Full Judgment Text
2010:BHC-OS:4835-DB
1
IN THE HIGH COURT OF JUDICATURE AT BOMBAY
O. O. C. J.
WRIT PETITION (LODG.) NO.799 OF 2010
Mckinsey & Company Inc.
Indian Operations / Branches
(‘Mckinsey India’)
India Branch Office,
st
21 floor, Express Towers,
Nariman Point, Mumbai 21. ..Petitioner.
Vs.
1. Union of India,
Ministry of Finance,
Government of India,
New Delhi 110 001.
2. Deputy Director of Income Tax,
(International Taxation)4(1),
st
133, Scindia House, 1 floor,
Ballard Pier, N.M. Road,
Mumbai 400 038.
3. Director of Income Tax
(International Taxation),
Scindia House, N.M. Road,
Mumbai 400 038. ..Respondents.
.....
Mr. Porus Kaka with Mr. Dinesh Chawla and Ms Anushka Sharda i/b
DSK Legal for the Petitioner.
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Mr. Suresh Kumar for the Respondents.
.....
CORAM : DR. D.Y.CHANDRACHUD &
J.P. DEVADHAR, JJ.
th
13 April, 2010.
ORAL JUDGMENT (Per. DR.D.Y.CHANDRACHUD, J.):
1. Rule, made returnable forthwith. By consent of the learned
counsel, taken up for hearing and final disposal.
2. The Petitioner is a nonresident company incorporated
under the laws of the United States of America. The Petitioner
operates in India with branches at New Delhi and Mumbai. According
to the Petitioner it has received all the requisite approvals from the
Government of India and the Reserve Bank. The Petitioner is engaged
in the business of providing consultancy on strategic planning and
related activities. The Petitioner has filed returns in India from
Assessment Year 199394. On 8 January 2010 the Petitioner made an
application under Section 195(3) of the Income Tax Act, 1961 for
Assessment Year 201112 to the Second Respondent – the Deputy
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Director of Income Tax, International Taxation – 4(1) – seeking a nil
withholding certificate for payments received for services rendered to
clients/ customers, group entities and for interest received on deposits
made with banks. The Petitioner has received certificates under
Section 195(3) for Assessment Year 199899 to Assessment Year
201011. During the course of the proceedings the Petitioner was
called upon to furnish details, by a letter dated 27 January 2010. The
Petitioner filed its response on 3 February 2010. On 24 March 2010
the Petitioner was called upon to show cause as to why its application
for a nil withholding certificate under Section 195(3) should not be
rejected. The Petitioner filed its response on 25 March 2010. By an
order dated 29 March 2010, the Second Respondent has rejected the
application of the Petitioner for the grant of a nil withholding
certificate for Assessment Year 201112.
3. The impugned order rejecting the application of the
Petitioner for the grant of a certificate under Section 195(3) contains
in paragraph 3 the following reasons for declining the request :
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“In this connection, in your case, it is seen that for A.Yr.
20062007, the draft assessment order is completed and a
demand has been raised to the tune of Rs.44,98,82,376/
(though the matter is pending before the DRP). In the past
also for A.Y. 20052006, the gross demand raised was Rs.
26,23,47,269/ and after payments till 31.3.2009, the net
balance outstanding demand is Rs.9,33,24,646/, which is
under MAP proceedings. This indicates that in the past you
did not pay proper advance tax, therefore, your case needs
to be examined with reference to Rule 29B especially the
sub rule 4 laying down the condition regarding prejudicial
to the interest of revenue. The TDS will ensure the nature
of receipts and also be clear from the TDS certificates that
all the receipts are accounted for by you and no demand
will be outstanding in your case.”
4. Counsel appearing on behalf of the Petitioner submitted
that the impugned order is, ex facie, contrary to law. The submission
before the Court is that (i) The order declining a certificate under
Section 195(3) is contrary to the statutory provision since the
Petitioner has complied with all the conditions requisite to the grant
of a certificate under Rule 29B; (ii) A certificate has been issued to
the Petitioner consistently for the last twelve Assessment Years under
Section 195(3) and there is no justification in law for the denial of a
certificate for Assessment Year 201112; (iii) The denial of a
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certificate in substance violates the provisions of the direct tax treaty
between India and the U.S. since the effect of the impugned order is
the imposition of a withholding tax with respect to matters which are
pending at the Mutual Agreement Procedure (MAP) Level; (iv) The
reasons which have been set out in the impugned order are, ex facie,
perverse; (v) The Assessing Officer has relied upon a draft assessment
order which has been passed for Assessment Year 200607. The order
being a draft order, no demand could be raised on the basis of the
order; (vi) The Assessing Officer has also relied upon an assessment
order for Assessment Year 200506 which is also subject to a Mutual
Agreement Procedure (MAP) initiated by the Petitioner; (vii) The
nature of the receipts to which the Assessing Officer has made a
reference has been duly considered both at the inter governmental
level and in an order of the Assessing Officer. On these grounds, the
exercise of jurisdiction by the Second Respondent to deny a certificate
under Section 195(3) has been called into question.
