9911796707
TMI Blog2011 (8) TMI 344X X X X Extracts X X X X X X X X Extracts X X X X ..... er No.1, the Department is seeking to bring within the tax net the purported income generated by the petitioner No.1 as capital gains arising from the transfer of shares of respondent No.4 which were held by the petitioner No.1. The contention of the petitioners is that such a transaction is not chargeable to tax in India when petitioner No.1, a non-resident company has transferred the share holding to another non-resident. However, that was not the issue canvassed before us. At present, the challenge to the validity of the aforesaid notice is confined on the ground that the respondent No.4 cannot be treated as representative assessee of the petitioner No.1 and therefore, the impugned notice is without any jurisdiction. We would, thus, like to take stock of the relevant facts surrounding this issue. 3. The first petitioner is a company incorporated in the State of New York in the United States of America its principal place of activity is the United States and it has business interests all over the world. It has been assessed to tax in India over the last several years in respect of its income taxable in India, as a non-resident, initially by the Deputy Commissioner of Inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the shares with the objective of acquiring of the BPO business of the petitioner is set out in Annexure-A to the writ petition. Though that may not be very relevant for deciding the controversy, for the sake of completing the narration of facts, we are reproducing the same as well: "Particulars of Series of Transactions Undertaken in December, 2004 1. The first step in the series of reorganization and restructuring transactions to consolidate petitioners‟ BPO business in a single Luxembourg holding company was the transfer by the second petitioner of the shares it owned in GECIS to GECIS India Investments by way of a gift. Certain individuals who were nominee shareholders of shares of GECIS likewise made a gift of the shares held by them to GECIS India Holdings GE CIS India Investments is a Mauritius incorporated company and a wholly owned subsidiary of GECIS India Holding, which is also incorporated in Mauritius and which, in turn, was set up as a wholly owned subsidiary of the second petitioner. The Second Petitioner had intimated to the Reserve Bank of India the factum of the gifts of the GECIS shares held by the First Petitioner as well as the nominee sha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... corporated in Luxembourg for a consideration which was secured by issue of promissory notes by GE Luxembourg Investment S.a.r.l. 8. GE Luxembourg Investments S.a.r.l thereafter transferred the preferred stock it held in GECIS Global Holdings to another company incorporated in Luxembourg called GECIS Global (Lux), and in consideration of such transfer was issued preferred and nominal common stock of GECIS Global (Lux). 9. These restructuring and reorganization transactions detailed in this Annexure A were taken by the various affiliates of the First and Second Petitioner pursuant to a Security Purchase Agreement dated November, 7, 2004 entered into between the First Petitioner, the Second Petitioner and certain of its affiliates and General Electric Capital Corporation of the one part, and Garuda Investments Company (which was subsequently substituted by GECIS Investments Co. (Lux), f the other part. 10. Ultimately 99.1% of the preferred stock and 60.6% of the nominal common stock held by GE Luxembourg Investment S.a.r.l in GECIS Global (Lux) was transferred to GECIS Investments Co. (Lux) for a consideration equivalent to its cost of acquisition. 11. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f CECIS by the second petitioner - a Mauritius company and certain nominee shareholders to GECIS India Investments and GECIS India Holdings, respectively (each a Mauritius incorporated company). Therefore, no income had accrued or arisen or can be deemed to accrue or arise in India. The Income Tax Department, on the other hand, maintains that it is a taxable event in India. 9. However, as pointed out above, we are not concerned with this aspect in the present proceedings. We are at a stage anterior to that as the question before us is as to whether the respondent No.4 can be treated as representative assessee of the first petitioner. 10. The first petitioner had filed its return of income for the assessment year 2005-06 on 29th October, 2005 with the Assessing Officer, having jurisdiction over the first petitioner‟s case, viz., the Assistant Director of Income Tax (International Taxation 3(1), Mumbai. The first petitioner declared a total income of Rs. 2,64,07,840/- that accrued to it from rendering certain technical services to GECIS and had filed with its return of income a computation of its total income as well as the Transfer Pricing Report required to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... said show cause notice, inter alia, stating that it had no obligation to deduct the tax at source in respect of such transactions between the petitioners on the one hand and General Atlantic Partners and Oak Hill Capital on the other hand. According to it, merely because by the said transaction, shareholding of respondent No.4 was transferred by one party to other, both being non-resident, the respondent No.4 could not be treated as representative assessee. Since none of the conditions specified in Section 13 of the Act were fulfilled. It was also submitted that the petitioner No.1 is not and had never been a direct shareholder of respondent No.4 and therefore, question of any income accruing or arising to the petitioner, which is chargeable to tax in India would not arise. 