2008 (12) TMI 3 - HC - Income Tax

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 - petitioner has withhold the information / documents deliberately - Petitioner accordingly was under obligation to withhold tax as required u/s 195.

Summary

Issues Involved:
1. Non-applicability of Section 201.
2. Extra-territorial application of Section 195.
3. Constitutional validity of the 2008 amendments to Sections 191 and 201.
4. Chargeability to tax in India.

Issue-wise Detailed Analysis:

I. Non-applicability of Section 201:
- Petitioner's Argument:
- Section 201 deems a person to be an "assessee in default" (AID) only in two cases: failure to deduct tax on dividends under Section 194 or failure to pay deducted tax to the Central Government under Section 200.
- The Petitioner argued that failure to deduct or withhold tax in any other case does not render a person an AID.
- The primary liability to pay tax remains with the payee, and the payer's liability arises only when the payee fails to pay the tax.
- The impugned Show Cause Notice under Section 201 was argued to be without jurisdiction as the payee had not been called upon to pay the tax, and thus, the Petitioner could not be deemed an AID.

- Respondent's Argument:
- Section 201 applies to any person who fails to deduct tax at source, not just those under Sections 194 and 200.
- The amendments in 2008 clarified that the payer could be deemed an AID if the payee fails to pay the tax.
- The Petitioner was argued to be an AID as the payee had not paid the tax, fulfilling the condition precedent for invoking Section 201.

II. Extra-territorial application of Section 195:
- Petitioner's Argument:
- Section 195 has no extra-territorial application and does not apply to offshore transactions between two non-residents involving capital assets and payments outside India.
- The Indian Parliament's competence to legislate extra-territorially must be clearly expressed, and there is a presumption against such extra-territorial application unless explicitly stated.
- The Petitioner argued that the term "person" in Section 195 should be contextually interpreted to exclude non-residents without a presence in India.

- Respondent's Argument:
- The Indian Income Tax Act applies to non-residents if the income has a source in India.
- Section 195 applies to any payment chargeable to tax in India, regardless of the payer's or payee's residence.
- The Petitioner had a nexus with India through its acquisition of interests in Indian companies, making Section 195 applicable.

III. Constitutional validity of the 2008 amendments to Sections 191 and 201:
- Petitioner's Argument:
- The 2008 amendments imposing retrospective liability on the payer were argued to be unconstitutional as they imposed a new and substantial burden retrospectively.
- The amendments were argued to be unreasonable, excessive, and harsh, violating Article 14 of the Constitution.
- The Petitioner contended that the amendments created an arbitrary classification, treating similarly situated persons differently based on the date of the transaction.

- Respondent's Argument:
- The amendments were clarificatory and did not introduce any new substantive liability.
- The retrospective application was justified to remove ambiguities and align with the legislative intent.
- The amendments did not violate Article 14 as they were based on rational grounds and aimed at ensuring tax compliance.

IV. Chargeability to tax in India:
- Petitioner's Argument:
- The transaction involved the transfer of share capital of a foreign company (CGP) and not a capital asset situated in India.
- The controlling interest in Indian companies is an incidence of shareholding and not a separate asset.
- The indirect transfer of controlling interest does not fall within Section 9(1)(i) of the Act, which requires a direct transfer of a capital asset situated in India.

- Respondent's Argument:
- The transaction was a transfer of interests in Indian companies, not just the shares of CGP.
- The transfer included tangible and intangible assets, including telecom licenses, brand, goodwill, and non-compete rights.
- The controlling interest and other assets in India were argued to be capital assets, making the transaction chargeable to tax in India under Section 9(1)(i).

Court's Conclusion:
- The Court found that the Petitioner had not demonstrated that the Show Cause Notice was without jurisdiction.
- The transaction was prima facie chargeable to tax in India as it involved the transfer of interests in Indian companies.
- The Court upheld the validity of the 2008 amendments, finding them to be clarificatory and not violative of Article 14.
- The Court directed the Petitioner to respond to the Show Cause Notice and produce the relevant agreements for proper adjudication.