Calcutta High Court (Appellete Side)
M/S Timken India Limited And Others vs Deputy Commissioner Of Income Tax on 28 March, 2016
Author: Sanjib Banerjee
Bench: Sanjib Banerjee
IN THE HIGH COURT AT CALCUTTA
CONSTITUTIONAL WRIT JURISDICTION
APPELLATE SIDE
WP 13932 (W) of 2005
M/S TIMKEN INDIA LIMITED AND OTHERS
-VERSUS-
DEPUTY COMMISSIONER OF INCOME TAX,
CIRCLE - 8, KOLKATA AND OTHERS
For the Petitioners: Mr J. P. Khaitan, Sr Adv.,
Ms Nilanjana Banerjee Pal, Adv.,
Mr Akhilesh Gupta, Adv.
For the Respondents: Mr Kaushik Chanda, Adv.,
Mr Nizamuddin, Adv.
Hearing concluded on: March 21, 2016.
BEFORE SANJIB BANERJEE, Judge Date: March 28, 2016.
SANJIB BANERJEE, J. : -
The challenge herein is to the vires of Section 44D(b) of the Income Tax Act, 1961 on the basis of a Supreme Court dictum. However, as interesting as the legal issue may be, it is of limited import since the relevant provision is dated; and any adjudication either way may have little impact as it would be confined to agreements of similar kind made after March 31, 1976 and before April 1, 2003.
2. The issue pertains to the machinery of presumptive tax provided for in the provision and the contention of the petitioners that the apparent shutting out of an assessee's option to claim deductions from the gross income in respect of the matters covered by the provision is unreasonable and, as such, falls foul of Article 14 of the Constitution of India.
3. Under an agreement of August 2, 2000, the second petitioner foreign company agreed to provide certain services to the first petitioner Indian company against compensation to be charged at cost without any mark-up or profit. The technical services that the foreign company agreed to provide to its Indian subsidiary included management services, management information services, systems development and computer usage, communication services, engineering services, manufacturing services and the like. Section 1.2 of the said agreement of August 2, 2000 is of relevance in the present context:
"Section 1.2. Compensation Recipient shall pay Provider for all services and materials provided pursuant to this agreement, upon receipt of an invoice from Provider. Provider shall provide invoices to Recipient listing the services that Provider has provided to Recipient and/or which Provider has obtained from third parties on behalf of Recipient, during each calendar month. Each invoice shall be submitted no later than the fifteenth (15th) day following the end of each calendar month. Each invoice shall identify the compensation that is due to Provider to compensate it for all costs of providing such services. Only costs, without any mark-up shall be invoiced."
4. Against the invoices raised by the foreign company on its Indian subsidiary, the Indian subsidiary was to remit a certain amount. In connection with such proposed remittance, the Indian company approached its assessing officer vide its letter of March 21, 2002 for an order under Section 195(2) of the Act, authorising the Indian company to remit the payment without deducting tax at source under Section 195(1) of the Act, inter alia, since the remittance was on account of reimbursement of the costs and expenses actually incurred by the foreign company and the same did not contain any mark-up or profit element.
5. By an order of May 10, 2002, the assessing officer declined the request on the ground that whether the money proposed to be remitted contained any profit element or not, "is a subject matter of a regular assessment in the hands of the recipient company and this cannot be a subject matter for discussion in course of issuance of a certificate related to tax deductible at source ..." The material paragraph in the said order under Section 195(2) of the Act recorded as follows:
"Considering the matter as a whole and in view of expressed (sic, the express) provisions of Sec. 115A read with Section 44D and Section 9(1)(vii) of the Act, it is held that the assessee company should deduct tax at the rate as provided in Section 2 (37A)(iii) of the Act from the gross amount of the technical services fees to be remitted to Timken Company of USA."