5. An affidavit in reply has been filed by the Second
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Respondent. Counsel appearing on behalf of the Revenue has
supported the order of the Second Respondent and has made a
reference to the reply which has been filed in response to the Petition.
6. Section 195(1) of the Income Tax Act, 1961 provides that
any person responsible for paying to a nonresident, not being a
company, or to a foreign company, any interest or any other sum
chargeable under the provisions of the Act, other than income under
the head of salaries, shall at the time of credit of such income to the
account of the payee or at the time of payment, deduct income tax
thereon at the rates in force. Sub section (3) provides that subject to
the rules which are made under sub section (5) a person entitled to
received a sum on which income tax has to be deducted under sub
section (1) may make an application to the Assessing Officer for the
grant of a certificate authorizing him to receive such sum without
deduction of tax. Where any such certificate is granted, every person
responsible for paying such sum to the person to whom the certificate
is granted shall, so long as the certificate remains in force, make
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payment of such sum without deducting tax thereon under sub
section (1). A certificate under sub section (3) is liable to remain in
force till the expiry of the period specified therein or, in the event that
it is cancelled prior to that date, till the cancellation. Under sub
section (5) the Central Board of Direct Taxes is empowered to make
rules specifying the cases in which and the circumstances under
which an application may be made for the grant of a certificate under
sub section (3) and the conditions subject to which a certificate may
be granted.
7. In exercise of the rule making power, Rule 29B has been
framed. Under sub rule (1) of Rule 29B a person entitled to receive
interest or any other sum on which income tax has to be deducted
under Section 195(1) is permitted to make an application for the
grant of a certificate under sub section (3) of Section 195 if he fulfills
the conditions specified in sub rule (2), authorizing him to receive
without deduction of tax such income as is referred to therein. A
person who carries on business or profession in India through a
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branch is permitted to make an application for the grant of a
certificate under sub section (3) of Section 195 in respect of income
received not being interest or dividends. Sub rule (2) of Rule 29B
stipulates the conditions which are required to be fulfilled before a
certificate can be granted. Sub rule (2) is to the following effect :
“(2) The conditions referred to in subrule (1) are the
following, namely :
(i) the person concerned has been regularly assessed
to incometax in India and has furnished the returns of
income for all assessment years for which such returns
became due on or before the date on which the application
under subrule (1) is made;
(ii)he is not in default or deemed to be in default in
respect of any tax (including advance tax and tax
payable under section 140A), interest, penalty, fine or
any other sum payable under the Act;
(iii)he has not been subjected to penalty under clause
(iii) of subsection (1) of section 27;
(iv)where the person concerned is not a banking
company referred to in clause (i) of subrule (1)
(a) he has been carrying on business or profession in
India continuously for a period of not less than five
years immediately preceding the date of the
application, and
(b) the value of the fixed assets in India of such
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business or profession as shown in his books for the
previous year which ended immediately before the
date of the application or, where the accounts in
respect of such previous year have not been made up
before the said date, the previous year immediately
preceding that year, exceeds fifty lakhs of rupees.”
8. Under sub rule (4) the Assessing Officer is vested with the
discretion to give a certificate authorizing the person concerned to
receive the income without deduction of tax under Section 195(1) if
he is satisfied that all the conditions laid down in sub rule (2) are
fulfilled and the issuance of a certificate will not be prejudicial to the
interests of the Revenue.
