (Emphasis supplied)

79. Mr.Parasaran pointed out the provisions of Section 195, under which the deduction of income tax on the amount paid to a non-resident, is for a tentative deduction of income tax thereon, subject to regular assessment and by the deduction of Income Tax, the rights of the parties are not, in any manner, adversely affected. it is further submitted that the deduction of tax at source is only provisional and is subject to final assessment and hence, does not any right of the Petitioner, much less any vested right and therefore, the writ Petition is premature. In support of his submission, Mr.Parasaran referred to the Hon’ble Supreme Court judgment in the case of Transmission Corporation of A.P. Ltd. Vs. CIT (1999) 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 cheque or draft or by any other mode, whichever is earlier, deduct an amount equal to 20% of such sum as income tax on income comprised therein……” It would be evident that at the time of making payment to the contractor, the person paying the sum cannot say or visualise how much of the said sum constitutes income in the hands of the contractor. It is indeed impossible for him to say so, it is thus clear that the said words are merely descriptive in nature.

81. Mr.Parasaran further relied on the decision of the Gujarat High Court in the case of CIT Vs. Vijay Ship Breaking Corporation 261 ITR 113 (Guj.) The buyer, therefore, does not get absolved from his contractual liabilities under the contract of sale or from his statutory liabilities, such as, of making deduction of tax at source under section 195(1) of the Act while making payment by the mode of a letter of credit.

Re. Proposition 1 (c) : Petitioner has an efficacious alternate remedy.

82. Mr.Parasaran submitted that the Courts have refused to entertain the Writ Petitions challenging the show cause notice seeking to by-pass the statutory mechanism provided and in particular, notice issued alleging incomes taxable under Section 9 of the Income Tax Act. The Income Tax Act itself is a self-contained code and in cases like this, the Act provides sufficient safeguards to persons like the Petitioner, who have an effective and efficacious alternative remedy. in fact the Petitioner itself has availed such efficacious alternative remedies in the past. Under the Income Tax Act, the petitioner, apart from responding to the show cause notice, can seek for a determination as to whether any income is at all chargeable and as to whether it is under any obligation to deduct any tax. in fact, the Department had reminded the petitioner, even before the conclusion of the transaction, of the obligations prescribed under the Income Tax Act and the remedies that are available to the Petitioner under the Income Tax Act, which it has failed to avail.

83. Mr.Parasaran pointed out that incidentally, the Hon’ble Supreme court has held that the rights of a person like the Petitioner are fully safeguarded under Section 195(2), 195(3) and Section 197 of the Income Tax Act. Assuming that the Petitioner is found liable to deduct tax or is construed to be an assessee in Default, the Petitioner has a right to Appeal under Section 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 taxable under Section 9 of the Income-tax Act and-tax should have been deducted at source. Instead of filing a reply to the show-cause notice, the appellants chose to file a writ petition. The singe judge dismissed the writ petition on the ground that alternative remedy was available to the appellants. In appeal, the Division Bench took the same view. Hence, this appeal by special leave.

It is contended by Dr.Pal, on behalf of the appellants, that during the pendency of this appeal, taking advantage of the Voluntary Disclosure Scheme, Asahi Glass Co.Ltd. Japan, had filed returns of income in respect of the four employees in question and had paid the entire amount of income-tax payable in respect of what was paid to these four employees in Yen currency.

This and the other facts cannot 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.

b)         Titaghur Paper Mills Co.Ltd. & Anr. Vs. State of Orissa & Ors. 142 ITR 663 SC. Under the scheme of the Act, there is a hierarchy of authorities before which the petitioners can get adequate redress against the wrongful acts complained of. The petitioners have the right to prefer an appeal before the prescribed authority under sub-s. (1) of s.23 of the Act. If the petitioners are dissatisfied with the decision in the appeal, they can prefer a further appeal to the Tribunal under sub-s.(3) of s. 23 of the Act, and then ask for a case to be stated upon a question of law for the opinion of the High Court under s.24 of the Act. The Act provides for a complete machinery to challenge an order of assessment, and the impugned orders of assessment can only be challenged by the mode prescribed by the Act and not 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 State Vs. Mask & Co., AIR 1940 PC 105. It has also been held in to be equally applicable to enforcement of rights, and has been followed by this Court throughout. The High Court was, therefore, justified in dismissing the writ petitions in limine.

Re. Proposition 1(d) : Non disclosure of vital documents

85. Mr.Parasaran, the learned Additional Solicitor General pointed out that the present case, the Petitioner has come forward with a writ petition challenging issuance of a show cause notice dated 19th September,2007, wherein the Petitioner has been requested to only show cause as to why it should not be treated as an assessee in default. The Petitioner was also requested to produce certain documents for adjudication in the matter. One of the crucial documents required by the 2nd Respondent for determining the question in dispute is the main/primary agreement dated 11th February,2007, entered into between the Petitioner and HTIL. The said agreement has not been produced by the Petitioner either before the department or before this Court. Mr.Parasaran strongly contended that the said agreement alone can aid this Court in finding out the true nature of the transaction and appreciate the controversy involved in the Writ Petition. Without producing this agreement and other relevant documents, the Petitioner cannot expect this Court to decide the merits of the matter.

86. Mr.Parasaran submitted that non-production/ non-disclosure of vital documents should result in this Court drawing an adverse inference against the Petitioner since it amounts to withholding of the best evidence, even assuming that the onus of proof does not lie on the Petitioner. At this juncture, Mr.Parasaran relied on a Supreme Court judgment in the case of Gopal Krishnaji Ketkar Vs. Mohamed Haji Latif & Ors. AIR 1968 SC 1413, wherein the Hon’ble Supreme Court has observed that;

Even if the burden of proof does not lie on a party the Court may draw an adverse inference if he withholds important documents in his possession which can throw light on the facts at issue. It is not, in our 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) 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 writ is in the discretion of the court Ex-Debito Justiciae and not as a matter of course.

88. Mr.Parasaran strongly also relied on Prestige Lights Ltd. Vs. State Bank of India (2007) 139 Comp.Cases.169 (SC), wherein in paragraphs 32 to 34, the Hon’ble Supreme Court held as under:

“32. It is thus clear that though the Appellant-Company had approached the High Court under Article 226 of the Constitution; it had not candidly stated all the facts to the Court. The High Court is exercising discretionary and extraordinary jurisdiction under Article 226 of the Constitution. Over and above, a Court of Law is also a Court of Equity. It is, therefore, or utmost necessity that when a party approaches High Court, he must place all the facts before the Court without any reservation. If there is suppression of material facts on the part of the Applicant or twisted facts have been placed before the Court, the Writ Court may refuse to entertain the Petition and dismiss it without entering into merits of the matter.”

“33. The object underlying the above principle has been succinctly stated by Scrutton, LJ in R.V.Kinsington Income Tax Commissioners (1917) 1 KB 486: 86b LJ KB 257:

116 LT 136, in the following words:

“It has been for many years the rule of the Court, and one which it is of the greatest importance to maintain, that when an applicant comes to the Court to obtain relief on an ex parte statement he should make a full and fair disclosure of all the material facts – facts, not law. He must not misstate the law if he can help it – the Court is supposed to know the law. But it knows nothing about the facts, and the applicant must sate fully and fairly the facts, and the penalty by which the Court enforces that obligation is that if it finds out that the facts have not been fully and fairly stated to it, the Court will aside, any action which it has taken on the faith of the imperfect statement”.

34. It is well settled that a prerogative remedy is not a matter of course. In exercising extraordinary power, therefore, a Writ Court will indeed bear in mind the 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.

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 pleaded in pleadings under the C.P.C., in a writ petition, not only facts but also evidence in proof of such facts have to be pleaded and annexed to it. Further, it is submitted that when the Petition has challenged the constitutional validity of the Amendment to sections 191 and 201 of the I.T.Act by the Finance Act,2008, the same must certainly be in the context of certain facts pleaded and proved by evidence in the form of documents on record and not in vacuum or in the abstract. The writ Petitioner is conveniently lacking in particulars as to the nature of the agreement dated 11th February,2007 and all other agreements preceding or following the same entered into by HTIL and/or the Petitioner. The essential facts supported by the necessary documents as proof of such facts, have been conveniently kept away from this Hon’ble Court. In this behalf Mr.Parasaran also referred to Sant Lal Bharti Vs. State of Punjab AIR 1988 SC 485 = (1988) 1 SCC 366. It must, however, be mentioned that the petition is lacking in particulars as to what premises the appellant owned and in respect of which premises the appellant is making the grievances. On this ground it is not possible to decide the question of vires canvassed before the High Court and repeated before us. A petition challenging the constitutional validity of certain provisions must be in the context of certain facts and not in abstract or vacuum. The essential facts necessary to examine the validity of the Act are lacking in this appeal. On this ground the petition was rightly rejected and we are not inclined to interfere with the order of the High Court on this ground alone.

Re. Proposition 1(e) Disputed facts:

90. Mr.Parasaran pointed out that the very reading of the show cause notice issued as also the chronological list of dates and events filed herewith, would reveal that the present case involves investigation into voluminous facts and perusal of numerous lengthy and complicated agreements, to determine the question of chargeability of the transaction to tax and also the question of duty to deduct tax at source. The present is not also a case where it could be alleged that the prima facie view in the show cause notice is extraneous or irrelevant or erroneous on its face or not based on any material at all. Mr.Parasaran also relied on Assam Consolidated Tea Estates Ltd. Vs. ITO ‘A’ Wards & Ors. 1981 ITR 699 (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 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 which it is neither convenient nor desirable to decide in an application under Article 226.

16…………………….

17…………………….

18…………………….

19. Could it be said that the reasons given by the Income Tax Officer for his belief that the interest income is assessable under Section 9(1) and has escaped assessment due to the failure of the assessee to file its return are extraneous or irrelevant? I agree with Mr.Gupta that the question whether the nterest due on the unsecured loan stock is assessable under Section 9(1) of the Act or not is not within the scope of this application. This Court has only to be satisfied that the impugned notices are on their face erroneous and/or that the issuing Income Tax Officer had no material for his belief that any income has escaped assessment due to any omission or failure on the part of the assessee either to file its returns or to disclose the primary material facts necessary for such assessment. in this case there is no dispute that apart from the assessment year 1958-59 no returns were filed by the assessee. Whether the Income Tax Officer should have made enquiries on the basis of the information received in connection with the assessments of the Indian company is not germane to the present question. it is for the assessee to file returns and furnish the necessary particulars. Very difficult questions of the interpretation and application of the provisions of Section 9(1) of the Act have been raised and issues have been joined in respect thereof. These are matters for decision by competent tribunals and courts cannot conveniently be decided by this Court in its writ jurisdiction. however, the case of the impugned notice for the assessment year 1958-89 is quite different. The point is covered by the decision of the Supreme Court in Ranchhoddas’s case and it must be held that the Income Tax Officer exceeded his jurisdiction in issuing that notice. The rule would, therefore, be made absolute only in the case of the notice for the assessment 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 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.

91. He also relied on Commissioner of Sales Tax Vs. Sugan Chant Shyam Lal 27 STC 161 wherein also the above principle has been reiterated.