6. The Indian company preferred an appeal under Section 248 of the Act before the Commissioner of Income Tax (Appeals) VIII, Kolkata against the order dated May 10, 2002 passed by the assessing officer under Section 195(2) of the Act. However, the Indian company did not pursue such appeal, but approached the Authority for Advance Rulings constituted under Section 245-O of the Act by withdrawing the appeal. The application for advance ruling was filed by the Indian company on July 2, 2003. The relevant authority ruled on December 6, 2004, inter alia, that the Indian company would have to withhold income-tax at the appropriate rate while making payment on account of technical services to the foreign company.
7. The Union has referred more to the said opinion of December 6, 2004 than the petitioners as the Union contends that in view of the decision of the relevant authority, the present proceedings should not have been entertained. The Authority for Advance Rulings noticed the sheet-anchor of the petitioning assessee's case, a judgment reported at 219 ITR 330 (Union of India v. A. Sanyasi Rao), and held that the Supreme Court had rejected the contention that the collection of tax due from specified traders on a presumptive basis was violative of Article 14 of the Constitution. The Authority also held that in dealing with Section 44AC in A. Sanyasi Rao, the Supreme Court observed that the provisions for presumptive tax on non-residents were irrelevant in the context of Section 44AC of the Act.
8. In A. Sanyasi Rao, the Supreme Court considered a clutch of petitions under Article 32 of the Constitution. The opening paragraph of the report referred to the legal issue: the validity of Sections 44AC and 206C of the Act. The challenge was that such provisions were ultra vires the Constitution, beyond legislative competence and violative of Articles 14 and 19(1)(g) of the Constitution.
9. Section 44AC of the said Act has now been omitted by the Parliament. At the time that such provision was considered by the Supreme Court, it provided for a percentage of the amount paid or payable by the buyer as purchase price for the relevant goods to be deemed to be the profit or gain of the buyer. On a plain reading of such provision, as it stood then, an assessee covered by such provision had no option to seek any deductions from the relevant head of income; all assessees covered thereby were subject to the machinery of presumptive tax without any exception.
10. However, such deeming provision was confined to goods being obtained in auction and where the sale price of the goods to be sold by the buyer was fixed under any statute. The percentages of the total price which would be deemed to be the gains or profits of the buyer were different from one class of goods to the other. The provision covered alcoholic liquor for human consumption other than foreign liquor, timber obtained under a forest lease, timber obtained other than under a forest lease and any forest produce not being timber. Such provision of Section 44AC of the said Act and the corresponding sub-sections of Section 206C thereof were introduced into the said Act by the Finance Bill, 1988. The scope of the relevant provisions was explained in a memorandum to the bill. The relevant passage is quoted in the Supreme Court judgment in A. Sanyasi Rao. It appears that it was department's experience that persons who were involved in the sale of liquor, scrap, forest products and the like were not subsequently traceable which resulted in large-scale tax evasion.
11. The Supreme Court noticed that the legislative competence of the Parliament to enact Sections 44AC and 206C of the said Act was upheld by all the High Courts. The issue before the Supreme Court was whether an assessee of the kind covered by Section 44AC of the said Act would have the option to either maintain no books and pay the presumptive tax or demonstrate that such assessee would be entitled to the benefit of the deductions under the said Act before his total income chargeable to tax was assessed. In considering the issue, the Supreme Court observed as follows at page 356 of the report:
"Considered in the light of the practical difficulties envisaged by the Revenue to locate the persons and to collect the tax due in certain trades, if the Legislature in its wisdom thought that it will facilitate the collection of the tax due from such specified traders on a "presumptive basis", there is nothing in the said legislative measure to offend article 14 of the Constitution. In the light of the legal principles stated above, we are unable to hold that section 44AC read with section 206C is wholly hit by article 14 of the Constitution of India.