9. The conditions which have been spelt out in sub rule (2) of
Rule 29B are that (i) The person concerned must be regularly
assessed to income tax in India and ought to have furnished returns
of income for Assessment Years for which the returns became due
prior to the date on which an application under sub rule (1) is made;
(ii) There should be no default or deemed default in respect of any
tax, interest, penalty, fine or sum payable under the Act; (iii) No
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penalty ought to have been imposed under Section 271(1)(iii) and
(iv) Where the person is not a banking company, he ought to be
carrying on business or profession in India continuously for atleast
five years prior to the date of the application and the value of the
fixed assets must be in excess of Rs.50 lacs for the previous year
ending immediately prior to the date of the application.
10. Now it has not been disputed before the Court that the
Petitioner has been regularly assessed to income tax in India and has
furnished its returns of income for all the Assessment Years in
question. The fact that the Petitioner has not been subjected to a
penalty under Section 271(1)(iii); that the Petitioner carries on
business for a period in excess of five years in India and that the value
of its fixed assets is in excess of the threshold prescribed is not in
dispute. The impugned order that was passed by the Second
Respondent relies essentially on two circumstances for the denial of a
certificate under Section 195(3). The first circumstance is that for
Assessment Year 200607 a draft assessment order was completed
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and a demand has been raised in the amount of Rs.44.98 lacs. Ex
facie, the order itself makes it clear that what has been issued is a
draft assessment order and that the matter in question is pending
before the Dispute Resolution Procedure.
11. The second circumstance to which a reference has been
made is that for Assessment Year 200506 a gross demand of Rs.
26.23 Crores was raised and after accounting for payments which
were made until 31 March, 2009, the net balance outstanding was Rs.
9.33 Crores which is under the Mutual Agreement Procedure (MAP).
In order to consider as to whether there is any basis or tenability in
the second ground which has been set out in support of the order, a
reference to the relevant provisions of the Memorandum of
Understanding that was arrived at between the Government of India
and the U.S. on 25 September, 2002 would be in order. Before
referring to the Memorandum of Understanding it would be necessary
to note that Section 90 of the Act inter alia empowers the Central
Government to enter into an agreement with the Government of any
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country outside India for the grant of relief in respect of income on
which have been paid both income tax under the Act and income tax
in that country, as the case may be, or income tax chargeable under
the Act and under the corresponding law in force in that country, in
order to promote mutual economic relations, trade and investment.
The MOU which was entered into between the Government of India
and the U.S. on 25 September 2002 is in pursuance of the Convention
for the Avoidance of Double Taxation. The object of the MOU is to
ensure the efficient processing of the Mutual Agreement Procedure
(MAP) cases, which is to be facilitated by deferring assessment or by
suspending collection of any amount of tax including related interest
or penalties for taxable years which form the subject matter of MAP
proceedings. Recital B to the MOU inter alia stipulates that the
competent authorities have arranged and desired to agree with regard
to amounts of tax covered under Article 2 of the Convention and
potentially payable to the Government of India, that “the Assessing
Officer will suspend collection until putting into effect a mutually
agreed disposition on the MAP proceedings concerning the amounts
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in question”. The MOU provides that the tax authorities in the two
countries would retain the right to demand security in order to avoid
prejudice to the interest of their respective governments. Under
clause (2) in India as security, a tax payer is required to provide an
irrevocable bank guarantee of a scheduled bank to secure the claim of
the Revenue pending the disposition of the MAP. Under Clause (6) of
the MOU the taxes identified inter alia in recitals are to include but
are not limited to tax demands and withholding tax. This Court has
been informed during the course of the hearing that in respect of
Assessment Year 200506 the Petitioner has invoked the Mutual
Agreement Procedure and in pursuance of the provisions of the MOU
a bank guarantee in the amount of Rs.15.67 Crores has been
furnished. A copy of the bank guarantee is annexed to the
proceedings in the petition.
12. There is merit in the submission which has been urged on
behalf of the Petitioner that the order which has been passed by the
Assessing Officer in the present case discloses a complete non
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application of mind to the provisions of the inter governmental MOU
dated 25 September 2002 and the governing principles stipulated in
Rule 29B. The Petitioner having invoked the Mutual Agreement
Procedure (MAP), the consequence under the MOU between the
Government of India and the Government of the U.S. is a suspension
of the collection of tax demands and withholding taxes on income.
The Petitioner invoked the provisions of Article 27 of the U.S. India
Tax Treaty for Assessment Year 200506 by a communication dated
24 February, 2009. In a response dated 20 March, 2009 the Internal
Revenue Service in the Department of Treasury of the U.S.