14. Nothing happened for almost six months. However, a letter dated 10.10.2007 was addressed by the respondent No.2 to respondent No.4 asking for some more information. It is averred in the petition that this letter could not be served upon the respondent No.4 and, therefore, it was again sent and served upon the respondent No.4 along with letter dated 26.10.2007. From this letter, the petitioners were i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se notice is not maintainable and the statute provides for efficacious remedy of appeal under the Act. It is also contended that writ petition is pre-mature as well. Maintainability is also challenged on the ground that disputed questions of fact arise and the High Court in exercise of its extraordinary jurisdiction under Article 226 of the Constitution of India would not exercise its discretionary powers in such a scenario. 18. The official respondents have also narrated the facts which led to the issuance of the show cause notice proposing to treat the respondent No.4 as the representative assessee. It is stated in this behalf that the respondent No.4, i.e., Genpact India was earlier known as GE Capital International Services (GECIS)/BPO company. The BPO company was created for providing BPO/IT-enabled services to petitioner No.1 and its affiliates with a paid up capital of Rs.3,60,00,000/-, comprising of 36,00,000 equity shares of Rs. 10 each. It was the captive BPO unit of the GE Group. That out of 36,00,000 shares, GE Capital International Mauritius (GECIM) (hereinafter referred to as „the Mauritius company") was holding 35,99,980 shares till 31.12.2004. The said ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e cash proceeds approximately $500 million. It also states that the parties aim to complete the transaction sometime in the next six months. Further, BPO company was carrying on a successful business and had potential to grow further. Its operations centres were not confined to Gurgaon only, but were started at other places also. It had hung reserves and surpluses. The petitioner No.1 through its various subsidiaries/affiliated companies sold 60% of its stake in GECIS/BPO company for approximately US$ 500 million. That on the basis of information collected during TDS proceedings and also information available in public domain, a prima facie belief was form that as per the provisions of Section 9(1)(i) of the Act, the income arising from these transactions, which otherwise was taxable in India but had not been offered to tax. The official respondents have maintained in the counter affidavit that conditions stipulated in Section 163 of the Act are satisfied and therefore, impugned show cause notice being perfectly valid, has rightly been issued. 19. Respondent No.4 has also filed the counter affidavit supporting the aforesaid legal stand taken by the petitioners questioning t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purpose of treating respondent No.4 as an agent of the petitioner No.1 had not been fulfilled. His submission was that Section 163 of the Act has to be read in conjunction with Section 161, which provides that the specified person can be treated as assessee "...as regards the income in respect of which he is a representative-assessee..." Therefore, an agent can only be a representative-assessee as regards the income in respect of which the alleged agent has business connection and/or from or through directly and/or indirectly the income was received. 23. In support of the aforesaid propositions, Mr. Salve relied upon the following case laws: (1) The Commissioner of Income Tax Vs. Currimbhoy Ebrahim and Sons [AIR 1936 P.C. 1]. (2) Ramnarayan Rajmal Vs. Commissioner of Income Tax [(1953) 24 ITR 442. (3) P. Subramania Chetty Vs. Commissioner of Income Tax [(1962) 46 ITR 724 Mad.] (4) C.R. Nagappa Vs. Commissioner of Income Tax [(1969) 73 ITR 626 (SC)]. (5) CIT Vs. Toshoku Ltd. [(1980) 125 ITR 525] (6) CIT Vs. Fertilizers & Chemicals (Travancore) Ltd. [(1987) 166 ITR 823. 24. Mr. Mohan Parasaran, learned A.S.G. pressed fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... est letter dated 20.02.1998 of M/s GE Capital International Services. As per the amendment, the foreign collaborators were M/s GE Capital International (Mauritius), Mauritius and M/s GE Capital Indian Service, Netherlands. The approved items of manufacture were computer software (data entry, conversion, data processing, data analysis, business support, billing, etc.) GE Capital International Services (Genpact India) has rendered IT-enabled services to General Electric Corporation and its affiliated companies since its incorporation in India. During the year ended 31.03.2005, the income of respondent No.4 form IT- enabled services were of Rs.13,518,433,002/-. Such income was Rs.12,788,233,532/- for the year ended 31.03.2004. The accounts of the company show the following transactions with the related parties with regard to each income: Particulars Holding Companies Fellow subsidiary companies 31st March, 2005 31st March, 2004 31st March, 2005 31st March, 2004 Income from IT enabled services 6,153,984,825 3,675,372,862 7,129,591,134 8,746,058,412 Further, the respondent No.4 (Genpact India) was a wholly owned subsidiary of the first petitioner and th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich income is derived by