"However, the denial of relief provided by sections 28 to 43C to the particular businesses or trades dealt with in section 44AC calls for a different consideration. Even according to Revenue, the provisions (sections 44AC and 206C) are only "machinery provisions". If so, why should the normal reliefs afforded to all assessees be denied to such traders? Prima facie, all assessees similarly placed under the Income-Tax Act are entitled to equal treatment. In the matter of granting various reliefs provided under sections 28 to 43C, the assessees carrying on business are similarly placed and should there be a law, negativing such valuable reliefs to a particular trade or business, it should be shown to have some basis and fair and rational. It has not been shown as to why the persons carrying on business in the particular goods specified in section 44AC are denied the reliefs available to others. No plea is put forward by the Revenue that these trades are distinct and different even for the grant of reliefs under sections 28 to 43C of the Act. The denial of such reliefs to trades specified in section 44AC, available to other assessees, has no nexus to the object sought to be achieved by the Legislature. To this extent, it appears to us that the non obstante clause in section 44AC denying such reliefs has no basis and is unfair and arbitrary and equality of treatment is denied to such persons, necessitating grant of appropriate relief ..."
12. The Supreme Court, thereafter, accepted the view expressed by the Andhra Pradesh High Court in 178 ITR 31 (A. Sanyasi Rao v. Government of Andhra Pradesh) by quoting therefrom:
"The non-obstante clause in section 44AC(1), 'notwithstanding anything to the contrary contained in sections 28 to 43' would be confined to the limited purpose of sustaining the deductions provided for in section 206C. The level of profits and gains would be relevant only for explaining and justifying the level of deductions provided for in section 206C. Collections will be made at the rates specified in section 206C and then a regular assessment will be made like in the case of any other assessee."
13. The petitioners have also relied on a judgment reported at 291 ITR 482 (Commissioner of Income Tax v. Hyundai Heavy Industries Company Limited). The issue in the case before the Supreme Court was whether the payment received by a non-resident foreign company on account of fabrication of a platform in connection with setting up facilities for offshore drilling for oil on the Bombay High was chargeable to tax.
14. The court found that by reason of Article 7 of the Convention for Avoidance of Double Taxation, the income that was received by the foreign company in Korea pertaining to design and fabrication was not taxable in India. The question framed by the court was as to what part of the profits could be reasonably attributable to the foreign company's permanent enterprise in India. By referring to Section 5(2) of the Act, the court held that a non- resident assessee may have several incomes accruing or arising to it in India or outside India but as far as taxability under Section 5(2) of the Act was concerned, it was restricted to the income that accrued or arose, or is deemed to have accrued or arisen, in India. It was in such context that the court referred to several provisions for presumptive tax in Sections 44BB, 44BBA and 44BBB of the Act. The parties have relied heavily on the following passage of the report:
"13. ... Thirdly, it is important to note that Chapter IV of the Act contains provisions for presumptive taxation of business income in certain cases as prescribed in sections 44B, 44BB, 44BBA and 44BBB of the Act. In the scheme of presumptive taxation, the assessee is presumed to have earned income at the rate of a certain percentage of his total turnover or gross receipts. If the assessee agrees to be taxed on presumed income, he is not required to maintain books of account. ..."
15. The petitioners assert that in Hyundai the Supreme Court noticed certain provisions pertaining to presumptive tax and enunciated, as a general principle, that in the scheme of presumptive taxation the assessee is presumed to have earned income at the rate of a certain percentage of his gross receipt in respect of the relevant item of income, but that would not prevent the assessee from claiming, by producing his books of accounts, that his income on such head was less than the presumed figure. The Union, however, contends that the relevant sentence in Hyundai cannot be seen to be a part of the ratio decidendi of the judgment. The Union says that what was in issue in that case was far removed from the principle that appears to have been stated in the relevant passage; and, as such, the same cannot be seen to be the law laid down by the Supreme Court.