Government acknowledged receipt of the application for competent
authority assistance and stated that the Government of India was
being requested to intervene to suspend collection actions on such
portion until the proceeding was completed. The Petitioner was
granted certificates under Section 195(3) both before and after the
assessment order was passed for Assessment Year 200506. The
Assessing Officer has declined to grant a certificate under Section
195(3) on the ground that the balance outstanding for Assessment
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Year 200506 is Rs.9.33 Crores. The Assessing Officer has
acknowledged the pendency of MAP proceedings. The basis on which
a certificate under Section 195(3) was declined is, ex facie, contrary
to law and amounts to a patent disregard of the binding provisions of
the MOU between the Governments of India and the U.S.
13. Counsel appearing on behalf of the Petitioner has also
urged before the Court that the effort of the Assessing Officer to refer
to the nature of the receipts is misconceived since this has been dealt
with in the assessment order passed for Assessment Year 2003 on 24
March 2006 by the Assessing Officer. The assessment order, in
paragraph 2.1, records that the competent authorities of India and
the U.S. have concluded by mutual agreement, on the application
filed by the assessee that the income of the assessee from its Indian
operations should be computed on net income basis in India. The
Assessing Officer has also made a reference to the fact that the
conclusion of the competent authorities and the terms of the
settlement have been documented by a letter dated 16 December
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2005 issued by the Government of India in the Ministry of Finance,
Department of Revenue. The assessee received a letter dated 24
January 2006 from the Department of Treasury, Internal Revenue
Service, Washington D.C. a copy of which was stated to be filed
before the Assessing Officer on 16 February 2006. We need not delve
any further into this aspect of the matter.
14. We have indicated the circumstances on the basis of which
this Court has arrived at the conclusion that the basis on which a
certificate has been declined to the Petitioner under Section 195(3) is
manifestly misconceived. The impugned order ignores relevant
provisions of law, more particularly of Rule 29B, does not take into
account the legal implications out of the MOU dated 25 September
2002 between the Government of U.S. and the Government of India
and disregards issues which were settled in the past as a result of the
Mutual Agreement Procedure between the two governments.
15. Counsel appearing on behalf of the Revenue has relied
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upon an order passed by this Court in Maharashtra State Electricity
Distribution Company Limited v. Commissioner of Income Tax
(Writ Petition 256 of 2009 decided by a Division Bench on 27 April,
2009). The order of the Division Bench records that the alternative
remedy that was available in that case was a statutory appeal under
Section 246(1) and it was in that circumstance that this Court
considered it appropriate not to exercise the extra ordinary writ
jurisdiction. No statutory appeal is available against the order that is
impugned in the present case. That apart, the exhaustion of
alternative remedies is a matter of judicial discretion. In a case such
as the present, the record before the Court clearly discloses that the
denial of a certificate under Section 195(3) is without considering the
relevant provisions of law and has been based on considerations
which are extraneous to a lawful exercise of power.
16. Counsel appearing on behalf of the Petitioner urged that in
these circumstances it would be appropriate and proper for this
Court to direct the grant of a certificate under Section 195(3).
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Having heard counsel appearing on behalf of the assessee and counsel
appearing on behalf of the Revenue, we are of the view that the
appropriate course of action for this Court would be to quash and set
aside the impugned order declining the grant of a certificate and to
direct the Assessing Officer to pass a fresh order in accordance with
law after furnishing an opportunity of being heard to the Petitioner.
The Court has been apprised of the fact that the denial of a certificate
under Section 195(3), despite the grant of such a certificate for nearly
twelve years in the immediate past would have serious ramifications
to the business operations of the Petitioner. The earlier certificate
that was granted to the Petitioner for Assessment Year 201011 on 13
March 2009 has come to an end on 31 March 2010. Having regard
to this circumstance, we direct that the Assessing Officer shall pass
fresh orders within a period of one week from today. The Court has
been informed by counsel appearing on behalf of the Revenue that
the Assessing Officer holding regular charge is on medical leave until
the middle of May 2010 and that charge of the office is being held by
another officer. We clarify that the order which is to be passed in
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compliance with the directions issued by this Court may be passed by
the officer holding charge in the matter.
17. Rule is accordingly made absolute in the aforesaid terms
and in terms of the directions set out earlier. The impugned order
dated 29 March 2010 is quashed and set aside.
In the circumstances of the case, there shall be no order as
to costs.
(Dr. D.Y.Chandrachud, J.)