him. There can, therefore, be more than one assessment in respect of income accrued or arisen to a non-resident provided that there is more than one representative assessee. Direct assessment on the non-resident in respect of other income would not affect the jurisdiction of the Income Tax Officer to assess the agent of the non-resident on income arising to the non-resident through him. Moreover, the respondent No.2 exercises jurisdiction in respect of persons being non-residents including foreign companies within the meaning of sub-section (23A) of Section 2 of the Act and having a permanent establishment "in terms of the applicable Double Taxation Avoidance Agreement in the areas lying within the territorial limits of National Capital Territory of Delhi or having a business connection" or having any source of income accruing or arising or deemed to be accruing or arising in the areas lying within the territorial limits of National Capital Territory of Delhi. Respondent No.4 (Genpact India) is a company incorporated under the Companies Act, 1956 and having its registered office at Delhi Information Technology Park, Shastri Park, Delhi - 110053. Therefore, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isions contained in this Chapter, be levied upon and recovered from him in like manner and to the same extent as it would be leviable upon and recoverable from the person represented by him. Right of representative assessee to recover tax paid. 162.(1) Every representative assessee who, as such, pays any sum under this Act, shall be entitled to recover the sum so paid from the person on whose behalf it is paid, or to retain out of any moneys that may be in his possession or may come to him in his representative capacity, an amount equal to the sum so paid. (2) Any representative assessee, or any person who apprehends that he may be assessed as a representative assessee, may retain out of any money payable by him to the person on whose behalf he is liable to pay tax (hereinafter in this section referred to as the principal), a sum equal to his estimated liability under this Chapter, and in the event of any disagreement between the principal and such representative assessee or person as to the amount to be so retained such representative assessee or person may secure from the Assessing Officer a certificate stating the amount to be so retained pending final settlement of the liabil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the non-resident for the purposes of the Act. However, merely because a person is an agent or is to be treated as an agent, it would lead to an automatic conclusion that he becomes liable to pay taxes on behalf of the non-resident. That would only mean that he would be treated as representative assessee. However, liability of such a representative assessee only if the eventualities stipulated in Section 161 of the Act are satisfied. Section 161 of the Act makes a representative assessee liable only "as regards the income in respect of which he is a representative assessee". 30. Of course, once a representative assessee is held liable, then he will be liable in the same manner as a non-resident and tax shall be levied and recovered from him in the same manner it could be recovered from the person represented by him. Since tax is recovered from such a representative assessee treating him as agent of other person, Section 162 of the Act gives representative assessee right to recover the sum paid by him from the person on whose behalf it is paid. This Section even makes a provision allowing representative assessee to retain out of any moneys that may be in his possession or may ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vision existed in the Income Tax Act 1922 which repeatedly came up before the Courts for interpretation. We may start our discussion from the Privy Council‟s judgment rendered in 1936. Name of the case is Commissioner of Income Tax, Bombay Presidency, and Aden Vs. Currimbhoy Ebrahim and Sons, Ltd. [AIR 1936 Privy Council 1]. That was a case where the respondent company was assessed as agent of His Exalted Highness the Nizam of Hyderabad. The order was made in respect of income tax for the year of assessee 1931-32. Two items were included in the order, viz: (i) The sum of Rs.27,960/- being income tax claimed to be due from the Nizam under the head "property" in respect of house property in Mumbai of which he was the owner. (ii) A sum of Rs.3,15,214/- being the amount received in the year of account by the Nizam from the respondent company as interest due upon a loan of Rs.50,00,000 made by Nizam to the respondent company upon the terms of a written instrument dated 16.08.1929. 33. The question was as to whether the assessee could be treated as representative assessee qua the interest income earned by the Nizam in the aforesaid circumstances. As pointed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had been rightly appointed an agent under Section 43 of the Income Tax Act, 1922 (which corresponds to Section 161 of 1961 Act). There was, thus, a business connection between the assessee/agent and the non-resident. However, the question was as to whether income which accrues to or earned by non-resident from business done through parties other than the agent and whether the appellant could be treated as representative assessee/agent. Answering this question in the negative, the Court held that even if because of business connection such an appellant is treated as agent, its liability was restricted to the income earned through his