16. A recent judgment reported at (2015) 64 taxmann.com 93 (Delhi) (Director of Income-Tax v. Royal Jordanian Airlines) has been placed by the petitioners for the acceptance therein by a Division Bench of the Delhi High Court that notwithstanding Section 44BBA of the Act providing for presumptive tax on a fixed basis, "it cannot preclude an assessee from producing books of accounts to show that in any particular AY, there is no taxable income."
17. The petitioners also refer to the judgments reported at (2015) 10 SCC 241 (Laxmi Devi v. State of Bihar) and (1996) 6 SCC 44 (Union of India v. Dhanwanti Devi) to demonstrate how the ratio decidendi in a judgment should be discerned. Paragraphs 22 to 24 of Laxmi Devi have been placed on behalf of the petitioners. The Supreme Court referred to the doctrine of precedents as explained by a Constitution Bench by referring to English cases. The essence of the discussion was that every judgment of a superior court has three segments: the facts and the point in issue; the reasons for the decision; and, the final order containing the decision. The ratio decidendi, the Supreme Court observed, would only be the reasons for the decision irrespective of the outcome in the particular matter.
18. In Dhanwanti Devi the Supreme Court discussed the doctrine of precedents in the context of Article 141 of the Constitution and held that only the essence of a decision and its ratio were binding and not every observation found therein. The following passage from paragraph 9 of the report is relevant in the present context:
"9. ... It is not everything said by a Judge while giving judgment that constitutes a precedent ... The enunciation of the reason or principle on which a question before a court has been decided is alone binding as a precedent. The concrete decision alone is binding between the parties to it, but it is the abstract ratio decidendi, ascertained on a consideration of the judgment in relation to the subject-matter of the decision, which alone has the force of law and which, when it is clear what it was, is binding. It is only the principle laid down in the judgment that is binding law under Article 141 of the Constitution. ..."
19. The Union submits that several provisions from Sections 44B to 44DA of the Act need to be seen to understand why the machinery pertaining to presumptive tax was introduced. The Union refers to the Notes on Clauses accompanying the Finance Bill, 1976 by which Section 44D was incorporated in the said Act. It may be profitable to notice the relevant note:
"Under the existing provisions of the Income-tax Act, 1961, income chargeable to tax under the various heads is computed on a net basis, i.e., after allowing deduction for admissible costs and expenses. The determination of the taxable income on net basis in the case of non-resident taxpayers, however, creates certain practical difficulties. The non-resident taxpayer is not always sure of the type and extent of expenses which would be admissible under our tax laws and the nature of evidence which he will be called upon to produce in support of his claim for expenses. Income-tax Officers are also handicapped as, in the absence of account books of the foreign taxpayer which are kept outside India, they are not in a position to carry out any worthwhile scrutiny of these claims.
"A step towards simplifying and rationalising the assessments of non-residents was taken last year when a special provision was made through the Finance Act, 1975, for computing the shipping profits in the case of non-resident. The Bill seeks to advance this process further by making special provisions for taxation of dividends, royalties and fees for technical services and for determination of head office expenses in the case of non-residents."
20. The Union also relies on a Division Bench judgment of the Delhi High Court reported at 340 ITR 507 (Director of Income Tax v. Rio Tinto Technical Services). In that case, the revenue had preferred appeals under Section 260A of the Act against orders of the Income Tax Appellate Tribunal. However, as would be evident from the judgment, the court held that the constitutional validity of the provision was not challenged before it "and cannot be examined in an appeal under Section 260A of the Act." But the Division Bench also found that the judgment in A. Sanyasi Rao had drawn a distinction between non-resident assessees and assessees who were residents in India.
21. The Union says that the income earned by non-resident assessees only in certain cases have been made applicable for presumptive tax. The Union submits that when such a conscious distinction is made by the Parliament, the court should not rush to undo the same. The Union claims that for a foreign company providing technical services, it would be an impossible task to assess which part of the fees obtained for such technical services could be seen to be the mark-up or profit and which part could be seen as the costs or expenses incurred therefor. The Union claims that the books of account of the non-resident assessee may not be readily available in India and, in any event, even if the books were produced, the department would never be in a position to ascertain the veracity of such books under the laws of a different country. The Union suggests that such matters as to presumptive tax in certain cases must be left to the best judgment of the Parliament and should not be interfered with by reading something into the relevant provision which is not expressly stated therein.
