The Delhi High Court while deciding a writ petition filed by the CEAT Ltd against the CBDT granted an exemption to the petitioners under Section 10(15)(iv)(c) of the Income Tax Act, 1961 for the amount paid by them as penal interest for the violation of the agreement.
The Petitioner entered into an agreement with SIFL, which represented a consortium of banks to finance the cost of the Petitioner’s tire cord plant, which was set 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 tire cord unit at Malanpur and expansion of an existing fiberglass plant unit at Dimapur. 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.
Further, clause 18 of the agreement set out the undertakings that the Petitioner had to furnish. In terms of clause 18(F), it was stipulated that the Petitioner’s indebtedness would not at any time exceed 250% of its net worth and its borrowings would not at any time exceed 80% of the book value of the project assets. Under clause 17(C), the Petitioner has required to intimate SIFL its compliance with the financial ratios in conformity with clause 18(F). Under clause 19(C) of the agreement, it was stated that in the event the Petitioner failed to comply with the undertakings furnished in terms of Clause 18, then such breach would amount to an event of default. According to clause 27(B), such default could be waived subject to the conditions that may be imposed by the lenders.
Prior to entering into the above agreement on 23rd November, 1989, the Petitioner wrote to the Department of Economic Affairs (DEA), Ministry of Finance (MoF) regarding the above foreign exchange loan which it was seeking to avail from the consortium of banks for the purposes of import of capital goods for the abovementioned plants. On 29th December 1989, the DEA issued an approval for the above proposal. In particular, approval was granted for payment of interest at 0.5% over the LIBOR rate as well as payment of interest and management fee, etc. exempting such payment under Section 10(15)(iv)(c) of the Act. It was consequent upon the above approval that the agreement was entered into between the Petitioner and SIFL on 20th September, 1990.
The total loan utilised by the Petitioner came to 4,900 million Japanese Yen.on 5th June, 1995 wrote to the DCIT, Special Range, who was its Assessing Officer (AO) under Section 237 of the Act claiming refund of the aggregate TDS in the sum of Rs. 64,53,214. The main submission of the Petitioner was that the penal interest was “interest” within the meaning of Section 2(28A) of the Act. This payment of penal interest had been specifically approved by the Government and was also exempt from tax. Accordingly it was contended that the Petitioner was entitled to refund of the tax wrongly deducted from the prepayments of the loan to SIFL.
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 hadbeen 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).
The Petitioner, several times, wrote to the CBDT requesting it to issue necessary instructions under Section 119 of the Act and grant a refund but the same was rejected. The Petitioner challenged the same before the High Court of Delhi.
The High Court on deciding the case invalidated the impugned order made by the CBDT on the ground that, firstly, the CBDT has violated the basic principles of natural justice as the petitioner was not given an opportunity of being heard. Secondly, the CBDT erred in interpreting the clauses of the agreement and falsely found that the penal interest paid by the petitioner would not entitle for granting exemption. The said order was therefore held invalid and the Court further directed the DCIT to grant excemption to the petitioner.
Read the full text of the Judgment below.
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