92. With regard to second proposition submitted by the learned Counsel for the Petitioner i.e. Chargeability to Income Tax, Mr.Parasaran, the learned Additional Solicitor General of India submitted as under:

a.          Like most other taxing jurisdictions, the Indian Income Tax Act follows the twin basis for taxation, (i) based on residence or domicile and (ii) based on source of income. While Indian residents are taxed on global income under Section 5(1), non-residents are taxed only on the income, which has its source in India under Section 5(2). The non-residents should have either received or deemed to have received the income in India or the income should have arisen or accrued in India or should be deemed to have accrued or deemed to have arisen in India. The deeming provision is enumerated in section 9 of the Income Tax Act. It is the submission of the Revenue that the income or capital gains of HTIL is deemed to have accrued or arisen in India and therefore, it squarely falls within the ambit of Section 9 and is hence chargeable to Income Tax.

b.         It was submitted that the transaction is prima facie, liable to Income Tax in India. HTIL, by reason of this transaction, has earned income liable for Capital Gains Tax in India as the income was earned towards sole consideration of transfer of its business/economic interests as a group, in favour of the Petitioner.

c.          For this purpose, certain vital points of the case have necessarily to be examined and before examining the same, the Revenue would place reliance upon the definition of the ‘Capital Asset’ in Section 2(14), the definition of ‘Transfer’ in section 2(47) and the definition of ‘Assessee’ in Section 2(7).

d.         Under Section 9(1)(i), income is deemed to accrue or arise in India whether directly or indirectly, through or from (a) business connection in India (b) property in India (c) any asset (d) any source of income in India, and (e) through the transfer of a capital asset situated in India.

e.          The question 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, recognised and affirmed if one looks at the restated 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 interested parties regarding a possible sale of the Company’s interests in HEL group.

January/February,2007 :

It is reliably learnt that among several interested buyers two Groups, namely Reliance and Hinduja also offered their bids and these interested buyers were asked to determine the price of its’ interests by reference to the enterprise value of Hutch Essar.

11th February,2007:

Agreement between Petitioner and HTIL for acquisition of Indian interests of HTIL by the Petitioner.

12th February,2007:

Petitioner’s disclosure to SEC, USA for acquisition of 67% stock of HTIL in HEL, for a consideration of US$ 11.1 billion, which confirms the total enterprises value of US# 18.8 billion.

20th February,2007:

Circular of HTIL to its share holders that the Company was selling its 67% stock in India for US$ 11.1 billion, based on an enterprise value of HEL of US/$ 18.8 billion and was expected to realize an estimated ‘before tax gain’ of approximately US$ 9.6 billion from the transaction.

20th February,2007:

Petitioner’s application to the FIPB for approval of direct acquisition of 51.96% stock in HEL.

15th March,2007:

Settlement agreement between HTIL and Essar Group disclosing HTIL’s agreement to dispose off its “HTIL interests” to the Petitioner. “HTIL’s interests” has been defined as HTIL’s direct and indirect equity, loan and other interests and rights in and related to HEL, which HTIL has agreed to sell to the Petitioner.

27th March,2007.

Petitioner files certain details with FIPB in reply to FIPB’s letter dated 22nd March,2007.

7th May,2007

Conditional approval by the FIPB stipulating that there should be compliance and observance of applicable laws and regulations of India, which would naturally include tax obligations under Income Tax Act.

8th May,2007:

Petitioner enters into an agreement with HTIL to provide for the retention of US$ 352 million out of total consideration payable by it to HTIL to meet certain specific liabilities which the Petitioner may incur for a period of up to 10 years.

June/July,2007

The names of 8 operating companies undergo change.

13th June,2007

HTIL announces a special dividend of HK $ 6.75 per share or approximately US $ 12.94 per ADS out of the proceeds from sale of its interests in HEL.

24th August,2007

Restated term sheet entered in India between Petitioner and essar group, confirming substitution of joint venture by the Petitioner in India and conferment of valuable rights and interests on the Petitioner, including Tag along rights and the right of first refusal and appointments of majority Directors.

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 & Goodwill; non-compete rights given by HTIL; Right to enter into Telecom Business in India; Control Premium et-all. It would be too simplistic to answer away all this merely by a submission that what was transferred was a only share of an unknown Cayman Island Company, which is a shell company and which was not even considered in the Enterprise value of HEL. The courts have been very liberal in interpreting the words ‘goods’ & ‘transfer’, especially viz. a viz tax laws.

In this behalf, Mr.M.Parasaran, the learned Additional Solicitor General of India relied on the following judgments:

CIT Vs. B.C.Srinivas Setty (1981) 128 ITR 294 (SC).

Blue Bay Fisheries Pvt. Ltd. Vs. CIT (1987) 166 ITR 1 (Ker).

Associated Cement companies Ltd. Vs. Commissioner of Customs AIR 2001 SC 862.

Tata Consultancy Services Vs. St. of A.P. air 2005 SC 371

CIT Vs. D.P.Sandu Bros (2005) 273 ITR 1 (SC).

Bharat Sanchar Nigam Ltd. Vs. Union of India AIR 2006 SC 1383.

Century Finance Corporation Vs. State of Maharashtra AIR 2006 SC 2436.

Mr. Parasaran, also referred to the definition of term ‘Transfer” given in Blacks Law Dictionary.

b.         Substitution of the Petitioner as a successor in interest to HTIL in a joint venture under a license agreement with Department of Telecommunications:-

The expression joint venture had come up for consideration before the Hon’ble Supreme Court in New Horizons Ltd. Vs. Union of India & Ors. 1995(1) SCC 478. The Hon’ble Supreme Court held that a joint venture is essentially in the nature of a quasi partnership where different companies, foreign and Indian come together to share risks in management and profits jointly. The Hon’ble Supreme Court had pierced the corporate veil in that case to look at the real entities or economic realities behind the joint venture. Hon’ble Supreme Court in the case cited supra observed that the company is in the ‘nature of partnership’ (between Indian group of companies and Singapore based company) that have jointly undertaken this commercial enterprise wherein they will contribute to the assets and share the risks. In respect of such a joint venture, experience of the company can only mean the experience of the constituents of the joint venture i.e. Indian group of companies and the Singapore based company. Accounting Standard 27 issued by the Institute of Chartered Accountants of India also recognizes 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 conditions of the License, is typical of the way the Cellular Mobile Business is conducted in the Country and can be found to have been pleaded before Hon’ble Courts in the Country. Assuming without admitting that the contention of the Petitioner is correct, then what has happened in effect in the present case is that the shares and all other interest of the 8 Indian Companies controlled by HTIL, stood stapled with shares of CGP, at the time of transfer. Mr.Parasaran referred to the decision of the Company law Board in the case of Air Touch International (Mauritius) Ltd. Vs. RPG Cellular Investments and Holdings P.Ltd. 2004(121) Comp Cas-0647-CLB

a)         Samayanallur Power Investment Private Ltd. Vs. Coventa Energy India (Balaji) Ltd. (b) 1976 (3) All E.R. 462 DHN Food Distributors Ltd. Vs. London Borough of Tower Hamlets.)

d)         Transfer of Controlling Interest in Indian Companies:

d.         The Petitioner themselves have not disputed that the transaction involves transfer of controlling interest. If any transaction involves a transfer of controlling interest in a company or a group of companies, such a transfer has to be viewed both from the point of view of transferor and transferee. It is inconceivable as to how HTIL can transfer its controlling interest in HEL without extinguishing its rights in the shares of the Indian group and without which, a transferee cannot acquire a controlling interest. A divestment or extinguishment of right, title or interest must necessarily precede the divestment of the controlling interest and it would be impossible to dissociate one from the other and any divestment by one of any interest of enormous value in shares of such high intensity would certainly amount to acquisition of enduring benefit to the other, resulting in acquisition of a capital asset in India. The transaction also results not only in extinguishment of HTIL’s rights in HEL but relinquishment of its asset viz., its interest in the Hutchinson – 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). At this stage, Mr.Parasaran, referred to the decision of our High Court in the case of CIT Vs. Ram Narain Kapur & Co. Pvt.Ltd. (1968) 69 ITR 719 (Bom.). It is submitted that by virtue of the transaction entered into between the Petitioner and HTIL, followed by number of other agreements, 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 nature of the asset; . 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) situated in India. The choice of the Petitioner in selecting a particular mode of transfer of these right enumerated above will not alter or determine the nature or character of the asset. Mr.Parasaran, the learned Additional Solicitor General of India relied on the decision of Gujarat High Court in the case of Mul Shankar Kunverji Gor Vs. Juvansinhji Shivubha Jadeja AIR 1980 Guj.62.

95. He also relied on the decision of our High Court in the case of Hanuman Vitamins Foods Pvt.Ltd. Vs. State of Maharashtra AIR 1980 Bom 204.

96. It was further submitted, that apart from the acquisition of controlling interest, the Petitioner has acquired other interests and intangibles rights. The Petitioner accordingly became a successor in interest in the joint venture between HTIL and the Essar group and became a co-licensee with the Essar group to operate mobile telephony in India. It is submitted that the joint venture by itself confers an enduring benefit to the Petitioner. Alternatively, the Respondent states that the interest which the Petitioner has acquired in India should nevertheless be construed as a capital asset inasmuch as the Petitioner has not only become the successor in interest in that Joint Venture to HTIL, but also has acquired a beneficial interest in the license granted by the Department of Telecommunications in India to its group companies, now known as Vodafone Essar Limited.

97. It is an admitted fact that VEL (earlier HEL), a subsidiary of the Petitioner in which the Petitioner has acquired 67% interest, was a group company of HTIL and now a group company of the Petitioner. Any profit or gain which arose from the transfer of a group company in India has to be regarded as a profit and gains of the entity or the company which actually controls its, particularly when on facts, the flow of income or gain can be established to such controlling company (HTIL). In the present case, by reason of the transfer, the income accrued not to CGP, but to HTIL and was treated as profits of HTIL and accordingly was distributed 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 veil to find out the real nature of the asset transferred or the real economic entities sought to be transferred. The Petitioner themselves, by their various declarations supra, made it apparent and clear that the purpose of their acquiring shares in CGP was to acquire the controlling interest of 67% in HEL. The Petitioner itself has disregarded the maze of subsidiaries in the matter of ownership, receipt of of sale consideration and signing and execution of agreement for transfer (See Pg.4 of the List of dates).

99. Mr.Parasaran submitted in relation to a foreigner, jurisdiction can be exercised by the executive, legislature and judiciary in India, if either the foreigner is actually present in the Indian Territory or if any interest in any of his property is within the Indian Territory. A foreigner cannot enter into a transaction which has an effect on Indian properties and still contend that the executive, legislature or judiciary in India cannot exercise extra territorial jurisdiction. Moreover, in the present case, it is fallacious to contend that extra territorial jurisdiction is being exercised as it would be begging the question.

100. Mr.Parasaran referred to the American principle of ‘Effects Doctrine’ is as follows:

“Any state may impose liabilities, even upon persons not within its allegiance, for conduct outside its borders that has consequences within its borders which the state represents.” In this behalf Mr.Parasaran referred to the discussion in International Law 4th Edition by Malcolm N.Shaw at pages 483 to 490 and also Page 456, which reads as follows:

“International law accepts that a state may levy taxes against persons nor within the territory of that state, so long as there is some kind of real link between the state and the proposed taxpayer, whether it be, for example, nationality or domicile.”

101. Mr.Parasarn pointed out that the principle of ‘Effects Doctrine’ has been upheld and followed by the Hon’ble Supreme Court in (2002) 6 SCC 600. The Hon’ble Supreme Court has 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 registerable under Section 33 of the MRTP Act, being an outside agreement, nevertheless, if any restrictive trade practice, as a consequence of outside agreement is carried out in India, then the Commission shall have jurisdiction 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 comity nor rule of international law can be invoked to prevent a sovereign state from taking what steps it thinks fit to protect its own revenue laws from gross abuse or to save its on citizens from unjust discrimination in favour of foreigners. To demand that the plain words of the stature should be disregarded in order to do that very thing is an extravagance to which this House will, I hope, give ear.”

