2011 (9) TMI 536 - AT - Income Tax

Withdrawal of exemption by Central Government - Utilization of ECB - Interest income being exempt in the hands of non-resident investors - Held That - by imposing a condition by Dy. Director (ECB) during the progress of the scheme was like changing the rules of the game in mid-way and the change of the rule was in respect of a game already played to alter its outcome. A retrospective or ex post facto change in such a manner is an arbitrary approach having no legal sanctity. First of all we want to observe that if the bureaucracy or executive is acting in an unjustifiable manner then the only course left to a citizen is to approach the judiciary for legitimate redressal. This is what exactly had been done in this appeal by the appellant company. It was catastrophic to withdraw the exemption already granted u/s.10(15)(iv)(f). Due to the withdrawal of the exemption the impugned order u/s.195 (2) now under dispute was passed directing to deduct withholding tax @ 20%. To arrive at a logical conclusion first we hold that considering the totality of the facts circumstances conditions of the scheme evidences of utility of the funds and the legal matrix of the case the withdrawal of exemption was unwarranted. Consequent there upon we also hold that the appellant company was not liable to deduct withholding tax @ 20% in respect of the interest payment of US 1, 05, 902 to M/s. Deutsche Bank - AG. With the result. - Decided in favor of assessee The Hon ble Supreme Court in Radhasoami Satsang v. CIT (1991 -TMI - 5353 - SUPREME Court) has held that Strictly speaking res judicata does not apply to income-tax proceedings. Though each assessment year being a unit what was decided in one year might not apply in the following year; where a fundamental aspect permeating through the different assessment years has been found as a fact one way or the other and parties have allowed that position to be sustained by not challenging the order it would not be at all appropriate to allow the position to be changed in a subsequent year.

Issues Involved:
1. Withdrawal of tax exemption under Section 10(15)(iv)(f) of the Income Tax Act.
2. Taxability of interest payments to non-resident lenders.
3. Jurisdiction and authority of the Tribunal to adjudicate the matter.
4. Validity of the withdrawal of exemption by the Central Government.
5. Applicability of the doctrine of "reading down" and judicial review.

Detailed Analysis:

1. Withdrawal of Tax Exemption under Section 10(15)(iv)(f) of the Income Tax Act:
The primary issue revolves around the withdrawal of tax exemption granted to the interest payments made by the appellant under Section 10(15)(iv)(f) of the Income Tax Act. The appellant had raised foreign currency loans for financing capital goods and services, which were initially exempted from tax. However, the Government of India later withdrew this exemption through a letter dated 5.2.2002.

2. Taxability of Interest Payments to Non-Resident Lenders:
The Assessing Officer (AO) held that after the withdrawal of the exemption, the interest payments made by the appellant were liable to tax in India. The AO completed the assessment by taxing the interest income at Rs. 18,90,161/- under the relevant Double Taxation Avoidance Agreement (DTAA) rates. The appellant contested this, arguing that the interest payments should remain exempt as per the original approval.

3. Jurisdiction and Authority of the Tribunal to Adjudicate the Matter:
The Tribunal examined whether it had the jurisdiction to adjudicate the matter in light of the Delhi High Court's decision and the subsequent Special Leave Petition (SLP) filed before the Supreme Court. The Tribunal concluded that it had the jurisdiction to decide the appeal, as the quasi-judicial authorities were not denuded of their powers by the Central Government's decision to withdraw the exemption.

4. Validity of the Withdrawal of Exemption by the Central Government:
The Tribunal scrutinized the validity of the Central Government's decision to withdraw the exemption. It noted that the exemption was granted to non-resident lenders, not the borrowers. Therefore, any default by the borrower should not affect the lenders' tax exemption. The Tribunal emphasized that the approval of the loan agreement by the Central Government remained intact, and the subsequent withdrawal of exemption was arbitrary and unjustified.

5. Applicability of the Doctrine of "Reading Down" and Judicial Review:
The Tribunal applied the doctrine of "reading down," which allows judicial authorities to interpret rules and notifications in a manner that aligns with the main provisions of the statute. It concluded that the withdrawal of the exemption was contrary to the provisions of Section 10(15)(iv)(f) and thus invalid. The Tribunal also referenced several judicial precedents to support its view that subordinate legislation (rules, notifications) must not contradict or diminish the statute's provisions.

Conclusion:
The Tribunal upheld the CIT(A)'s decision, confirming that the interest payments made by the appellant to non-resident lenders under the approved ECB loan agreements continued to be exempt from tax. The Tribunal dismissed the Revenue's appeals, emphasizing that the withdrawal of the exemption was unwarranted and that the appellant was not liable to deduct withholding tax on the interest payments.

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