The Bombay High Court has held that the income tax illegally levied must be refunded to the assessee. Refusal of the Department to return the amount and retaining the same is unauthorized by law and would only amount to unjust enrichment by the Department on technical grounds.
Grasim Industries Ltd, the petitioner had set up a Gas-based Sponge Iron Plant in India for which it entered into a Foreign Technical Collaboration Agreement dated 22nd October 1989 (“Agreement”) with one M/s. Davy Mckee Corporation (“DAVY”) and another party. Under the agreement, DAVY agreed to render to Petitioner outside India certain engineering and other related services in relation to the project.
On 22 October 1989, the Petitioner entered into a Foreign Technical Collaboration for Basic Engineering and Training Agreement (‘BEAT Agreement’) with Davy Mckee Corporation (‘Davy’) to set up a gas-based Sponge Iron Plant in India. In terms of the BEAT agreement, Davy was to deliver to the Petitioner the designs, drawings and data concerning the Sponge Iron Plant outside India besides training a certain number of employees of the Petitioner outside India for commissioning, operation and maintenance of the Sponge Iron Plant.
The Petitioner agreed to pay as consideration to Davy under the BEAT agreement a sum of US $ 16.23 Million net of Indian Income, if any, levible. In other words, if any withholding tax was required to be deducted, it would be born by the Petitioner and Davy would be paid the net amount of US $ 16.23 Millions;
The Petitioner sought a no objection certificate from the Respondents to remit the consideration payable to Davy under the BEAT agreement without deduction of tax at source. The Respondents did not accept the Petitioner’s contention and by order directed the Petitioner to deduct tax at source on the amounts being remitted to Davy.
Accordingly, the Petitioner initially paid tax of Rs.2,73,73,084/- on 6 December 1989 under protest as withholding tax for the first instalment of payments to Davy. The Petitioner again on 5 September 1990 paid tax of Rs.2,81,83,272/- under protest as withholding tax on the second instalment of payment to Davy.
Davy declared nil income as chargeable to tax in India on the ground that the income received by Davy from the Petitioner under the BEAT Agreement head had not accrued in India. The A.O. held that the amounts received by Davy under the BEAT agreement were chargeable to tax in India. The withholding tax paid by the Petitioner was adjusted towards Davy’s tax liability. Later ,appeal before Commissioner of Income Tax (Appeals) got dismissed.
The Petitioner and Davy thereafter filed a Writ Petition challenging the constitutional validity of the provisions of Section 9(1)(vii) of the Income Tax Act, 1961 (‘the Act’); and the assessment orders. The petition is allowed and the assessment order made by the Respondent nos.2 and 3 in original or in appeal subjecting the income received by Petitioner no.2 from Petitioner no.1 under the BEAT agreement dated 22 October 1989 to Indian income tax is quashed and set aside.
Mr. Mistry, Senior Advocate appearing on behalf of the Petitioner submitted that the Petitioner had to pay the withholding tax under protest given the stand of Revenue in the order dated 5 December 1989 that the amount payable by the Petitioner to Davy under BEAT agreement was taxable in India. This resulted in the Petitioner paying amounts aggregating Rs.5.54 crores to the Revenue out of its funds under protest, in December 1989 and in September 1990, as tax deducted at source.
It is submitted that once this Court holds by order dated 5 May 2010 that the income by way of fees for technical services paid by the Petitioner to Davy under the BEAT Agreement was not liable to Indian Income Tax, then the amounts paid by the Petitioner out of its funds as withholding tax becomes refundable to the Petitioner.
On the other hand, the petition has been opposed by the counsel for Revenue relying upon submissions made in the affidavit-in-reply of Mr. Anil Gupta, Deputy Commissioner of Income Tax, Range 6(3). It was submitted that since tax was deducted at source at the relevant time on behalf of Davy by Section 199 of the Act, credit can only be given to Davy and the benefit of the order of this Court rendered on 5 May 2010 can only be given to Davy who had filed its return of income for the A.Y. 1990-91 and 1991-92.
The division bench comprising Justice K.R Shriram & Justice Dr. N.k. Gokhale observed that the refusal of the Department to return the amount and retain the same is unauthorized by law and would only amount to unjust enrichment by the Department on technical grounds.
The Court quashed the impugned order and directed the Respondents to grant a refund of tax along with interest by the law and as per the direction of the Supreme Court of India in respect of amounts which have been wrongfully detained by the Department.
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