102. Mr.Parasaran pointed out that the very purpose of entering into agreements between the two foreigners is to acquire the controlling interest which one foreign company held in the Indian company, by other foreign company. This being the dominant purpose of the transaction, the transaction would certainly be subject to municipal laws of India, including the Indian Income Tax Act. The Petitioner has admitted that HTIL has transferred their 67% interests in HEL qua their shareholders, qua the regulatory authorities in India (FIPB), qua the statutory authorities in USA and Hong Kong and the Petitioner has also admitted acquiring 67% held by HTIL in HEL. This being the case, a different stand cannot be taken before the tax authorities in India and a different stand cannot be put forth by either HTIL or the Petitioner.

103. With regard to third proposition, Mr.M.Parasaran, the Additional Solicitor General of India, states that Section 195 and the impugned show cause notice are not extra territorial in their operations and he also made following submissions;

a.          The Indian Constitution vests plenary powers on the Union to enact legislations having both territorial and extra territorial operation (See Article 245(2) and the municipal courts cannot strike down legislation as unconstitutional on the ground that they are extra territorial in operation. In this case, he referred to the case of Electronics Corporation of India Vs. Commissioner of Income Tax (1990) 183 ITR 43

b.         Section 1(2) of the Income Tax Act provides that the Act extends to the “whole of India”. The “whole of India” is used in contradiction to ‘a part of India’ and not to outside India. Several other enactments which are made applicable to only certain territories in India are specifically not made applicable to some States like Jammu & Kashmir. It is not the case of the Revenue that the Income Tax Act applied to territories outside India. However, that does not mean that 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 applicability of those Acts to persons or entities who are Indian citizens cannot be compared with the provisions of the Income Tax Act. Those Acts deal with the various acts of omissions and commissions i.e. conduct of persons or entities in India as well as outside India. The Indian Income Tax Act on the other hand is concerned with either residence of the person in India or the source of income or the economic activity which has to be carried out in India. Further, the meaning of words used in one section of the IT Act itself, cannot be used to interpret the meaning of words used in another section of the same Act, since the words used derive their meaning from the context in which they are used. (1997) 237 ITR 17 (SC)

e.         Merely because non-residents are subject to Indian Income Tax act for transactions entered into outside India if the transaction has a clear nexus to income or property or asset in India, the provisions cannot be said to be extra territorial. In this behalf he relied on Pannalal Nandlal Bhandari Vs. CIT (1961) 41 ITR 76 (SC).

f.          Mr. Parasaran also referred to a speech of the United States Attorney General Griffen Bell to the Law Council of Australia on 17th July,1978 in the book titled ‘Extra Territorial Jurisdiction by A.V. Lowe as well as the ‘Effects Doctrine’, which is already referred in proposition No.2.

g.         Section 195 applies to all payments, which wholly or partly represent sum chargeable to tax. Once the income is chargeable, the nexus will exist both with regard to the payee and the payer. The expression any ‘person’ used in Section 195 is only to be given a plain or literal meaning as defined in the Income Tax Act. Section 2(37) read with sections 2(17) and 2(23A) defines a ‘person’ to include a foreign company. Secondly, Section 195 being a machinery provision cannot be strictly construed like a charging section and the literal construction of a machinery provision is a rule as opposed to strict construction of a charging section in tax jurisprudence. Mr. Parasaran relied on the following judgments of the Hon’ble Supreme Court in the case of:

i.          Gursahai Vs. Commissioner of Income Tax AIR 1963 SC 1062

ii.         Commissioner of Income Tax Vs. National Taj Traders AIR 1980 SC 485

iii.        Mahim Patram Pvt. Ltd. Vs. Union of India 2007 (3) SCC 668

h.         While deciding the chargeability 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 Petitioner signed the agreement to acquire interests in India on 11th February, 2007, it automatically acquired nexus to a source of income in India and significantly, the said agreement was conditional upon the approval of the Indian regulatory authorities, only after the grant of which, the payment was made for acquiring Indian interest. Therefore, the nexus was clearly established even before the payment was made on 8th May, 2007.

j.          It is not as though the FIPB approval was not required as stated by the Petitioner. The FIPB approval is mandatory even as per Petitioner’s own case, whereby they have reserved the right to cancel the agreement in case the FIPB does not grant approval (page 272) and the said terms have been acted upon and is a binding document. In terms of the FIPB approval, the Petitioner is bound to comply with all Indian laws including Indian Income Tax Act. It is respectfully submitted that the principle of reading down a statute would be ‘inapplicable in the context of Section 195 and the expression any ‘person’ shall include a ‘non resident’. There is no ambiguity or conflict between the said expressions with any other provision. Further the virus of Section 195 is also not under challenge and therefore there is no occasion for reading down Section 195.

k.         It is submitted that the concept of chargeability and enforceability are different concepts and mere difficulty in compliance with the statute would not be a ground to avoid the compliance of the statute by any person. Mr.Parasaran relied on the decision in the case of 1997 228 ITR 487 (AAR) In Re Advance Ruling P.No.13 of 1995 Vs. Respondent (ruling of question No.12)  The Deductor of Tax at Source is only a tentative deduction and it does not cause any prejudice to the person who is responsible to deduct tax within the moneys payable to deductor. No prejudice is caused either to the deductor or to the deductee at that stage.

i. Aggarwal Chamber of Commerce Ltd. Vs. Ganpat Rai Hira Lal (SC) (1958) 33 IR 245;

ii. Commissioner of Income Tax Vs. Vijay Ship Breaking Corporation (2003) 261 ITR 113 (Guj.)

iii. Transmission  Corporation of A.P.Ltd. & Anr. Vs. Commissioner of Income Tax (1999) 239 ITR 587 (SC).

104. Mr.Parasaran submitted that the liability under section 195 does not depend upon the outcome of the assessment proceedings and there cannot be one set 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 of the said Chapter shall not prejudice the charge of tax on income under section 4(1) thereby ensuring that the assessee who is charged with the liability of tax on his total income does not get away by taking defence of the provisions contained in Chapter XVII, thus while section 4(2) empowers the  enforcement of machinery provisions for TDS, section 190(2) protects the charge created on the assessee (deductee under section 4(1).

iii.        In this backdrop, section 191 has always been a more express safety valve provided by law to protect the right of collection of taxes from the assessee (deductee). The provision never provided any slippery ground in the scheme of collection/recovery of taxes to suggest that the deductor has the liberty of not deducting the tax and getting away with his obligation by seeking recourse to stipulation of direct payment by the assessee (deductee) under section 191. Once the assessee has made payment of tax directly, the recovery of such tax again from the deductor cannot be made.

iv)        Any explanation added to section can only explain only what is stated in the main provision. The main provision of section 191 deals with only two situations (i) where there is no provision for deduction of tax and (ii) where the tax has not been deducted. It was beyond the scope of the Explanation to explain the third situation viz. where the tax was deducted but not paid to the Central Government. Thus, the interpretation sought to be placed by the Petitioner could not emanate from the Explanation to section 191.

v)         The provisions of Sections 201 (and section 191) clearly apply to the Petitioners for default of non deduction of tax under Section 195. The position is the same both prior to and after the amendment of 2008. The income of HTIL paid by the Petitioner to HTIL (without tax deduction) was income chargeable to tax in India and the Petitioner was obliged to deduct tax under Section 4(2) read with Section 195.

vi)        Having failed to deduct tax and having taken the risk of facing the consequences of non deduction, the Petitioners cannot escape from such consequences.

vii)       It is a submission of the Revenue that there has been no change in the substantive law either by the amendments made by the Finance Act of 2002 or of 2003 or of 2008. A comparative chart showing how these provisions (section 191, 200 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 to make payments by way of advance tax or by any other prescribe mode till date. The conditions of non-payment of the tax by the payee cannot be read in a manner to render it uncertain in point of time so as to put the tax authorities in an unending wait. The situation cannot be uncertain and the law cannot be interpreted in such a fashion.

ix)        Further, on the date of the issuance of the show cause notice in the present case, “the deductor’ admittedly had not paid its taxes and in any event the second condition which the Petitioner says should be fulfilled, has nevertheless been fulfilled on the facts and in circumstances of the present case.

x)         It may also be of relevance to highlight that  the provisions of Section 191 have been held to be of no relevance for considering the applicability of the provisions of Section 201, which is independent in itself. The liability of the deductor is independent and ambulatory in character. At this Mr.Parasaran relied on Mittal Steels Ltd. Vs. ACIT 240 ITR 707 (Kant). He also relied on Traco Cables Co. Ltd. Vs. CIT 166 ITR 278 (Ker.)

xi)        It is further submitted that one other significant aspect which requires notice is that the Petitioner, on 08/05/2007, had withheld to itself, a sum of US $ 352 million under an agreement with the deductee, HTIL, in stipulation of future consideration of certain “potential claims”. Normally, in an agreement of this type, which are essentially cross border agreements, such liabilities are predetermined under the due diligence determination test and possibly that could been the reason why certain material agreements have been withheld from this Hon’ble Court. Non applicability of Section 201

xii)       the submission of the Petitioner that it is not an ‘assessee in default’ under Section 201, is incorrect. The submission of the Petitioner that Section 201, being a deeming provision in a fiscal  statue, should be construed strictly, with great respect, is also fallacious. As already submitted above, Section 201 is only a machinery provision for collection and the charging Section is Section 4(2). The charging Section has already provided and created a duty and imposed an obligation on the Petitioner to deduct the tax at the time of payment. Chapter XVII contains only the machinery provision for giving effect to the charging provision. it is well settled by a catena 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 an assessee in default. In other words, according to the Petitioner, an interpretation should be placed so as to consider the expression ‘assessee in default’, to apply to only persons falling under Section 194 and to persons who deduct taxes but who do not remit it to the Government, but not to apply to cases where the person fails to deduct tax. The Petitioner wants to place a premium upon persons committing gross default in deducting tax at the time of payment, in defiance of the charging provision and that can never be the intention of the legislature. 2008  was  that  Section  201  could  be  applied  only  in  two  case  viz.,  in  respect  of  persons  falling  under  Section  194  where  there  was  a  failure  to  deduct  tax  on  payment

xiv)      The power of the Parliament to enact law retrospectively is not under challenge. The law as amended by the Finance Act of 2008 holds the Petitioner as ‘assessee in default’ u/s. 201. it is respectfully submitted that under the amended provisions of section 201 (and explanation to section 191), the Petitioner is an ‘assessee in default’, for failing to comply with the provisions of section 195  of the Act.

xv)       The Petitioner, with respect, is seeking to put a fallacious interpretation to the words employed in section 201 viz. “any such person referred to in section 200”. The legislative history of Chapter XVII would put at rest the speculative argument of the Petitioner.

xvi)      Prior to the amendment made to the provision in 2002, the language rad “if any such person……. fails to deduct tax or after deduction fail to pay……..”. The word “such person” referred necessarily to the person occurring in the immediately preceding section viz. section 200. These words remained on the statute since the beginning of the enactment in 1961 and there was no occasion to interpret the words differently. The settled position was that the liability under Section 201 arose as soon as the person committed the default on non-deduction of tax. At this juncture, Mr.Parasaran, the learned Additional Solicitor General of India relied on the following judgments;

i. Yashpal  Sahni Vs. Rekha Hajarnavis ACIT 293 ITR 539 (Bom)

ii. ACIT Vs. Om Prakash Gattani (Gau) 242 ITR 638

iii. Aggarwal Chamber of Commerce Ltd. Vs. Ganpat Rai Hiralal 22 ITR 245 (SC)

iv. CIT  Vs. Meat Products of India Ltd. 244 ITR 1 (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 diluting the rigour of section 201. In this behalf Mr.Parasaran relied on the judgment of our High Court in the case of Yashpal Sahni Vs. Rekha Hajarnavis ACIT 293 ITR 539 (Bom).