(J.P. Devadhar, J.)
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IN THE HIGH COURT OF JUDICATURE AT BOMBAY
O. O. C. J.
WRIT PETITION (LODG.) NO.799 OF 2010
Mckinsey & Company Inc.
Indian Operations / Branches
(‘Mckinsey India’)
India Branch Office,
st
21 floor, Express Towers,
Nariman Point, Mumbai 21. ..Petitioner.
Vs.
1. Union of India,
Ministry of Finance,
Government of India,
New Delhi 110 001.
2. Deputy Director of Income Tax,
(International Taxation)4(1),
st
133, Scindia House, 1 floor,
Ballard Pier, N.M. Road,
Mumbai 400 038.
3. Director of Income Tax
(International Taxation),
Scindia House, N.M. Road,
Mumbai 400 038. ..Respondents.
.....
Mr. Porus Kaka with Mr. Dinesh Chawla and Ms Anushka Sharda i/b
DSK Legal for the Petitioner.
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2
Mr. Suresh Kumar for the Respondents.
.....
CORAM : DR. D.Y.CHANDRACHUD &
J.P. DEVADHAR, JJ.
th
13 April, 2010.
ORAL JUDGMENT (Per. DR.D.Y.CHANDRACHUD, J.):
1. Rule, made returnable forthwith. By consent of the learned
counsel, taken up for hearing and final disposal.
2. The Petitioner is a nonresident company incorporated
under the laws of the United States of America. The Petitioner
operates in India with branches at New Delhi and Mumbai. According
to the Petitioner it has received all the requisite approvals from the
Government of India and the Reserve Bank. The Petitioner is engaged
in the business of providing consultancy on strategic planning and
related activities. The Petitioner has filed returns in India from
Assessment Year 199394. On 8 January 2010 the Petitioner made an
application under Section 195(3) of the Income Tax Act, 1961 for
Assessment Year 201112 to the Second Respondent – the Deputy
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Director of Income Tax, International Taxation – 4(1) – seeking a nil
withholding certificate for payments received for services rendered to
clients/ customers, group entities and for interest received on deposits
made with banks. The Petitioner has received certificates under
Section 195(3) for Assessment Year 199899 to Assessment Year
201011. During the course of the proceedings the Petitioner was
called upon to furnish details, by a letter dated 27 January 2010. The
Petitioner filed its response on 3 February 2010. On 24 March 2010
the Petitioner was called upon to show cause as to why its application
for a nil withholding certificate under Section 195(3) should not be
rejected. The Petitioner filed its response on 25 March 2010. By an
order dated 29 March 2010, the Second Respondent has rejected the
application of the Petitioner for the grant of a nil withholding
certificate for Assessment Year 201112.
3. The impugned order rejecting the application of the
Petitioner for the grant of a certificate under Section 195(3) contains
in paragraph 3 the following reasons for declining the request :
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“In this connection, in your case, it is seen that for A.Yr.
20062007, the draft assessment order is completed and a
demand has been raised to the tune of Rs.44,98,82,376/
(though the matter is pending before the DRP). In the past
also for A.Y. 20052006, the gross demand raised was Rs.
26,23,47,269/ and after payments till 31.3.2009, the net
balance outstanding demand is Rs.9,33,24,646/, which is
under MAP proceedings. This indicates that in the past you
did not pay proper advance tax, therefore, your case needs
to be examined with reference to Rule 29B especially the
sub rule 4 laying down the condition regarding prejudicial
to the interest of revenue. The TDS will ensure the nature
of receipts and also be clear from the TDS certificates that
all the receipts are accounted for by you and no demand
will be outstanding in your case.”
4. Counsel appearing on behalf of the Petitioner submitted
that the impugned order is, ex facie, contrary to law. The submission
before the Court is that (i) The order declining a certificate under
Section 195(3) is contrary to the statutory provision since the
Petitioner has complied with all the conditions requisite to the grant
of a certificate under Rule 29B; (ii) A certificate has been issued to
the Petitioner consistently for the last twelve Assessment Years under
Section 195(3) and there is no justification in law for the denial of a
certificate for Assessment Year 201112; (iii) The denial of a
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certificate in substance violates the provisions of the direct tax treaty
between India and the U.S. since the effect of the impugned order is
the imposition of a withholding tax with respect to matters which are
pending at the Mutual Agreement Procedure (MAP) Level; (iv) The
reasons which have been set out in the impugned order are, ex facie,
perverse; (v) The Assessing Officer has relied upon a draft assessment
order which has been passed for Assessment Year 200607. The order
being a draft order, no demand could be raised on the basis of the
order; (vi) The Assessing Officer has also relied upon an assessment
order for Assessment Year 200506 which is also subject to a Mutual
Agreement Procedure (MAP) initiated by the Petitioner; (vii) The
nature of the receipts to which the Assessing Officer has made a
reference has been duly considered both at the inter governmental
level and in an order of the Assessing Officer. On these grounds, the
exercise of jurisdiction by the Second Respondent to deny a certificate
under Section 195(3) has been called into question.
