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TMI Blog2016 (4) TMI 316X X X X Extracts X X X X X X X X Extracts X X X X ..... g refund. Therefore, there was no question of the CBDT not considering the applicability of the said circular as far as the Petitioner was concerned. These decisions, therefore, do not come to the aid of the Revenue to justify its rejection of the application made by the Petitioner. There is only one ground on which the CBDT rejected the Petitioner’s application for refund. This was that the penal interest was paid by the Petitioner as a result of violation/transgression of the Agreement and was, therefore, not exempt under Section 10(15)(iv)(c) of the Act. This is factually incorrect since Clause 27 of the Agreement itself provides for waiver, in the event of default, by SIFL subject to certain conditions. The penal interest was imposed as part of the conditions of the Agreement itself. Therefore, the payment of penal interest cannot be said to be for breach of the terms of the conditions but in terms of the conditions imposed for condoning such breach. The impugned order of the CBDT, therefore, proceeds on an erroneous interpretation of the clauses of the Agreement. The order of the CBDT does not state that the Petitioner otherwise does not satisfy the conditions contained ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to finance the cost of the Petitioner s tyre cord plant, which it was setting up at Gwalior, Madhya Pradesh. In terms of the Agreement dated 20th September, 1990, entered into between the Petitioner and SIFL as well as other banks, the Petitioner was granted a term loan facility of Japanese Yen 5 billion. Under the loan agreement, the entire proceeds of the loan facility were to be used for import of capital plant, equipment, raw materials and components for setting up a new nylon tyre cord unit at Malanpur and an expansion of an existing fibre glass plant unit at Timapur. The term loan was to be repaid in ten equal instalments. The Petitioner had a right to prepay the loan wholly or in part without premium or penalty by giving the lenders not less than 14 days notice of the sum that was to be prepaid. Interest on the loan was payable at a rate which was to be 0.5% per annum over the six months London Inter Bank Offer Rate (LIBOR). The Petitioner was also required to pay a commitment fee of 0.2% and the management fee. The agreement stipulated that all sums payable by the Petitioner under the agreement were to be paid without deduction or withholding any tax leviable in India. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lated ratio of actual indebtedness to net worth. For the financial year ending 30th June 1993 and the financial year ending 30th September 1994, this ratio was 318% and 316% respectively. Since the indebtedness ratio crossed 250%, the lenders imposed a normal penal interest of 1% from 1st July, 1993 onwards. The agency fee was also increased by additional one-time payment of US$ 8,000. As a result on 24th March 1995, the Petitioner wrote to the DEA seeking the approval for payment of penal interest as charged above from 1st July, 1993 onwards. On 7th April, 1995, the DEA replied to the Petitioner approving payment of penal interest @ 1% per annum on the outstanding amounts with effect from July 1, 1993, and onetime payment of USD 8,000 as additional agency fee to Sanwa International Finance Limited. Pursuant to the above approval, the Petitioner remitted a sum of ₹ 6,51,41,380 Japanese Yen. It is stated that tax thereon amounting to ₹ 49,51,049 was deducted at source and paid to the MoF/Respondent No. 3. 10. Meanwhile the Petitioner decided to disinvest the tyre cord division as it wanted to concentrate on its core business, viz., tyres. However, the Petitioner rea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d order before the Commissioner of Income Tax (Appeals) [CIT(A)] and also filed a rectification application before the ITO, (TDS) Mumbai under Section 154 of the Act. 14. The Petitioner s application under Section 154 of the Act was rejected by the ITO by an order dated 28th October, 1996. There were two reasons given in this order one was that since the Petitioner stated that the tax had been paid by it on behalf of SIFL, the refund of excess tax, if any, paid can only be made by the said party, on an application made by it under Section 237 of the Act. Attention was drawn to CBDT s circular No.285 dated 21st October, 1980 as to the circumstances when a person other than an Assessee could claim refund of tax. Since the Petitioner did not fall within the scope of the said circular its application for refund was not entertained. The Petitioner filed an appeal against the said order dated 28th October, 1996 before the CIT(A). 15. On 19th November 1996, the CIT, City-IV wrote to the Petitioner stating that it could declare itself as a representative assessee of SIFL under Section 161 of the Act and thereafter file refund claim/return with the non-resident refund circle under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act, 1961. Thus tax has correctly been deducted at source u/s.195 on interest paid to M/s. Sanwa and the question of refund does not arise. 23. This was virtually the same as the letter dated 8th December 1998 by the CBDT rejecting the plea for refund. Here it was pointed out that the payment of the penal interest was for transgressing the provisions of clause 18(F)(1)(a) of the Agreement with Sanwa. The consequential letter dated 16th February 1999, written by the DCIT to the Petitioner communicating the rejection of its application dated 9th October, 1998 for issue of refund has already been adverted to hereinbefore and has also been challenged by the Petitioner. Submissions of the Petitioner 24. Mr. S. Ganesh, learned Senior Advocate appearing for the Petitioner, submitted as under: i. The Petitioner had fulfilled all the conditions stipulated for payments made to a non-resident which would be exempt from tax in terms of Section l0(15)(iv)(c) of the Act. Accordingly, there was no basis for rejecting its claim. ii. The interest paid was for utilisation of the funds, which was in respect of import of capital goods which was one of the purposes set out in Section l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the ITO (TDS), rejecting the application for refund the Petitioner did not seek any remedy and allowed that order to become final. Instead only a rectification application was filed. Having not preferred an appeal against those orders before the CIT(A) there was no occasion for the Petitioner to have moved the CBDT under Section 119 of the Act for grant of refund. Accordingly, the entire proceedings were misconceived. 