xx) In the year 2002, Section 192 (1A) was inserted in the Income Tax Act. Certain non-monetary payments in the form of perquisites by employers became taxable in the hands of employees and it was not possible to deduct tax from such income. The option was therefore, given to the employers to make payment of tax on their own without any deduction of tax. The Revenue wishes to place specific emphasis on the expression ‘make direct payment of tax without deduction’, as that introduced a third category of payment of tax. This led to insertion of new Section (1A) in Section 192 w.e.f. 01/06/2002, to ensure that employers make such payments within the stipulated time and sub Section (2) was added to Section 200. As a direct consequence, Section 201 was amended to insert the words ‘referred to in Section 200’ as without the said amendment, Section 201 would not have covered cases of payment of tax as envisaged in Section 200(2) and would have covered only cases of failure to deduct or failure to pay after deduction and not failure to pay without deduction, like the one done by employers. hence, to cover all possible situations, reference to section 200 was made in Section 201. the notes on clauses and explanatory memorandum to the Finance Act clearly stated that the amendments in Section 200 and 201 were consequential in nature.

xxi. No substantive change was made in Section 201 by the Finance Act of 2002. Neither the language employed in the Statute by the amendment nor other aids of construction ever suggest any change in the substantive law. Reference to ‘referred to in Section 200″, meant the persons mentioned in that section and not their acts of omission or commission.

xxii. In the meantime, the ITAT, Mumbai took the view in case of Associated Cement Co.Ltd. Vs. ITO, TDS (2000) 74 ITD 369 (Mum), that where deductor had failed to deduct the tax, the recovery under Section 201 could not be made from him in view of the provisions of Section 191. Since the order was likely to be followed by the other Coordinate Benches generating a spate of litigation, Parliament took the task of clarifying the position by adding Explanation to section 191. The fact that the amendment 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, from the very beginning, has been a effective took in timely collection of taxes. Any interpretation to suggest that the recovery of tax cannot be made in the event of non-deduction from the deductor, renders the charging provisions ineffective and unworkable.

xxvi) if the submission of the Petitioner is accepted, only a company and its Principal Officer can be brought within the ambit of Section 201 (or 191) for failure to deduct tax under Section 194, while all other classes of deductors (which are as many as 19 in  number for different sources of income) shall fall in the ambit of the Section 201 only if they have deducted the tax but failed to pay it to the Government. This interpretation is not only illogical but would amount to discriminating against the same class of persons and should, therefore, not be accepted.

xxvii) The provisions of Section 201 clearly stipulate default of two kinds (i) failure to deduct tax or (ii) after deduction failure to pay the tax. The proposition of the Petitioner would render vital words of the provision “fails to deduct tax” used in Section 201 therefore such an interpretation has to be avoided.

REJOINDER OF THE PETITIONER

106. The learned Senior Counsel Mr.Chagla appearing on behalf of the Petitioner submitted the rejoinder to the arguments urged by the Respondents.

Mr.Chagla submitted that the Petitioner reiterates all submissions and contentions in propositions I to IV and all submissions and contentions of the Respondents to the contrary are denied.

107. In reply to the Petitioner’s submissions, the Respondents have submitted that;

i) the writ petition is not maintainable as it purports to challenge a show cause notice and the discretion under Article 226 should not be exercised.

ii) the transaction of sale of the share capital of CGP Investment (Holdings) Ltd. (CGP) would give rise to a charge to tax in India.

 iii) the provisions of section 195 of the Income Tax Act, 1961 (the Act) and the impugned show cause notice are not extra-territorial in their operation;

iv) the Petitioner would be an assessee in default even in accordance with the language prior to the amendments made by the Finance Act,2008; and

v) the amendments made by the Finance Act,2008 are not violative of Article 14 of the Constitution.

Rejoinder to submission (i) of the Respondents

108. It is submitted by the learned Senior Counsel for the Petitioner, that having submissions already made in the course of the hearing,  this is a fit case for the exercise of jurisdiction under Article 226 of the Constitution of India. it is submitted that it is now well settled, and even the decisions relied upon by the Respondents support the contention that if the High Court is satisfied that the show cause notice was totally non est in the eye of law for absolute want of jurisdiction a writ petition could be entertained. In fact the judgment of the Constitution Bench of the Hon’ble Supreme Court in Calcutta Discount Company Vs. Income Tax Officer (AIR 1961 SC 372) Pages 379-380), clearly establishes that the High Court would have the power to issue an appropriate writ prohibiting an executive authority from acting without jurisdiction and where the action of an executive authority acting without jurisdiction subjects or 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 under Section 201 of the Act (prior to the 2008 amendments thereto) could be passed for an illegal failure to comply with the provision of section 195 of the Act certain jurisdictional conditions have to be complied with viz;

a. the payment has to be made by a person who is either a resident or a non-resident who has  a presence in India;

b. there has to be income which is chargeable to tax in India that is earned by a non-resident;

c. the recipient has to have failed to pay the tax due on such income;  and

d. the payer has to have deducted tax but failed to pay it over the Government.

As none of these conditions have been fulfilled it is clear that Respondent NO.2 is purporting to act without jurisdiction and hence an appropriate writ ought to be issued. Even after the 2008 amendments to Sections 191 and 201 of the Act, the show cause notice is without jurisdiction as conditions (a) to (c) continue to be applicable and the same have not been fulfilled.

110. Further, in any event, as the petitioner is urging that the provisions of section 195 of the Act as sought to be interpreted by the Respondents would be violative of Article 14 and the Petitioner is also challenging the validity of the retrospective amendments inserted by the Finance Act,2008 in sections 191 and 201 of the Act, the writ petition is clearly maintainable as it would not be open to the Petitioner to challenge the vires of the aforesaid provisions in the course of the regular assessment proceedings.

111. The argument that the Petitioner has an efficacious remedy inasmuch as it could have approached the Assessing Officer under section 195(2) or under section 197 of the Act or an application could have been furnished to the Authority for Advance Ruling has no relevance in the present situation. These alternative (assuming that they were efficacious) remedies may have been availed of it there was an obligation to deduct tax at source but as according to the Petitioner it was not obliged to deduct tax at source, the question of invoking one of these remedies does not arise. In any event the failure to opt for such an alternative would not enable the Respondents to urge that the Petitioner should be precluded from invoking jurisdiction under Article 226 at this stage. Availing of an alternative remedy is not a condition precedent to invoking the writ jurisdiction of this Hon’ble court.

112. It was repeatedly argued that the Petitioner has not produced vital documents that are crucial to the determination of the issue of chargeability to tax in India of the sum paid by the Petitioner to Hutchison Telecommunications International (Cayman) Holdings Ltd. and, therefore, this Hon’ble Court should refuse to exercise its discretion under Article 226. It is submitted that as rule has already been issued, albeit subject to the issue of maintainability of the writ Petition, the question of the exercise of discretion by this Hon’ble Court to entertain the writ  petition could not be disputed at this stage. There is a distinction in law between the exercise of discretion by a Court to entertain a Writ Petition and the 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 documents from this Hon’ble Court, as alleged or at all. It was argued that the Petitioner has not produced either before the Revenue authorities in the reply to the show cause notice or before this Hon’ble court the agreement dated 11th February,2007 which spells out the terms and conditions on which the sale of the share capital of CGP and the loan interest are made. The Petitioner submits that as according to it Respondent No.2 was acting without any jurisdiction there was no question of furnishing any document to Respondent No.2 in the course of the proceedings initiated by him lest it be urged that by doing so the Petitioner has acquiesced to his jurisdiction. As regards the argument that the said agreement has not been produced in this Hon’ble Court, the petitioner submits that in paragraph 3(a) of the Petitioner, the  agreement is specifically referred to and the Petitioner has craved leave to refer to and rely upon the same. If, according to the Respondents, the said agreement was vital to the determination of any issue they ought to have sought inspection of the same in the course of the proceedings and the Petitioner would have offered inspection and/or copies of the same. before the present Division Bench as also the Division Bench which issued rule in the Writ Petition, Counsel for the petitioner offered to furnish copies of the agreement dated 11th February,2007 to the Court and the Respondents if a request for the same was made by the Respondents in the present proceedings before this Hon’ble Court. To date no such request has been made in the proceedings before this Hon’ble court inspite of the fact that the Petitioner has repeatedly drawn the attention of the Respondents to this course of action. Therefore, it is not open to the Respondents to urge that the Petitioner has suppressed any documents or that this Hon’ble Court should draw an adverse inference against the Petitioner as a consequence thereof.

114. Further, the argument that the challenge to the constitutional validity of the amendments made to sections 191 and 201 of the Act by the Finance Act,2008 is not maintainable in the absence of any facts which are pleaded and proved by evidence in the form of documents on record, is unsustainable. The only fact required to be pleaded and proved in the present case to entitle the Petitioner to challenge the constitutional validity of the 2008 amendments is the issuance of a show cause notice by Respondent No.2 purporting to treat the Petitioner as an assessee in default under Section 201 of the Act. The issuance of the show cause notice dated 19th September,2007 is admitted and the same is annexed to the Writ Petition as Exhibit-“E”.

With regard to the third reply of the Respondents, the learned Senior Counsel for the Petitioner submits, that;

115. It is submitted that submission (iii) above deals with the Petitioner’s case in respect of section 195 of the Act. This case of the Petitioner is a stand-alone argument, in the sense that it assumes that the gains accruing as a consequence of the transaction is chargeable to tax, but nevertheless, there is no obligation to withhold tax under section 195 of the 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 casts an obligation on a “person” to deduct tax at source when making a payment to a non-resident of a sum which is chargeable to tax in India and the term “person” as defined in Section 2(31) of the Act would take within its ambit a foreign company like the Petitioner, nevertheless, one must give a contextual interpretation to the term “person” in section 195 of the Act. This particularly in view of the presumption or rule of construction that Parliament does not intend to exceed its territorial jurisdiction or violate the rules of international law, unless the language of the provision permits only one construction which is to the contrary. This presumption or rule of construction would apply more so in the case of section 195 of the Act where a default thereunder entails penal consequences. On an application of this contextual interpretation the obligation to deduct tax at source would not extend to a non-resident having no presence in India. It was submitted that the term “person” must, in its contextual interpretation, be confined to a person resident in India or a person who has a presence in India as the law would not contemplate that a person who has no presence in India would be subject to the various procedural requirements that have to be complied with in India by a person deducting tax at source such as application for a Tax Deduction Account Number, issuance of certificates, filing of quarterly and annual returns etc.

118. All that the Respondents have urged in paragraph 6 is that neither the payments nor the residential status of the payer or the payee are relevant; and that where a restrictive meaning has been sought to be given to the meaning of the expression “person”, the Legislature has provided so clearly and unambiguously in various parts of the Act. In other words, the Respondents urge that this Hon’ble Court should prefer the statutory definition in preference to the contextual interpretation of the expression “person”. In so contending, the Respondents have relied only upon their ipse dixit and have ignored the judgment cited by the Petitioner in this regard.

119. Mr.Chagla for the Petitioner submitted that the Respondents have completely ignored the decision of the Hon’ble Supreme Court in the case of Kapurchand V.  Tax Recovery Officer (AIR 1969 SC 682), where, in the absence of any provision by the Legislature in this regard, the Court preferred a restricted contextual interpretation of the very word “person” to the wider statutory definition thereof in Section 2(31) of the Act. It is submitted that the absurdity  of reading “person” in the manner sought to be canvassed by the Respondents has already been demonstrated and it was pointed out how such an interpretation would render several provisions of the Act unworkable, and accordingly the expression, as used n section 195 of the Act, must be construed in the context in which it appears, and so construed cannot include within its scope an entity like the Petitioner, i.e. a non-resident having no presence in India.

120. In support of its contention that the requirement to deduct tax at source was not envisaged when a payment is made 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 House of Lords in Clark. While the judgment of the House of Lords is not binding on this Hon’ble court, if certainly has great persuasive value, more so when the House of Lords has construed provisions of the English statute which were in pari materia with section 195 of the Act and there is no judgment of an Indian Court in  this regard.