5. An affidavit in reply has been filed by the Second
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Respondent. Counsel appearing on behalf of the Revenue has
supported the order of the Second Respondent and has made a
reference to the reply which has been filed in response to the Petition.
6. Section 195(1) of the Income Tax Act, 1961 provides that
any person responsible for paying to a nonresident, not being a
company, or to a foreign company, any interest or any other sum
chargeable under the provisions of the Act, other than income under
the head of salaries, shall at the time of credit of such income to the
account of the payee or at the time of payment, deduct income tax
thereon at the rates in force. Sub section (3) provides that subject to
the rules which are made under sub section (5) a person entitled to
received a sum on which income tax has to be deducted under sub
section (1) may make an application to the Assessing Officer for the
grant of a certificate authorizing him to receive such sum without
deduction of tax. Where any such certificate is granted, every person
responsible for paying such sum to the person to whom the certificate
is granted shall, so long as the certificate remains in force, make
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payment of such sum without deducting tax thereon under sub
section (1). A certificate under sub section (3) is liable to remain in
force till the expiry of the period specified therein or, in the event that
it is cancelled prior to that date, till the cancellation. Under sub
section (5) the Central Board of Direct Taxes is empowered to make
rules specifying the cases in which and the circumstances under
which an application may be made for the grant of a certificate under
sub section (3) and the conditions subject to which a certificate may
be granted.
7. In exercise of the rule making power, Rule 29B has been
framed. Under sub rule (1) of Rule 29B a person entitled to receive
interest or any other sum on which income tax has to be deducted
under Section 195(1) is permitted to make an application for the
grant of a certificate under sub section (3) of Section 195 if he fulfills
the conditions specified in sub rule (2), authorizing him to receive
without deduction of tax such income as is referred to therein. A
person who carries on business or profession in India through a
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branch is permitted to make an application for the grant of a
certificate under sub section (3) of Section 195 in respect of income
received not being interest or dividends. Sub rule (2) of Rule 29B
stipulates the conditions which are required to be fulfilled before a
certificate can be granted. Sub rule (2) is to the following effect :
“(2) The conditions referred to in subrule (1) are the
following, namely :
(i) the person concerned has been regularly assessed
to incometax in India and has furnished the returns of
income for all assessment years for which such returns
became due on or before the date on which the application
under subrule (1) is made;
(ii)he is not in default or deemed to be in default in
respect of any tax (including advance tax and tax
payable under section 140A), interest, penalty, fine or
any other sum payable under the Act;
(iii)he has not been subjected to penalty under clause
(iii) of subsection (1) of section 27;
(iv)where the person concerned is not a banking
company referred to in clause (i) of subrule (1)
(a) he has been carrying on business or profession in
India continuously for a period of not less than five
years immediately preceding the date of the
application, and
(b) the value of the fixed assets in India of such
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business or profession as shown in his books for the
previous year which ended immediately before the
date of the application or, where the accounts in
respect of such previous year have not been made up
before the said date, the previous year immediately
preceding that year, exceeds fifty lakhs of rupees.”
8. Under sub rule (4) the Assessing Officer is vested with the
discretion to give a certificate authorizing the person concerned to
receive the income without deduction of tax under Section 195(1) if
he is satisfied that all the conditions laid down in sub rule (2) are
fulfilled and the issuance of a certificate will not be prejudicial to the
interests of the Revenue.