22. Since the legislative competence to provide for presumptive tax has been accepted by the Supreme Court, the petitioners have not directly questioned the validity of Section 44D(b) thereof on such ground. The petitioners only suggest that on a conjoint reading of Section 44D and Section 115A of the Act, it would be evident that if the provision as to presumptive tax were to apply to a non- resident assessee, such assessee would have to pay the tax as a percentage of the quantum of fees that it obtains from an Indian assessee for providing technical services, without being able to demonstrate that permissible deductions should be allowed therefrom. The petitioners say that they have challenged only the propriety of Section 44D(b) of the Act and not the validity of Section 115A(3) thereof since an assessee who is covered by Section 44D of the Act can, in any event, enjoy no latitude under Section 115A thereof.
23. The petitioners submit that while it is possible that in most cases a non- resident assessee entitled to any payment for technical services may not be able to establish the permissibility of the deductions claimed; but if a non-resident assessee did have the requisite material, the denial of the deduction would be unjust and unreasonable.
24. Before coming to the key question as to whether the foreign company in this case would be entitled to claim that its deemed income on account of fees for technical services may not be any taxable income at all, the preliminary ground urged by the Union as to the propriety of the present petition needs to be addressed. There can be no doubt that by virtue of Section 245S of the Act, the advance ruling pronounced by the Authority on December 6, 2004 is binding on the Indian company as the Indian company had sought such ruling. Simultaneously, the ruling is binding on the relevant principle commissioner or commissioner, and the income tax authorities subordinate to him, in respect of the Indian company and the relevant transaction. However, nothing more needs to be read in the ruling than the answers to the questions rendered therein. It will be evident from the five questions set out in the ruling that all of them pertained to the Indian company and its obligation while remitting payment under the agreement of August 2, 2000 to the foreign company.
25. Apart from the fact that the opinion of the Authority is not binding on the foreign company, the opinion has to be confined to the obligation of the Indian company, notwithstanding such opinion having dwelt on the dictum in A. Sanyasi Rao and finding the same to be in applicable to the matter before it. The foreign company is one of the petitioners herein and the primary contention - that the foreign company should be entitled to claim deductions from the payment that it is entitled to on account of technical services under the agreement of August 2, 2000 - cannot be seen to be covered by the opinion of December 6, 2004 rendered by the Authority on Advance Rulings. Even if the name of the Indian company is deleted as a co-petitioner, the foreign company would be entitled to maintain a petition under Article 226 of the Constitution to complain of a taxing provision being unreasonable or ultra vires the Constitution.
26. There is considerable force in the Union's submission that when certain situations have been carved out by the Parliament for exceptional treatment, the court should yield to the wisdom of the legislature and not attempt to treat the exceptional situations at par with the general. There is equal merit in the Union's assertion that such matters should be perceived as matters of policy which should be scarcely tinkered with by court unless unavoidable.
27. There are several provisions that incorporate the machinery of presumptive taxation in Chapter IV of the Act. Several of such provisions, which did not originally permit assessees covered thereby to claim lower profits and gains than the stipulated rate of presumptive tax, subsequently introduced provisions permitting such claims to be made by the relevant assessees. For instance, Section 44BB was introduced in the 1980s but the option to an assessee to claim lower profits and gains was introduced in 2004 by incorporating sub-section (3) therein.