121. The Petitioner also relied upon the Department of Revenue’s Income Tax Manual referred to in the Commentary on “The Law of Income Tax in India” by V.S.Sundaram, which clarified that there was no obligation to deduct tax at source under the Indian Income-Tax Act,1922 when payments were made outside British India. The Petitioner also relied upon the authoritative pronouncement in “The Law and Practice of Income Tax” by Kanga and Palkhivala which clearly states that section 195 of the Act does not apply to payments made outside India by one foreigner to another.

122. Mr.Chagla submitted that the Respondents have failed to deal with the above interpretation supplied by leading commentators and have not relied upon any binding precedent to the contrary. The Respondents have relied upon a ruling of the Authority for Advance Ruling reported in 228 ITR 487 which ruling would have no precedential value as section 245S of the Act makes it clear that the ruling has a binding effect only inter parties and may only be of persuative value as observed by the Supreme Court in Union of India Vs. Azadi Bachao Andolan (2004) 10 SCC 1 page 43. It is further submitted that in the case before the AAR the non-resident payer was required to maintain two offices in India to supervise the execution of the contract. As such, admittedly, it had a presence in India. In the present case the Petitioner is a non-resident having no presence in India at the time when it entered into the Agreement for purchase of the share capital of CGp. The only “nexus” it had with India was that it owned 5.61% of the equity share capital in an Indian company and a mere financial investment in an Indian company would not constitute a “presence”, taxable or otherwise, which would give rise to an obligation to deduct tax at source in terms of section 195 of the Act. Neither the signing of the agreement on 11th February,2007 nor the Foreign Investment Promotion Board (FIPB

) approval is indicative of any nexus with, or constitutes any presence of the Petitioner in India. When the annual inflow of foreign investment has reached approximately US$ 28 billion, it would be absurd to contend that each and every financial investor has a presence in India.

123. An application under section 197 of the Act sought to be relied on by the Respondents (which was not referred to in any affidavit filed by the Respondents) is totally irrelevant and misplaced as the said application was not made by the Petitioner but another company in respect of transfer of shares in an Indian company, and not a foreign company. The adjustment in the consideration by way of a “Retention Amount” of approximately US$ 352 million was not on account of any potential tax liability as falsely contended by the Respondents. When the Respondent allege a tax 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 Ground (g) at page 30 of the Petition as well as prayer (d). It is submitted in the petition that if the interpretation placed by the Petitioner upon section 195 of the Act is not accepted, then the provisions would be violative of Article 14 inasmuch as two dissimilar classes of people would be treated similarly. The further submission that section 195 of the Act is only a machinery provision and, therefore, the rules of strict construction do not apply, overlooks the position that non-compliance with section 195 of the Act attracts penal consequences and ought, on that account, to be construed strictly and in a manner that avoids the penalty, if permissible.

In Rejoinder to the submission (ii) of the Respondents, the learned Senior Counsel for the Petitioner states as under;

125. It is an admitted position that the payee would be chargeable to tax in India only if income is deemed to accrue or arise to it in India as a consequence of the transfer of a capital asset situated in India. It is also accepted by the learned Additional Solicitor General on behalf of the Respondents that the argument that income has arisen through or from a business connection or through a property or a source of income in India is tenuous and accordingly was not pressed, and, therefore, it is proposed to rejoin only to the sole argument that was urged viz., that income has accrued or arisen through or from the transfer of a capital asset situated in India.

126. Mr.Chagla for the Petitioner contended that the Respondents accept that if it was a simple sale of share capital of a foreign company there would have been no obligation to deduct tax at source as the amount would not be chargeable to Tax in India even though the price at which such sale of the share capital takes place is determined having regard to the value of certain assets in India. However, accordingly to the Respondents, the present is a case of a transfer of a valuable property/asset in India. The Respondents, however, have not categorically asserted as to what is the specific asset situated in India which stands transferred to the Petitioner. According to the Respondents what is transferred is the interest, tangible and intangible, in Indian operating companies of the “Hutchison Group” in favour of the petitioner, a nebulous term to say the least. It is submitted that the only capital asset transferred is the entire share capital of CGP. This capital asset admittedly was situated outside India. As a consequence of the transfer of this capital asset the Petitioner has acquired indirect control over companies of which CGP or its subsidiaries were a shareholder, including Hutchison Essar Ltd. (now Vodafone Essar Ltd.) and its subsidiaries. However, there has been no change in or transfer of the shareholding of any of the Indian companies or of the controlling interest (assuming while denying that the same is an intangible asset existing independent of shareholding) of the Indian companies inasmuch as the controlling interest of the Indian companies continue to remain vested in its shareholders and exercised by them. Therefore, it is submitted that there is no transfer 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 indirect transfer would not come within the scope of section 9(1)(i) of the Act which, being a charging provision creating a legal fiction, must be strictly construed. The Respondents have not replied to the Petitioner’s submissions in this regard contained in Proposition IV and the Respondent’s entire argument on chargeability is based on the erroneous legal premise that an indirect transfer of a capital asset in India attracts chargeability under section 9(1)(i) of the Act. The Respondents’ reliance on the application to the FIPB is inapposite as the new policy for Foreign Direct Investment in India, unlike section 9(1)(i) of the Act,takes into account both direct and indirect holding (in contrast to the earlier policy) as highlighted in paragraph 36 of the Respondents’ affidavit filed on 19th June,2008.

128. To meet the absurdity of contending that any indirect interest in an Indian company (e.g. the purchase of 1000 shares of Coca Cola Inc. on the New York stock exchange, which shares would naturally have the underlying value of the Indian subsidiary) would amount to a capital asset in India, it was contended that it was only “controlling interest” that would be considered a “capital asset”. This contention, apart from what has been submitted above, would lead to the further absurdity that a non-resident would be entitled to indirectly acquire 49.99% of the shares of an Indian company without there being any chargeability to tax under section 9(1)(i) of the Act. In such a scenario, tax would be chargeable only on the one share that would give such a non-resident control of the Indian company.

129. The decisions relied upon by the Respondents with regard to “controlling interest” are either cases where there was a transfer of a managing agency. The learned Senior Counsel for the Petitioner relied on CIT Vs. Ram Narain Kapur & Co. Pvt. Ltd. 69 ITR 719 and Rama Narain & Sons Pvt. Ltd. Vs. CIT 41 ITR 534, which was recognized by the Companies Act as a separate right by itself independent of the shares in such company, or where the right of shareholders of a company to manage its affairs was taken over by the Government, which case emphasize that “controlling interest” is an incidence e of shareholding and can only be separated therefrom by express legislation. In this behalf, the learned Senior Counsel for the Petitioner placed his reliance on the decision in the case of CIT Vs. National Insurance Co. Ltd. 113 ITR 37 and Lakshmi Insurance Co. Ltd. Vs. C.I.T. 80 ITR 575 and CIT Vs. New India Assurance Co.Ltd. 122 ITR 633. None of these decisions support the proposition that the controlling interest in a company is an asset independent of the shares.

130. The Respondents have relied upon the public statements made by Hutchison Telecommunications International Ltd. (HTIL) and the Petitioner to their respective shareholders and other regulatory authorities to contend that the Petitioner has acquired 67% of HTIL’s interest in the Indian operating companies. It is submitted that the liability to pay tax in India is not dependent upon such statements or what may in commercial parlance be regarded as having been acquired. The 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 continue to vest with the Indian operating companies. Under the legal position as settled in Bacha F.Guzder Vs.  C.I.T. AIR 1955 sc 74, the Petitioner has acquired no interest of whatsoever nature in such telecom licenses or other assets. This decision has not been dealt with by the Respondents in their reply. The Petitioner has not acquired any assets in India. It is an admitted position that the share capital of CGP (i.e. the capital asset) was transferred to the Petitioner outside India. The Respondents cannot dispute this position and/or rely on authorities to contend that the subject matter of transfer as contracted between the parties is not actually the share capital of CGP, but assets situated in India and/or that the Petitioner’s choice of the mode of transfer will not alter the nature or character of the asset allegedly transferred.

132. It was argued that there has been a transfer of a bundle of rights in India and for this purpose several decisions were relied upon where the Courts have held that ’property’ is a term of wide import. It is submitted that none of the decisions referred to is apposite and hence they are not being dealt with individually. The question that this Hon’ble Court has to consider is whether there has been a direct transfer of any capital asset in India, and the reply thereto can only be in the negative.

133.The next plank of the Respondent’s argument was that the Petitioner has acquired the Joint Venture interest of the Hutchison Group in Hutchison Eessar Ltd. and it subsidiaries. This argument is also fallacious. If the Respondents’ case was that the Petitioner has stepped into the shoes of “Hutchison Group” by “Huthison Group” having allegedly transferred its interest in the Joint Venture to the Petitioner, then, the question of the Petitioner having entered into any fresh Shareholder’s Agreement with Essar would not have arisen. In any event is submitted that as one is testing the validity of the show cause notice and there has been no reference in the show cause notice to a transfer of a Joint Venture interest, the question of going into it at this stage would not arise. From the agreements relied on by the Respondents, it is evident that it is only the direct shareholders of Hutchison Essar Ltd. who have a right to nominate the directors, Chairman and CEO of Hutchison Essar Ltd.

134. The Petitioner submits that the reliance on the judgment of the Hon’ble Supreme Court in the case of New Horizon Ltd. Vs. Union of India & Ors. (1995) 1 SCC 478 is completely misplaced. In that case the issue before the Court was whether in determining whether a bidder could qualify for a tender the experience of one of its shareholders could be considered for complying with the requirement that “the tenderer should have the experience in compiling, printing and supplying of telephone directories of large telephone systems with the capacity of more than 50,000 lines.” The observations of the Court must be read having regard to this specific issue that it was called upon to consider. The Court was not called upon to consider whether the rights of a “joint venture partner” are a “capital asset” or 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 “stood stapled with” the share capital of CGP and, hence, there has been a transfer of such shares and other interests as a consequence of the transfer of the share capital of CGP and in this regard reliance was placed on certain decisions including that of the Company Law Board. It is submitted that the ratio of these decisions does not aid in adjudicating the specific issue that arises for consideration before this Hon’ble Court.

136. The decision of the Company Law Board in Air Touch  International (Mauritius) Ltd. Vs. RPG Cellular  Investments 121 Comp.Cases 647, (the propriety of citing the same before this Hon’ble Court apart) involved the issue whether the disputes raised in the Company Petition had arisen out of or in connection with the Shareholders Agreement and whether there is any commonality of parties to the proceedings before the Company Law Board and the Shareholders Agreement. it was held that the Petitioner in that case could not escape a reference to arbitration in  terms of the shareholders agreement on the ground that certain Respondents to be Petition were not parties to the said agreement, in view of the Petitioner’s own pleadings that such Respondents constituted a single economic entity and were different limbs of one organization. The observation of the Company law Board relied upon by the Respondents must, therefore, be considered having regard to the background in which they were made. Likewise in Samayanallur Power Investments  Pvt.Ltd. Vs. Covanta Energy India (Balaji)  Ltd. (130 Comp.Cases 21), the question that arose was whether the sale by a holding company of its shares in a subsidiary company would invite the rights of preemption pursuant to a shareholders agreement between the subsidiary and another shareholder. In view of the claim by the holding company that the business carried on by the subsidiary was that of the holding company, the Court was of the view that the holding company and the subsidiary constituted a single economic unit. This was a case where the Court was of the view that the Company was seeking to resile from its obligation under the shareholders agreement by adopting a device. This decision has not considered the judgment of the Division Bench of this Court in CDS Financial Services (Mauritius) Ltd. Vs. BPL Communications Ltd. & Ors. 121 Comp. Cases 374 (relied on by the Respondents) which rejected the contention that the business of the subsidiary is the business of the holding company, and also held that  the sale of shares cannot be equated with the sale of undertaking or any part thereof.