28. Ms. Malhotra placed reliance on the decisions in BASF (India) Ltd. v. W. Hasan, Commissioner of Income Tax (2006) 151 Taxman 31 (Bom) and Mardia Chemicals Ltd. v. Commissioner of Income Tax Anr. (2012) 26 taxmann.com 42 (Guj.). The thrust of the submissions of Ms. Malhotra on the basis of these decisions was that the Petitioner s application for refund had to be processed only in terms of the circulars that were in force at the time of making of such application. The subsequent circular including circular No.769 dated 6th August, 1998, would not apply in the case of the Petitioner since its application was made for the first time on 5th June, 1995. 29. Ms. Malhotra further submitted that the penal interest paid by the Petitioner was in the nature of comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reement 33. Clause 8(B) of the Agreement refers to Normal Interest Rate , which is linked to the LIBOR as already noticed. Clause 9 deals with the Fees to be paid. Clause 9(B) talks of the Management Fee ; 9(C) deals with the Participation Fees and 9(D) deals with the Agency Fee . Clause 10A makes it clear that all sums payable by the borrower shall be paid free of any restriction or condition and in particular without any deduction or withholding for or on account of any tax imposed, levied, collected withheld and under Clause 10(A)(3) without deduction or withholding except to the extent required by law on account of any other amount, whether by way of set off or otherwise. 34. Under Clause 10(B) of the Agreement Grossing-up of payments is envisaged. It states that if the borrower himself at any time deducts or withholds any tax in the sum payable, the borrower shall pay such additional amount as is necessary to ensure that the bank to which such payment is due is paid such additional amount equal to what it had received had no deduction been made. Clause 27 refers to Remedies, Waivers, Amendments and Consents . Clause 27B states that any provision of the Agreem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... subject to the conditions that might be stipulated for such waiver. It was on the strength of this clause that SIFL agreed to ignore the event of default on the condition that the Petitioner paid the additional rate of 1% interest for the period from1st July, 1993 to 31st December, 1994 and at the rate of 2% interest for the period from 1st January to 1st June, 1995. These payments were, therefore, in the nature of interest and would in any event be covered by the expression other charge in respect of the moneys borrowed occurring in Section 2(28A) of the Act. Consequently the objections raised by the Respondent on these grounds do not appear to be justified in law. The CBDT Circular of August 1998 40. The other major objection raised is that at the time when the application for refund was made, the CBDT circular No.769 dated 6th August, 1998 was not in force. Ms. Malhotra drew the attention of the Court to circular No.285 dated 21st October, 1980, which first stipulated the procedure for regulating refund of amounts paid in excess of tax deducted at source. She also referred to the subsequent circulars that had been issued, i.e., circular No.790 dated 20th April, 2000; c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eads as under: Sub: Application under Section 154 of the Income-tax Act, 1961 (The Act) Ref: Your letter dated 30.9.1996 Please refer to the above letter addressed to ITO, TOS-IV, Mumbai, endorsing copy of this letter. In this connection I have been directed by the CIT MC IV, Mumbai to inform you that you may declare yourself as a representative assessee of M/s.Sanwa International Finance Ltd., Hong-Kong U/s.161 of the Income-tax Act, 1961 and thereafter file the refund claim/return with non resident refund circle under the charge of CIT, MCIT,Mumbai. In case you decline to declare yourself as a representative assessee you may please approach the CBDT with your request in view of the powers vested with them U/s.119(2)(a) of the Income-tax Act, 1961. 43. It was pursuant to the above letter that on 17th December, 1996, the Petitioner addressed a letter to the CBDT under Section 119 of the Act. 44. Meanwhile the CIT(A) by the order dated 13th August, 1998, dismissed the appeal of the Petitioner treating the entire matter to be an administrative one and that if any wrong has been committed, in doing so, it can be addressed administratively. Here again the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was any doubt as to the amount to be deducted at source. 50. It appears to the Court that in the light of the law explained in GE India Technology Centre Private Limited (supra), the Petitioner in the present case was justified in going before the ITO with an application dated 14th September, 1998, requesting that the CBDT s circular No.769 dated 6th August, 1998 be applied. 51. It must also be noted at this stage that this circular No.769 dated 6th August, 1998 of the CBDT came as a result of a number of representations made to it for granting approval for refund of excess deduction of TDS. The circumstances noted in para 1(i) by the CBDT itself details where such refund appears to be justified is (a) where a contract is cancelled and no remittance is required to be made to the foreign collaborator; (b) where the contract is cancelled after the remittance is made and the foreign collaborator returns the remitted amount; and (c) where the TDS is found to be in excess for any other reason . Para 2 of the said circular acknowledges that a lot of hardship resulted where the Assessing Officer while assisting a foreign resident in whose case deduction was made at source having ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... impugned order of the CBDT 54. That brings us to the question of validity of the order passed by the CBDT rejecting the Petitioner s application for refund. In the first place it is required to be noticed that the CBDT, in fact, did not give the Petitioner any opportunity of being heard. The impugned order was not directly communicated to the Petitioner. The Petitioner got to know of it when a copy thereof was enclosed with the letter dated 16th February 1999 of the DCIT. 55. There is only one ground on which the CBDT rejected the Petitioner s application for refund. This was that the penal interest was paid by the Petitioner as a result of violation/transgression of the Agreement and was, therefore, not exempt under Section 10(15)(iv)(c) of the Act. This is factually incorrect since Clause 27 of the Agreement itself provides for waiver, in the event of default, by SIFL subject to certain conditions. The penal interest was imposed as part of the conditions of the Agreement itself. Therefore, the payment of penal interest cannot be said to be for breach of the terms of the conditions but in terms of the conditions imposed for condoning such breach. The impugned order of the CB ..... X X X X Extracts X X X X X X X X Extracts X X X X
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