28. It is, thus, that the judgment in A. Sanyasi Rao needs to be seen for the law that it laid down. The challenge to the combined effect of Sections 44AC and 206C in that case was on the ground of discrimination "in having selected certain businesses or trade for hostile treatment". The court held that Article 14 of the Constitution applied to tax laws as well, though taxing statutes enjoyed more judicial indulgence. The Supreme Court addressed the issue by breaking it down into two parts: the practical difficulties faced by the revenue to collect tax from the specified traders; and the denial of the reliefs as to the deductions to such persons. As to the first part, the court held that the legislative measure to impose tax on a presumptive basis did not offend Article 14 of the Constitution. But, on the other count the court held that the denial of the reliefs as to deductions had no nexus with the object sought to be achieved by the legislature.
29. In ascertaining the ratio decidendi in a particular case, the facts of the case and the process of reasoning need to be analysed. The instructive passage extracted in Laxmi Devi recognises that the process of reasoning in a judgment may involve a major premise consisting of a pre-existing rule of law, either statutory or judgment; and a minor premise consisting of the material facts of the case under immediate consideration. In A. Sanyasi Rao the court gave due respect to the primacy of the legislature in introducing a special provision to arrest the evasion of tax. The court accepted the explanation contained in the memorandum to the Finance Bill, 1988 that since at the time of assessment in such cases the accounts were not available or were grossly incorrect or incomplete, it was justified to combat the large-scale tax evasion. The court held that a class of persons deriving income from certain specified businesses could be subjected to a special determination of income chargeable to tax. However, the court also held that, as a corollary, to the extent an assessee covered by the relevant provision was able to produce the complete accounts at the time of assessment, such assessee would be entitled to the benefit of permissible deductions.
30. In other words, the mischief that the special provision sought to arrest was found to be reasonable and justified; but the assessees covered thereby not responsible for the mischief could not be unduly penalised by not being permitted to avail of the reliefs of deductions. The major premise of the ratio decidendi in A. Sanyasi Rao must be seen to be thus: that those who could later be untraceable or whose accounts may not be available or such accounts may be incorrect or incomplete would be subjected to the tax on the presumptive basis and they would not be in a position to claim deductions as their books would not be in order; but those assessees, who were covered by the same provision and who could produce their books of accounts to justify their claims of deductions, had to be afforded the reliefs if they could establish the same. The minor premise of the ratio decidendi was that a distinction had to be made in respect of assessees covered by Section 44AC of the Act between those who would be able to justify the deductions claimed and others who may not stay back for the same or have their books in order for such purpose.
31. It is the same rule that needs to be applied to Section 44D(b) of the Act in similar circumstances as the rule was applied to Section 44BBA thereof in the case of Royal Jordanian Airlines. Nothing regarding the possible availability of the option to an assessee covered by Section 44D(b) of the Act to claim permissible deductions, will affect the obligation of the resident assessee while making the relevant payment to a foreign company, whether under Section 195 of the Act or otherwise. The resident assessee making a payment in respect of a matter covered by Section 44D(b) of the Act to a foreign company will be obliged to withhold the tax on presumptive basis and deposit the same with the department. However, it will be open to the concerned foreign company to subject itself to assessment by claiming the permissible deductions, notwithstanding Section 44D(b) of the Act, whereupon the burden, as always, will be on the foreign company to establish the permissibility of the deductions that it claims. The option to claim deductions cannot be denied to a foreign company covered by Section 44D(b) of the Act; but as to whether it can establish the deductions that it claims, is an entirely different matter.
32. WP 13932(W) of 2005 is disposed of by reading down Section 44D(b) of the Act and by holding that notwithstanding the machinery of presumptive tax being provided thereunder, a foreign company would be entitled to claim deductions under the applicable provisions of the Act upon establishing its entitlement in such regard on the basis of the material that it may produce. Usually, such exercise would imply a claim for refund as the tax on presumptive basis would already have been deducted at the time of remittance by the resident assessee and deposited with the department.
33. There will be no order as to costs.
34. Urgent certified website copies of this judgment, if applied for, be supplied to the parties subject to compliance with all requisite formalities.
(Sanjib Banerjee, J.)