137. In the present case, in response to a specific query from this Hon’ble Court it has been categorically asserted by the learned Additional Solicitor General that it is not the case of the Respondents that the transaction entered into by HTIL and the Petitioner is a colourable device or that there has been any attempt at evasion of tax, and hence the decision of the Madras High Court (referred to in the preceding paragraph) would also not have any application. In view of the aforesaid assertion by the learned Additional Solicitor 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 intent. In order to bring a sum to tax in India what has to be established by the Respondents is that there is a direct transfer of a capital asset situated in India. There is no question of determining the taxability of income based on the effect a transaction has or does not have in a particular jurisdiction. Even assuming the transaction of purchase by the Petitioner of the share capital of CGP has some effect in India, nevertheless, that would not give rise to a charge to tax in India based on such effect. Rejoinder   to submissions (iv) and (v) of the Respondents

139. In so far as Propositions 4 and 5 of the Respondent is concerned, it was submitted by the Petitioner that an order under Section 201 of the Act could be passed against only two classes of persons viz. (a) in the case of a person referred to in section 200 of the Act i.e., either a person who has deducted tax at source and is required to pay the tax to the Government or a person who has failed to pay the tax borne by him in terms of section 192(1A) of the Act; or (b) in a case where the person referred to in section 194 of the Act has failed to deduct tax at source. As the Petitioner did not fall under either of these categories the question of initiating proceedings under section 201 of the Act did not arise. The Respondent’s argument is that this would not be a correct manner of interpreting section 201 of the Act because a person who is guilty of a gross failure to deduct tax could not be considered as an assessee in default whist a person who has deducted tax at source but not remitted it (which according to the Respondents is a lesser default) would be so considered. Accordingly, the Respondents contend that the Court should embark on an impermissible exercise of adding words to section, which words were in fact added by the 2008 amendments. That apart, it is submitted that a person who has failed to deduct tax at source, assuming that he was obliged to do so, would be visited with penal consequences as provided for under section 271C of the Act but a person who has failed to pay over the tax after deducting the same would be visited with prosecution as provided for in section 276B of the Act. it is thus apparent that a failure to remit tax deducted at source as opposed to a failure to deduct tax at source is viewed by the Legislature as a far more serious default.

140. The Petitioner submits that the Legislature has provided that if a person deducts tax at source and fails to pay it over to the Government he should be proceeded against under Section 201 of the Act and recovery of the tax be made from such person because under section 205 of the Act the Revenue would be precluded from recovering such tax from the recipient of the income. on the other hand if the payer has failed to deduct tax at source there is no bar against the Revenue recovering it from the recipient, and in fact section 191 of the Act provides that tax would be recovered directly from the assessee, as he is the person primarily responsible for the payment of tax.

Therefore, the assertion that the Petitioner wants to place a 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 amendments made in section 201 of the Act all persons who have failed to deduct tax at source could be proceeded against under section 201 of the Act. In fact the decisions relied upon by the Respondents accept that the provisions of section 201 of the Act are penal provisions, and accordingly it is submitted that they have to be strictly construed and, therefore, the argument of the respondents that the rule of strict construction is inapplicable as they are merely machinery or procedural provisions, is therefore misconceived.

142. It is submitted that the observation in the judgment of this Hon’ble Court in Yashpal Sahni Vs. Rekha Harjanavis 293 ITR 539 is at the highest obiter and not binding, as is ex-facie evident from the facts of the case and the question considered by the Court.  It is stated in the judgment that “the only question to be considered is, if the employer -respondent No.6 has failed to deposit the tax deducted at source from the salary income of the Petitioner to the credit of the Central Government, whether the Revenue can recover the TDS amount with interest once again from the Petitioner? (emphasis supplied). The Court ultimately upheld the contention of the assessee that no recovery could be made from him in view of the clear mandate of section 205 of the Act. This decision, therefore, in no manner whatsoever militates against the interpretation placed by the Petitioner on the provisions of section 201 of the Act as they stood after its amendment in 2002 but before the amendments made by the Finance Act,2008.

143. The argument that the amendment made in section 201 of the Act by the Finance Act,2002 was as a consequence of the amendments made in section 192(1A) and section 200(2) of the Act, and the same was only clarified by the 2008 amendment is unsustainable. The amendments made in section 201 of the Act by the Finance Act,2002 made it absolutely clear that proceedings under Section 201 of the Act could only be taken against the two classes of persons referred to in paragraph 35 hereinbefore. On a literal reading of these penal provisions, therefore, a person who has failed to deduct tax at source as required in terms of a section other than section 194 of the Act could not be proceeded against under section 201 of the Act. It was by the Finance Act,2008 that section 201 of the Act has been substantively amended, and the interpretation to the contrary that has been urged by the Respondents in its reply is without any basis and contrary to well-settled principles of construing a penal provision.

144. It is submitted that the Respondent’s interpretation of section 191 of the Act is also fallacious. The Explanation to section 191 of the Act makes it clear that the Revenue can proceed against the payer only after the assessee who actually receives the income fails to pay the tax -a position reinforced by the 2008 amendments. Undoubtedly the obligation to deduct tax at source is at a point of time prior to the assessee being obliged to pay the tax in its own hands. Nevertheless, on a proper interpretation of the Act, it must follow that the 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 has not paid its advance tax and, therefore, it must be construed that the payee has failed to pay the tax and hence it is open to the Revenue to proceed against the Petitioner is erroneous, and contrary to the earlier statement of the larned Additional Solicitor General to this Court that no notice had been issued to the payee as the time for filing its return had not yet expired. Assuming while denying that any tax is payable, it is submitted that when the show cause notice was issued the time for payment of the advance tax had not expired. Even as of now the time for filing a return has not expired and hence it could not be stated that the payee has failed to pay such tax directly as contemplated in section 191 of the Act so as to vest Respondent No.2 with jurisdiction to take proceedings against the Petitioner under section 201 of the Act. It is submitted that proceedings under section 201 of the Act ought to be taken only after the assessee has failed to pay the tax. This is because the primary obligation to pay tax is that of the recipient of the income. Assuming the payer is required to, but does not deduct tax at source, then, logically, proceedings to recover the tax from him should be taken only after the Revenue has established, at least by an assessment order, that the amount paid is chargeable to tax in India, and the payee has thereafter failed to pay the tax, as there is no mechanism available in the Act to refund such tax to the payer if the payee subsequently does pay the tax. In the absence of any such mechanism an interpretation should be placed on sections 191 and 201 of the Act which make the provisions workable and it is only the interpretation canvassed by the Petitioner that would have the desired effect.

146. The Petitioner submits that the argument of the Respondents that the Petitioner has no vested rights and hence the “clarificatory” amendments made by the Finance Act 2008 are not violative of Article 14 is without any substance. It is submitted that as explained hereinbefore on a plain construction of section 201 of the Act, as it stood before the 2008 amendments, no proceedings could be taken against the Petitioner to treat it as an assessee in default. it is only by virtue of the amendments that Respondent No.2 may be able to contend that a default under section 195 of the Act is now within the purview of section 201 of the Act and, therefore, the Petitioner’s vested right has been affected and it is imperative that this Court strike down the impugned amendments to the extent that they operate retrospectively. The judgments relied on by the Petitioner in support of its submission to strike down the impugned retrospective amendments of 2008 have not been dealt with by the Respondents.

147. The arguments that section 201 of the Act is a procedural provision and, therefore, the amendments made thereto can have retrospective effect is totally misconceived. Section 201 of the Act empowers the Assessing Officer to treat a person as an assessee in default thereby visiting such person with severe penal consequences viz., an obligation to pay over the tax 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 submission of Mr.Parasaran, the learned Additional Solicitor General of India, is that the moment the Petitioner signed the agreement to acquire interests in India on 11th February, 2007, it automatically acquired a nexus to a source of income in India and it is significant to note that the said agreement was conditional upon the approval of the Indian regulatory authorities, and only after the  grant of approval, the payment was made for acquiring Indian interest. Therefore it is clear that the nexus was clearly established even before the payment was made on 8th May, 2007.

150. In fact,it is Petitioner’s own case that the approval of FIPB was mandatory and the petitioner had reserved the right to cancel the agreement in case the FIPB does not grant approval. The above terms were acted upon in a binding document. In this context, it is very vital note, that as per the terms of the FIPB approval, the Petitioner is bound to comply with all Indian laws, including Indian Income Tax Act.

151. Like most other taxing jurisdictions, the Indian Income Tax Act follows the twin basis for taxation, (i) based on residence or domicile and (ii) based on source of income. While Indian residents are taxed on global income under Section 5(1), non-residents are taxed only on the income, which has its source in India under Section 5(2). The non-residents should have either received or deemed to have received the income in India or the income should have arisen or accrued in India or should be deemed to have accrued or deemed to have arisen in India. The deeming provision is enumerated in section 9 of the Income Tax Act. It is the submission of the Revenue that the income or capital gains of HTIL is deemed to have accrued or arisen in India and therefore, it  squarely falls within the ambit of Section 9 and is hence chargeable to Income Tax.

152. Prima facie, HTIL, by reason of this transaction, has earned income liable for Capital Gains Tax in India as the income was earned towards sole consideration of transfer of its business/economic interests as a group, in favour of the Petitioner.

153. Under Section 9(1)(i), income is deemed to accrue or arise in India whether directly or indirectly, through or from (a) business connection in India (b) property in India (c) any asset (d) any source of income in India, and (e) through the transfer of a capital asset situated in India.

154. The subject matter of the present transaction between the Petitioner and HTIL is nothing but transfer of interests, tangible and intangible, in Indian companies of the Hutch Group in favour of the Petitioner and not an innocuous acquisition of shares of some Cayman Islands Company, M/s. CGP Investments (Holdings) Ltd.

155. In this context, it is vital to note the chronological sequence of events in the above matter, as under:

HTIL owned 67% interests  in HEL (India) directly and indirectly;

HEL was a joint venture company of the Hutch group (foreign investor) with the Essar Group partner) and obtained Telecom license to cellular service in different circles in India November 1994. The existence of joint structure 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 possible sale of the Company’s interests in HEL group. interested  parties . . interested Hinduja buyers January/February,2007

 : It is reliably learnt that among several buyers two Groups, namely also offered their bids and were asked to determine the  Reliance these price of  and interest edits’  interests by reference to the enterprise value of  Hutch Essar.. 11th February,2007: . Agreement between Petitioner and HTIL for acquisition of Indian interests of HTIL by the Petitioner. . 12th February,2007: . Petitioner’s disclosure to SEC, USA for acquisition of 67% stock of HTIL in HEL, for a consideration of US$ 11.1 billion, which confirms the total enterprises value of US# 18.8 billion. . 20th February,2007: . Circular of HTIL to its share holders that the Company was selling its 67% stock in India for US$ 11.1 billion, based on an enterprise value of HEL of US/$ 18.8 billion and was expected to realize an estimated ‘before tax gain’ of approximately US$ 9.6 billion from the transaction. . 20th February,2007: .

 Petitioner’s application to the FIPB for approval of direct acquisition of 51.96% stock in HEL. . 15th March,2007:

 . Settlement agreement between HTIL and Essar Group disclosing HTIL’s agreement to dispose off its “HTIL interests” to the Petitioner. “HTIL’s  interests” has been defined as HTIL’s direct and indirect equity, loan and other interests and rights in and related to HEL, which HTIL has agreed to sell to the Petitioner. . 27th March,2007. . Petitioner files certain details with FIPB in reply to FIPB’s letter dated 22nd March,2007. . 7th

 May,2007 . Conditional approval by the FIPB stipulating that there should be compliance and observance of applicable laws and regulations of India, which would naturally include tax obligations under Income Tax Act.