9. The conditions which have been spelt out in sub rule (2) of
Rule 29B are that (i) The person concerned must be regularly
assessed to income tax in India and ought to have furnished returns
of income for Assessment Years for which the returns became due
prior to the date on which an application under sub rule (1) is made;
(ii) There should be no default or deemed default in respect of any
tax, interest, penalty, fine or sum payable under the Act; (iii) No
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penalty ought to have been imposed under Section 271(1)(iii) and
(iv) Where the person is not a banking company, he ought to be
carrying on business or profession in India continuously for atleast
five years prior to the date of the application and the value of the
fixed assets must be in excess of Rs.50 lacs for the previous year
ending immediately prior to the date of the application.
10. Now it has not been disputed before the Court that the
Petitioner has been regularly assessed to income tax in India and has
furnished its returns of income for all the Assessment Years in
question. The fact that the Petitioner has not been subjected to a
penalty under Section 271(1)(iii); that the Petitioner carries on
business for a period in excess of five years in India and that the value
of its fixed assets is in excess of the threshold prescribed is not in
dispute. The impugned order that was passed by the Second
Respondent relies essentially on two circumstances for the denial of a
certificate under Section 195(3). The first circumstance is that for
Assessment Year 200607 a draft assessment order was completed
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and a demand has been raised in the amount of Rs.44.98 lacs. Ex
facie, the order itself makes it clear that what has been issued is a
draft assessment order and that the matter in question is pending
before the Dispute Resolution Procedure.
11. The second circumstance to which a reference has been
made is that for Assessment Year 200506 a gross demand of Rs.
26.23 Crores was raised and after accounting for payments which
were made until 31 March, 2009, the net balance outstanding was Rs.
9.33 Crores which is under the Mutual Agreement Procedure (MAP).
In order to consider as to whether there is any basis or tenability in
the second ground which has been set out in support of the order, a
reference to the relevant provisions of the Memorandum of
Understanding that was arrived at between the Government of India
and the U.S. on 25 September, 2002 would be in order. Before
referring to the Memorandum of Understanding it would be necessary
to note that Section 90 of the Act inter alia empowers the Central
Government to enter into an agreement with the Government of any
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country outside India for the grant of relief in respect of income on
which have been paid both income tax under the Act and income tax
in that country, as the case may be, or income tax chargeable under
the Act and under the corresponding law in force in that country, in
order to promote mutual economic relations, trade and investment.
The MOU which was entered into between the Government of India
and the U.S. on 25 September 2002 is in pursuance of the Convention
for the Avoidance of Double Taxation. The object of the MOU is to
ensure the efficient processing of the Mutual Agreement Procedure
(MAP) cases, which is to be facilitated by deferring assessment or by
suspending collection of any amount of tax including related interest
or penalties for taxable years which form the subject matter of MAP
proceedings. Recital B to the MOU inter alia stipulates that the
competent authorities have arranged and desired to agree with regard
to amounts of tax covered under Article 2 of the Convention and
potentially payable to the Government of India, that “the Assessing
Officer will suspend collection until putting into effect a mutually
agreed disposition on the MAP proceedings concerning the amounts
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in question”. The MOU provides that the tax authorities in the two
countries would retain the right to demand security in order to avoid
prejudice to the interest of their respective governments. Under
clause (2) in India as security, a tax payer is required to provide an
irrevocable bank guarantee of a scheduled bank to secure the claim of
the Revenue pending the disposition of the MAP. Under Clause (6) of
the MOU the taxes identified inter alia in recitals are to include but
are not limited to tax demands and withholding tax. This Court has
been informed during the course of the hearing that in respect of
Assessment Year 200506 the Petitioner has invoked the Mutual
Agreement Procedure and in pursuance of the provisions of the MOU
a bank guarantee in the amount of Rs.15.67 Crores has been
furnished. A copy of the bank guarantee is annexed to the
proceedings in the petition.
12. There is merit in the submission which has been urged on
behalf of the Petitioner that the order which has been passed by the
Assessing Officer in the present case discloses a complete non
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application of mind to the provisions of the inter governmental MOU
dated 25 September 2002 and the governing principles stipulated in
Rule 29B. The Petitioner having invoked the Mutual Agreement
Procedure (MAP), the consequence under the MOU between the
Government of India and the Government of the U.S. is a suspension
of the collection of tax demands and withholding taxes on income.
The Petitioner invoked the provisions of Article 27 of the U.S. India
Tax Treaty for Assessment Year 200506 by a communication dated
24 February, 2009. In a response dated 20 March, 2009 the Internal
Revenue Service in the Department of Treasury of the U.S.