agency, i.e., income arising in respect of head qua which he was an agent. The Court relied upon the judgment of Privy Council in Currimbhoy Ibrahim & Sons Ltd. (supra) for arriving at this conclusion. The Court was of the opinion that provisions of Section 42 incorporated the principle of „vicarious liability‟ and the limit of that liability was that the agent must be concerned with the head in respect of which the principal is sought to be taxed. There was an interesting argument raised by the Department, viz., if this be accepted, then it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ax Act of 1961 and the same provisions, viz., Sections 160 and 161 of the Act, though these provisions came up for interpretation in the context of assessment of income at the hands of trustee under Section 64(v) of the Act. We may quote the following passage from the said judgment for our benefit: "14. In our view Chagla C.J. was right in observing in Balwantrai Jethalal Vaidya's case in dealing with the scheme of section 41 of the Income- tax Act, 1922, that "....... it is clear that every case of an assessment against a trustee must fall under section 41, and it is equally clear that, even though a trustee is being assessed, the assessment must proceed in the manner laid down in Chapter III.... Section 41 only comes into play after the income has been computed in accordance with Chapter III. Then the question of payment of tax arises and it is at that stage that section 41 issues a mandate to the taxing department that, when they are dealing with the income of a trustee, they must levy the tax and recover it in the manner laid down in section 41." 37. The issue came up for consideration, in a more direct manner, before the Supreme Court in the case of Commissione ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r of Income Tax Vs. Fertilizers & Chemicals (Travancore) Ltd. [166 ITR 823]. In that case, the assessee-company had entered into a collaboration agreement with a foreign company for construction of a synthesis gas plant. The assessee was to pay certain amount to the foreign company for construction of a synthesis gas plant. The assessee was to pay certain amount to the foreign company. The Income-tax Officer treated the assessee- company as the agent of the non-resident foreign company under Section 163 of the Act and assessed the aforesaid amount in the hands of the assessee. The Appellate Assistant Commissioner cancelled the assessment as also the orders under section 163 on the ground that the assessee company could not be treated as an agent of the foreign company as there was no business connection between the foreign company and the assessee. The Appellate Assistant Commissioner also found that since the non-resident foreign company had already been assessed directly in India, the said foreign company should not have again been assessed "through an agent". The Appellate Tribunal upheld the order of the Assistant Commissioner. On a reference, the High Court held that the Tribu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er to become liable as a representative assessee, a person must be situated such as to fall within the definition of a representative assessee; (ii) The income must be such as is taxable under Section 9; (iii) The income must be such in respect of which such a person can be treated as a representative assessee; (iv) The representative assessee has a statutory right to withhold sums towards a potential tax liability; (v) Since the liability of a representative assessee is limited to the profit representative assessee, there can be multiple representative assessees in respect of a single non-resident entity - each being taxed on the profits or gain relateable to such representative assessee. 42. The scheme underlying the aforesaid provisions is explained with clarity and precision in the commentary on Section 163 of the Act in "The Law and Practice of Income Tax (Kanga and Palkhivala at page No.1280, English Edition), the relevant extract is reproduced: "...Thus Section 163 really provides only the machinery for giving effect to Sections 160 and 161, and the mere appointment of an agent under Section 163 would be of no consequence unles ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... espect of which the alleged agent has business connection and/or from or through directly and/or indirectly the income was received. 44. At this stage, it would be necessary to deal with another contention of Mr. Parasaran, questioning the maintainability of this writ petition at this stage on the ground that it is pre-mature proceeding only a show cause notice has been issued and the facts are yet to be ascertained/investigated. We are not impressed with this argument either. We may point out that the petitioners have gone to the extent of arguing that it has no business connection with respondent No.4. However, we have proceeded on the basis that allegations in the show cause notices to this effect are correct. Even then, the ingredients of Section 161 are not satisfied as the petitioner as assessee could be taxed only as regards the income and in respect of which he is a representative assessee. No case is made out by the Department that in respect of transaction in question, viz., transfer of share to third party, that too, outside India. Respondent No.4 is sought to be taxed as representative assessee when he had no role in the said transfer. Merely because those share ..... X X X X Extracts X X X X X X X X Extracts X X X X
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