 . 8th May,2007: . Petitioner enters into an agreement with HTIL to provide for the retention of US$ 352 million out of total consideration payable by it to HTIL to meet certain specific liabilities which the Petitioner may incur for a period of up to 10 years.

 . June/July,2007 . The names of 8 operating companies undergo change.

 . 13th June,2007  . HTIL announces a special dividend of HK $ 6.75 per share or approximately US $ 12.94 per ADS out of the proceeds from sale of its interests in HEL.

 . 24th August,2007 . Restated term sheet entered in India between Petitioner and essar group, confirming substitution of joint venture by the Petitioner in India and conferment of valuable rights and interests on the Petitioner, including Tag along rights and the right of first refusal and appointments of majority Directors.

156. VODAFONE AND ESSAR AGREE TO PARTNERSHIP TERMS:

Vodafone and Essar have reached an agreement under which they will work to continue the growth of Hutchison Essar Limited (“Hutchison Essar”), one of India’s leading mobile operators. This follows Vodafone’s announcement on 11 February 2007 that it had agreed to acquire Hutchison Telecommunications International Limited’s (“HTIL”) controlling interest in Hutchison Essar, in which Essar is and will continue to be a 33% shareholder.

The partners have 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 currently available in India. Essar is a major industrial group with a deep understanding of India and the Indian mobile telecommunications industry. With these complementary strengths Vodafone and Essar plan to broaden Vodafone Essar’s service offering and enable it to become the leader in the Indian mobile telephony market.

Commenting on the new partnership, Arun Sarin, Chief Executive of Vodafone said: . “I am delighted that Essar and Vodafone have agreed the terms of an ongoing partnership. Essar has played a key role in transforming this business into a leading Indian mobile operator. We look forward to leveraging this experience and working with our partner as the company enters its next phase of growth in the attractive Indian telecommunications market. We will be bringing the relevant range of Vodafone products and services to the Indian consumer”.

 . Under the terms of the partnership, Vodafone will have operational control of Vodafone Essar and Essar will have rights consistent with its  shareholding, including proportionate Board representation. Ravi Ruia will be appointed by Vodafone as Chairman of Vodafone Essar and Arun Sarin will be appointed by Essar as Vice Chairman.

 . Essar will have certain liquidity rights including, between the third and fourth anniversaries of completion, and subject to regulatory requirements, an option to sell its 33% shareholding in Vodafone Essar to Vodafone for US$5 billion or an option to sell between US$1 billion and US$5 billion worth of Vodafone Essar shares to Vodafone at an independently appraised fair market trading value.

 . Vodafone expects to complete the acquisition of HTIL’s interest in Hutchison Essar in the coming weeks. 14th June, 2007/Annueal Report

 . Acquisition of Hutchison Essar: On 8 May 2007, the Group completed its acquisition of 100% of the share capital in CGP Investments (Holdings) Limited (“CGP”) for US$10.9 billion from Hutchison Telecommunications International Limited. CGP owns a 51.95 indirect shareholding in Hutchison Essar Limited (“Hutchison Essar”), a mobile telecommunications operator in the Indian market.

 . As part of its acquisition of CGP, Vodafone acquired a less than 50% equity interest in Telecom Investments India Private Limited (“TII”) and in Omega Telecom Holdings Private Limited (“Omega”), which in turn have a 19.54% and 5.11% indirect shareholding in Hutchison Essar.

 . The Group was granted call options to acquire 100% of the shares in two companies which together indirectly own the remaining shares of TII for, if the market equity value of Hutchison Essar at the time of exercise is less than US$25 billion, an aggregate price of US$431 million or, if the market equity value of Hutchison Essar at the time of exercise is greater than US$25 billion, the fair market value of the shares as agreed between the parties. The Group also has an option to acquire 100% of the shares in a third company, which owns the remaining shares in Omega. In conjunction with the receipt of these options, the Group also granted a put option to each of the shareholders of these companies with identical pricing which, if exercised, would 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 292 million), which entitle the holder to a redemption premium of approximately 13% per annum.

 . Concurrently with the acquisition of CGP, the Group granted put options exercisable between 8 May 2010 and 8 May 2011 to members of the Essar group of companies that will allow the Essar group to sell its 33% shareholding in Hutchison Essar to the Group for US$5 billion or to sell between US$1 billion and US$5 billion worth of Hutchison Essar shares to the Group at an independently appraised fair market value. As with the above call and put options, this put option can only be exercised in accordance with Indian law prevailing at the time of exercise.

 157. Under the aforesaid facts and circumstances, Revenue has made out a strong prima facie case that the transaction entered upon by the Petitioner amounts to transfer of a capital asset and not merely a transfer simplicitor of controlling interest ipso facto in a corporate entity, especially in the light of the fact that the interest in Telecom License is jointly held with the Essar Group complied with the use of Brand & Goodwill and non-complete rights given by HTIL. There is a right to enter into Telecom Business in India, with a control premium.

 158. It will be too simplistic to answer away all the above facts and circumstances, by a submission of the Petitioner that what was transferred was only shares of an unknown Caymon Island Company, which is a shell company and the same was not even considered in the enterprise value of HEL.

 159. The Petitioner themselves have not disputed that the transaction involves transfer of controlling interest. If any transaction involves a transfer of controlling interest in a company or a group of companies, such a transfer has to be viewed both from the point of view of transferor and transferee. It is inconceivable as to how HTIL can transfer its controlling interest in HEL without extinguishing its rights in the shares of the Indian group and without which, a transferee cannot acquire a controlling interest. A divestment or extinguishment of right, title or interest must necessarily precede the divestment of the controlling interest and it would be impossible to dissociate one from the other and any divestment by one of any interest of enormous value in shares of such high intensity would certainly amount to acquisition of enduring benefit to the other, resulting in acquisition of a capital asset in India. The transaction also results not only in extinguishment of HTIL’s rights in HEL but relinquishment of its asset viz., its interest in the  Hutchison -Essar Group, so as to fall within the ambit of transfer as defined in Section 2(47) of the Income Tax Act (qua the transferor).

 160. It is clear from the various declarations made supra by HTIL, that the purpose of transfer of its Interest in HEL was to enable the Petitioner to acquire controlling interest in HEL by acquiring 67% direct and indirect equity and loan interest, held by HTIL through its subsidiaries, in HEL and thus acquire the right to manage HEL by appointing its own directors on the board. The object of the transaction in the present 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) situated in India. The choice of the Petitioner in selecting a particular mode of transfer of these right enumerated above will not alter or determine the nature or character of the asset.

 162. Prima facie, apart from the acquisition of  controlling interest, the Petitioner has acquired other interests and intangibles rights. The Petitioner accordingly became a successor in interest in the joint venture between HTIL and the Essar group and became a co-licensee with the Essar group to operate mobile telephony in India. The joint venture by itself confers an enduring benefit to the Petitioner. Prima facie, the Petitioner has not only become the successor in interest in that Joint Venture to HTIL, but also has acquired a beneficial interest in the license granted by the Department of Telecommunications in India to its group companies, now known as Vodafone Essar Limited.

 163. It is an admitted fact that VEL (earlier HEL), a subsidiary of the Petitioner in which the Petitioner has acquired 67% interest, was a group company of HTIL and now a group company of the Petitioner. Any profit or gain which arose from the transfer of a group company in India has to be regarded as a profit and gains of the entity or the company which actually controls its, particularly when on facts, the flow of income or gain can be established to such controlling company (HTIL). In the present case, by reason of the transfer, the income accrued not to CGP, but to HTIL and was treated as profits of HTIL and accordingly was distributed 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.

 164. The Petitioner themselves, by their various declarations supra, made it apparent and clear that the purpose of their acquiring shares in GDP was to acquire the controlling interest of 67% in HEL.

 165. Another aspect to be noted is the American principle of “Effects Doctrine” which is as follows:

 . “Any state may impose liabilities, even upon persons not within its allegiance, for conduct outside its borders that has consequences within its borders which the state represents.” In International Law 4th Edition by Malcolm N.Shaw at pages 483 to 490 and also Page 456, which reads as follows: “International law accepts that a state may levy taxes against persons nor within the territory of that state, so long as there is some kind of real link between the state and the proposed taxpayer, whether it be, for example, nationality or domicile.”

 166. The above “Effects Doctrine” has been upheld and followed by our Hon’ble Supreme Court in the case of Shyama Charan Agarwala & Sons Vs. Union of India (2002) 6 SCC 201. . In the above case, it was held that even if an  agreement is executed outside India or the parties to the agreement are not in India and the agreement may not be registrable under Section 33 of the MRTP Act, being an outside agreement, nevertheless, if there is a restrictive trade practice 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. 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 comity nor rule of international law can be invoked to prevent a sovereign state from taking what steps it thinks fit to protect its own revenue laws from gross abuse or to save its on citizens from unjust discrimination in favour of foreigners. To demand that the plain words of the stature should be disregarded in order to do that very thing is an extravagance to which this House will, I hope, give ear.”

 168. The very purpose of entering into agreements between the two foreigners is to acquire the controlling interest which one foreign company held in the Indian company, by other foreign company. This being the dominant purpose of the transaction, the transaction would certainly be subject to municipal laws of India, including the Indian Income Tax Act. The Petitioner has admitted that HTIL has transferred their 67% interests in HEL qua their shareholders, qua the regulatory authorities in India (FIPB), qua the statutory authorities in USA and Hong Kong and the Petitioner has also admitted acquiring 67% held by HTIL in HEL. This being the case, a different stand cannot be taken before the tax authorities in India and a different stand cannot be put forth by either HTIL or the Petitioner.

169. We are also clearly of the view that the Petitioner has wilfully failed to produce the primary/original agreement dated 11th February, 2007 and other prior and subsequent agreements/documents entered into between the Petitioner and HTIL. In the  absence of all relevant agreements and documents, it will be impossible to appreciate the true nature of the transaction. We agree with Mr.Parasaran, that in the absence of the said agreement and other relevant documents, constitutional validity of Income Tax provisions cannot be gone into. 170. Under the aforesaid facts and circumstances, the Petitioner has not been able to demonstrate the show cause notice to be totally non-est in the eyes of law for absolute want of jurisdiction of the authority to even investigate into the facts, by issuing a show cause notice. In this context, the following observations of the Hon’ble Supreme Court in The Special Director & Anoter Vs. Mohd. Ghulam Ghouse & Anr.    (2007) 120

Comp.Cases 467 (SC) would be relevant: 5. This Court in a large number of cases has deprecated the practice of the High Courts entertaining writ petitions questioning legality of the show cause 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. Whether the show cause notice was founded on any legal premises is a jurisdictional issue which can even be urged by the recipient of the notice and such issues also can be adjudicated by the authority issuing the very notice initially, before the aggrieved could approach the Court.  Further, when the Court passes an interim order it should be careful to see that the statutory functionaries specially and specifically constituted for the purpose are not denuded of powers and authority to initially decide the matter and ensure that ultimate relief which may or may not be finally granted in the writ petition is accorded to the writ petitioner even at the threshold by the interim protection, granted.

 171. Similarly in Kunisetty Sathyanarayana AIR 2007 SC 906, the Hon’ble Supreme Court has held as under:

13. It is well settled by a series of decisions of this Court that ordinarily no writ lies against a charge sheet or show-cause notice vide Executive Engineer, Bihar State Housing Board Vs. Ramdesh Kumar Singh and others JT 1995 (8) SC 331, Special Director and another Vs. Mohd. Ghulam Ghouse and another AIR 2004 SC 1467, Ulagappa and others Vs. Divisional Commissioner, Mysore and others 2001 (10) SCC 639, State of U.P. Vs. Brahm Datt Sharma and another AIR 1987 SC 943 etc.