Government acknowledged receipt of the application for competent
authority assistance and stated that the Government of India was
being requested to intervene to suspend collection actions on such
portion until the proceeding was completed. The Petitioner was
granted certificates under Section 195(3) both before and after the
assessment order was passed for Assessment Year 200506. The
Assessing Officer has declined to grant a certificate under Section
195(3) on the ground that the balance outstanding for Assessment
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Year 200506 is Rs.9.33 Crores. The Assessing Officer has
acknowledged the pendency of MAP proceedings. The basis on which
a certificate under Section 195(3) was declined is, ex facie, contrary
to law and amounts to a patent disregard of the binding provisions of
the MOU between the Governments of India and the U.S.
13. Counsel appearing on behalf of the Petitioner has also
urged before the Court that the effort of the Assessing Officer to refer
to the nature of the receipts is misconceived since this has been dealt
with in the assessment order passed for Assessment Year 2003 on 24
March 2006 by the Assessing Officer. The assessment order, in
paragraph 2.1, records that the competent authorities of India and
the U.S. have concluded by mutual agreement, on the application
filed by the assessee that the income of the assessee from its Indian
operations should be computed on net income basis in India. The
Assessing Officer has also made a reference to the fact that the
conclusion of the competent authorities and the terms of the
settlement have been documented by a letter dated 16 December
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2005 issued by the Government of India in the Ministry of Finance,
Department of Revenue. The assessee received a letter dated 24
January 2006 from the Department of Treasury, Internal Revenue
Service, Washington D.C. a copy of which was stated to be filed
before the Assessing Officer on 16 February 2006. We need not delve
any further into this aspect of the matter.
14. We have indicated the circumstances on the basis of which
this Court has arrived at the conclusion that the basis on which a
certificate has been declined to the Petitioner under Section 195(3) is
manifestly misconceived. The impugned order ignores relevant
provisions of law, more particularly of Rule 29B, does not take into
account the legal implications out of the MOU dated 25 September
2002 between the Government of U.S. and the Government of India
and disregards issues which were settled in the past as a result of the
Mutual Agreement Procedure between the two governments.
15. Counsel appearing on behalf of the Revenue has relied
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upon an order passed by this Court in Maharashtra State Electricity
Distribution Company Limited v. Commissioner of Income Tax
(Writ Petition 256 of 2009 decided by a Division Bench on 27 April,
2009). The order of the Division Bench records that the alternative
remedy that was available in that case was a statutory appeal under
Section 246(1) and it was in that circumstance that this Court
considered it appropriate not to exercise the extra ordinary writ
jurisdiction. No statutory appeal is available against the order that is
impugned in the present case. That apart, the exhaustion of
alternative remedies is a matter of judicial discretion. In a case such
as the present, the record before the Court clearly discloses that the
denial of a certificate under Section 195(3) is without considering the
relevant provisions of law and has been based on considerations
which are extraneous to a lawful exercise of power.
16. Counsel appearing on behalf of the Petitioner urged that in
these circumstances it would be appropriate and proper for this
Court to direct the grant of a certificate under Section 195(3).
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Having heard counsel appearing on behalf of the assessee and counsel
appearing on behalf of the Revenue, we are of the view that the
appropriate course of action for this Court would be to quash and set
aside the impugned order declining the grant of a certificate and to
direct the Assessing Officer to pass a fresh order in accordance with
law after furnishing an opportunity of being heard to the Petitioner.
The Court has been apprised of the fact that the denial of a certificate
under Section 195(3), despite the grant of such a certificate for nearly
twelve years in the immediate past would have serious ramifications
to the business operations of the Petitioner. The earlier certificate
that was granted to the Petitioner for Assessment Year 201011 on 13
March 2009 has come to an end on 31 March 2010. Having regard
to this circumstance, we direct that the Assessing Officer shall pass
fresh orders within a period of one week from today. The Court has
been informed by counsel appearing on behalf of the Revenue that
the Assessing Officer holding regular charge is on medical leave until
the middle of May 2010 and that charge of the office is being held by
another officer. We clarify that the order which is to be passed in
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compliance with the directions issued by this Court may be passed by
the officer holding charge in the matter.
17. Rule is accordingly made absolute in the aforesaid terms
and in terms of the directions set out earlier. The impugned order
dated 29 March 2010 is quashed and set aside.
In the circumstances of the case, there shall be no order as
to costs.
(Dr. D.Y.Chandrachud, J.)
(J.P. Devadhar, J.)
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