 14. The reason why ordinarily a writ petition should not be entertained against a mere show-cause notice or charge-sheet is that at that stage the writ petition may be held to be premature. A mere charge-sheet or show-cause notice does not give rise to any cause of action, because it does not amount to an adverse order which affects the rights of any party unless the same has been issued by a person having no jurisdiction to do so. It is quite possible that after considering the reply to the show-cause notice or after holding an enquiry the authority concerned may drop the proceedings and/or hold that the charges are not established. It is well settled that a writ lies when some right of any party is infringed. A mere show-cause notice or charge-sheet does not infringe the right of any one. It is only when a final order imposing some punishment or otherwise adversely affecting a party is passed, that the said party can be said to have any grievance.

 16. No doubt, in some very rare and exceptional cases the High Court can quash a charge-sheet or show-cause notice if it is found to be wholly without jurisdiction or for  some other reason if it is wholly illegal, however, ordinarily the High Court should not interfere in such a matter. 172. On similar lines, this Court in Jayanthi Lal Thankar  & Co. Vs. Union of India (2006) 195 ELT 9 (Bom.), has held as under; 9. It is true that in large number of cases, the Apex Court has deprecated the practice of the High Courts entertaining writ petitions questioning legality of the show cause notices stalling enquiries as proposed and retarding investigative process to find actual facts with the participation and in the presence of the parties. Unless, 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  alternate  remedy  is  available  is  also  fairly  well-settled.  If  a  show  cause  notice  is  issued  by  a  statutory  authority  relying  upon  some  facts,  the  said  notice  can  be  challenged  before  the  Writ  Court  only  on  the  ground  that  even  if  the  facts  are  assumed  to  be  correct  no  case  has  been  made  out  against  the  noticee.  If  a  prima  facie  case  has  been  made  out  in  the  show  cause  notice,  it  is  for  the  adjudicating  authority  to  finally  decide  all  the  questions  including  the  questions  of  fact.  It  has  also  been  laid  down  in  series  of  cases  by  the  Supreme  Court  that  the  High  Court  should  not  interfere  at  the  stage  of  show  cause  notice  to  take  over  the  fact  finding  investigation  which  is  to  be  resolved  by  fact  finding  authorities  constituted under the relevant statute. In a series of recent cases, the Supreme Court has taken the aforesaid view. Some reported cases are : State of Goa Vs. Leukoplast (India) Ltd. 1997 (92) E.L.T. 19 (SC) = AIR 1997 SC 1875 ; Union of India Vs. Polar Marmo Aglomerates Ltd. -1997 (96) E.L.T. 21 (SC) and Union of India Vs. Bajaj Tempo Ltd. ­1997 (94) E.L.T. 285 (S.C.). In State of U.P. Vs. Labh Chand -AIR 1994 SC 754, the  Supreme Court befittingly illuminated the power as under: “When a statutory Forum or Tribunal is specially created by a statute for redressal of specified grievances of persons on certain matters, the High Court should not normally permit such persons to ventilate their specified grievances before it by entertaining petitions under Article 226 of the Constitution is a legal position which is too well settled……”

 In State of A.P. Vs. T.C. Lakshmaiah Setty & Sons AIR 1994 SC 2377, the above decision was reiterated by the Supreme Court and it was observed that the orders of assessment rendered under tax laws should be tested under the relevant Act and in no other way. In Shyam Kishore Vs. Municipal Corporation of Delhi AIR 1992 SC 2279, it was observed that recourse to writ petition is not proper, when more satisfactory solution is available on the terms of the statute itself. The position is, therefore, clear that extraordinary and discretionary power under writ jurisdiction should be exercised with caution when statutory remedy is sought to be by-passed. 173. Another important aspect is where the question 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 comes within the purview of the tax net has to be done by the authorities only, which cannot be determined on the basis of an affidavit and counter-affidavit in a proceeding under article 226 of the Constitution of India. Useful reference can be had to the judgment of the Supreme Court in the case of State of Goa Vs. Leukoplast (India) Ltd. reported in (1997) 105 STC 318 (SC). hence, we are not able to take a view different than the one taken by the learned single judge.

 174. We also find that the Petitioner is fully safeguarded under Section 195(2), 195(3) and Section 197 of Income Tax Act. As held by the Hon’ble Supreme Court in Transmission Corporation case, (1999) 239 ITR 587  (SC), Petitioner’s rights are adequately safeguarded under Section 195(2), 195(3) and 197 of the Income Tax Act, and the only thing required to be done is to file an application before the Assessing Officer under those provisions.

 175. In this behalf, the following observations of the Hon’ble Supreme Court in the case of Indo Asahi Glass  Company Ltd. & Anr. Vs. I.T.O. & Ors., 2002 (254) ITR 210, 2002(10) SCC 444, would be relevant:

 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 taxable under Section 9 of the Income-tax Act and-tax should have been deducted at source.

 Instead of filing a reply to the show-cause notice, the appellants chose to file a writ petition. The singe judge dismissed the writ petition on the ground that alternative remedy was available to the appellants. In appeal, the Division Bench took the same view. Hence, this appeal by special leave. It is contended by Dr.Pal, on behalf of the appellants, that during the pendency of this appeal, taking advantage of the Voluntary Disclosure Scheme, Asahi Glass Co.Ltd. Japan, had filed returns of income in respect of the four employees in question and had paid the entire amount of income-tax payable in respect of what was paid to these four employees in Yen currency. This and the other facts cannot 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 of the Act. If the petitioners are dissatisfied with the decision in the appeal, they can prefer a further appeal to the Tribunal under sub-s.(3) of s. 23 of the Act, and then ask for a case to be stated upon a question of law for the opinion of the High Court under s.24 of the Act. The Act provides for a complete machinery to challenge an order of assessment, and the impugned orders of assessment can only be challenged by the mode prescribed by the Act and not 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 State Vs. Mask & Co., AIR 1940 PC 105. It has also been held in to be equally applicable to enforcement of rights, and has been followed by this Court throughout. The High Court was, therefore, justified in dismissing the writ petitions in limine.

 177. In the present case, the Petitioner has been requested to only show cause as to why it should not be treated as an assessee in default. The Petitioner  was requested to produce certain documents for proper adjudication in the matter. One of the crucial documents required by the second Respondent was the primary agreement entered upon between the Petitioner and HTIL. The said agreement has not been produced by the Petitioner either before second Respondent or even before us. Without 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) 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).

 179. Similarly, the observations of the Hon’ble Supreme court in Prestige Lights Ltd. Vs. State Bank of  India (2007) 139 Comp.Cases.169 (SC), would squarely apply in the present case:

“32. It is thus clear that though the Appellant-Company had approached the High Court under Article 226 of the Constitution; it had not candidly stated all the facts to the Court. The High Court is exercising discretionary and extraordinary jurisdiction under Article 226 of the Constitution. Over and above, a Court of Law is also a Court of Equity. It is, therefore, or utmost necessity that when a party approaches High Court, he must place all the facts before the Court without any reservation. If there is suppression of material facts on the part of the Applicant or twisted facts have been placed before the Court, the Writ Court may refuse to entertain the Petition and dismiss it without entering into merits of the matter.”

 “33. The object underlying the above principle has been succinctly stated by Scrutton, LJ in R.V.Kinsington Income Tax Commissioners (1917) 1 KB 486: 86b LJ KB 257: 116 LT 136, in the following words: “It has been for many years the rule of the Court, and one which it is of the greatest  importance to maintain, that when an applicant comes to the Court to obtain relief on an exparte statement he should make a full and fair disclosure of all the material facts ­facts, not law. He must not misstate the law if he can help it -the Court is supposed to know  the law. But it knows nothing about the facts, and the applicant must sate fully and fairly the facts, and the penalty by which the Court enforces that obligation is that if it finds out that the facts have not been fully and fairly stated to it, the Court will aside, any action which it has taken on the faith of the imperfect statement”.

 34. It is well settled that a prerogative remedy is not a matter of course. In exercising extraordinary power, therefore, a Writ Court will indeed bear in mind the 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 of the I.T.Act by the Finance Act,2008, then the same must be in context of certain facts pleaded and proved by evidence in the form of documents on record and not in vaccum or in the abstract. The present Petition totally lacks particulars as to the nature of agreement dated 11th February, 2007 and all other agreements preceding or following the same entered into by HTIL and/or the Petitioner. The essential facts supported by the  necessary documents as proof of such facts, have been conveniently kept away from this Court.

 181. In the above context, it is relevant to note the observations of the Hon’ble Supreme Court in Sant Lal  Bharti Vs. State of Punjab AIR 1988 SC 485 = (1988) 1 SCC 366, as under: It must, however, be mentioned that the petition is lacking in particulars as to what premises the appellant owned and in respect of which premises the appellant is making the grievances. On this ground it is not possible to decide the question of vires canvassed before the High Court and repeated before us. A petition challenging the constitutional validity of certain provisions must be in the context of certain facts and not in abstract or vacuum. The essential facts necessary to examine the validity of the Act are lacking in this appeal. On this ground the petition was rightly rejected and we are not inclined to interfere with the order of the High Court on this ground alone. 182. A perusal of the show cause notice, the chronological list of dates and events, clearly reveals that the present case involves investigation into voluminous facts and perusal of numerous lengthy and complicated agreements. Based on the above, the question of chargeability of the transaction to tax and also the question of duty to deduct tax at source, can be determined. In the present case, the show cause notice, cannot be termed extraneous or irrelevant or erroneous on its face or not based on any material at all. 183. In this context, the following observations of  the Calcutta High Court in Assam Consolidated Tea Estates  Ltd. Vs. ITO ‘A’ Wards & Ors. 1981 ITR 699 (Cal), would be relevant:

 “15. Section 9(1) of the Act is a complicated provision applying to all income 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 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 which it is neither convenient nor desirable to decide in an application under Article 226.

 16…………………….

 17…………………….

 18…………………….

 19. Could it be said that the reasons given by the Income Tax Officer for his belief that the interest income is assessable under Section 9(1) and has escaped assessment due to the failure of the assessee to file its return are extraneous or irrelevant? I agree with Mr.Gupta that the question whether the  interest due on the unsecured loan stock is  assessable under Section 9(1) of the Act  or  not  is  not within  the scope of  this  application.  This Court has  only to be  satisfied that the impugned notices  are  on  their face erroneous and/or that the issuing  Income Tax Officer had no material for his  belief that any income has escaped assessment  due to any omission or failure on the part of  the assessee either to file its returns or to  disclose the primary material facts necessary  for such assessment.  in this case there is no  dispute that apart from the assessment year  1958-59 no returns were filed by the assessee.  Whether the Income Tax Officer should have  made enquiries on the basis of the information  received in connection with the assessments of  the Indian company is not germane to the  present question. it is for the assessee to  file  returns and  furnish the  necessary  particulars.  Very difficult questions of the  interpretation  and  application  of  the  provisions of Section 9(1) of the Act have  been raised and issues have been joined in  respect  thereof.  These  are  matters for  decision by competent tribunals and courts  cannot conveniently be decided by this Court  in its writ jurisdiction. however, the  case  of the impugned notice for the assessment year  1958-89 is quite different. The point is  covered by the decision of the Supreme Court  in Ranchhoddas’s case and it must be held that  the  Income  Tax  Officer  exceeded  his  jurisdiction in issuing that notice.  The rule  would, therefore, be made absolute only in the  case  of the notice for the assessment 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.”

 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 discharged with costs.

 186. After pronouncement of the judgment, the learned Senior Counsel Mr.Iqbal Chagla appearing on behalf of the Petitioner sought an extension of stay granted earlier by a period of eight weeks.

 187. In view thereof, the stay granted earlier to continue for a period of eight weeks from today.

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