FAG BEARINGS INDIA LTD. vs. CHIEF COMMISSIONER OF INCOME TAX

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SCA/11132/2002HC GujaratGJHC24017507200223 July 2012Author: HONOURABLE MR. JUSTICE AKIL KURESHI,HONOURABLE MS. JUSTICE HARSHA DEVANI10 pages
AI SummaryAllowed

What did the High Court hold?

The High Court allowed the petition, quashing the impugned communication dated April 18, 2001. The Court held that the petitioner was entitled to a refund of Rs. 19,49,400. The reasoning was that the petitioner had mistakenly deducted and deposited tax twice for the same payment. The Court found that the initial deduction of Rs. 19,49,400 at the time of making a provision was not even required to be deposited as tax at that stage. The respondents' argument that this initial deposit was not tax was considered contradictory to their contention that it was not refundable under the circulars. The Court emphasized that the respondents could not capitalize on the petitioner's mistake. Furthermore, the Court held that the subsequent circular dated April 20, 2000, could not be applied to the petitioner's case because the application for refund was filed promptly on November 2, 1998, and the respondents' inordinate delay in deciding the application, despite reminders, meant that the earlier circular should have governed the claim. The Court also directed that the refund should carry simple interest at the rate of 9% per annum for the period after four months from the date of receipt of the application dated November 2, 1998, until actual payment, subject to adjustment against any existing tax liability of the petitioner. The entire exercise was to be completed preferably within four months.

What were the facts?

The petitioner, FAG Bearings India Ltd., sought to quash a communication dated April 18, 2001, and claimed a refund of Rs. 19,49,400 with interest. In 1998, the petitioner engaged a German company for technical assistance for updating its computer system, agreeing to pay DM 9 lakhs (Rs. 1,94,94,000). The petitioner made a provision for this amount in its books as of March 31, 1998, and deducted tax at source (TDS) of Rs. 19,49,400 under Section 195 of the Income Tax Act, 1961, depositing it on June 1, 1998. Subsequently, due to an oversight, the petitioner again deducted TDS of Rs. 21,82,500 and deposited it on August 18, 1998, when making the actual remittance. Realizing the mistake of deducting tax twice for the same payment, the petitioner applied for a refund of Rs. 19,49,400 on November 2, 1998, citing CBDT Circular No. 769 dated August 6, 1998. After reminders and furnishing details, the application was rejected by the impugned communication.

What were the issues?

1. Whether the petitioner is entitled to a refund of Rs. 19,49,400, which was deducted and deposited twice as TDS for the same technical assistance fees paid to a foreign company, under Section 195 of the Income Tax Act, 1961. Assessee's Contentions: - The petitioner argued that tax was deducted and deposited twice for the same payment, and the excess amount should be refunded as it was deposited by mistake and cannot be retained by the revenue without legal authority. - The petitioner contended that the respondents erred in rejecting the refund request, especially in light of CBDT Circular No. 769 dated August 6, 1998, which allowed refunds under certain circumstances, including when TDS is found to be in excess for any other reason. - The petitioner argued that a subsequent circular dated April 20, 2000, should not affect its claim, as the application was filed promptly and the delay in processing by the respondents prevented it from benefiting from the earlier circular. - Reliance was placed on the Bombay High Court decision in BASF (India) Ltd. v. W. Hasan, Commissioner of Income-tax (2006) 151 Taxman 31 (Bom). Revenue's Contentions: - The revenue contended that the liability to pay tax was that of the foreign company, and the petitioner could not claim a refund in the absence of a specific provision under the Act or Rules. - The revenue argued that the deduction and deposit of tax at the time of making a provision for payment was not in the nature of tax and therefore not refundable. - The revenue submitted that the petitioner's case was not covered under clause (i)(c) of paragraph (1) of Circular No. 769 dated August 6, 1998. - The revenue further argued that Circular No. 769 was superseded by Circular No. 20.4.2000, and in any case, no interest was payable on such refund claims under either circular.

Which sections of the Income-tax Act were involved?

Section 195,Section 244A

AI-generated summary — verify with the full judgment below

Cause title — parties, addresses and appearances
SCA/11132/2002 1/10 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD SPECIAL CIVIL APPLICATION No. 11132 of 2002 For Approval and Signature: HONOURABLE MR.JUSTICE AKIL KURESHI HONOURABLE MS.JUSTICE HARSHA DEVANI ========================================================= 1 Whether Reporters of Local Papers may be allowed to see the judgment ? 2 To be referred to the Reporter or not ? 3 Whether their Lordships wish to see the fair copy of the judgment ? 4 Whether this case involves a substantial question of law as to the interpretation of the constitution of India, 1950 or any order made thereunder ? 5 Whether it is to be circulated to the civil judge? ========================================================= FAG BEARINGS INDIA LTD. - Petitioner(s) Versus CHIEF COMMISSIONER OF INCOME TAX & 1 - Respondent(s) ========================================================= Appearance : MR SAURABH N SOPARKAR, SENIOR COUNSEL WITH MR BANDISH SOPARKAR AND MRS SWATI S SOPARKAR FOR Petitioner(s) : 1, MR KM PARKIKH for Respondent(s) : 2, ========================================================= CORAM : HONOURABLE MR.JUSTICE AKIL KURESHI and HONOURABLE MS.JUSTICE HARSHA DEVANI Date : 23/07/2012

ORAL JUDGMENT (Per : HONOURABLE MR.JUSTICE AKIL KURESHI)

SCA/11132/2002 2/10

1.

The petitioner has prayed for quashing a communication dated 18.4.2001 and consequently prayed for refund of an amount of Rs.19,49,400/­ with interest from 1.6.1998 till actual payment.

2.

Brief facts are as follows :

2.

1 The petitioner is a company registered under the Companies Act   and   is   regularly   assessed   to   tax.   In   the   year   1998,   the petitioner desired to update its computer system and to replace its existing computer system with a new one. For such purpose, the petitioner took technical assistance of a German company called M/s. IBB Information System (here­in­after referred to as “the foreign company”).  Towards such assistance, the petitioner agreed to pay Deutsche Mark 9 lakhs equivalent to Rs.1,94,94,000/­. A provision in this respect was made in the books of accounts as on 31.3.1998 at the prevailing exchange rate.

2.

2 On   such   provision   made,   the   petitioner   deducted   tax   at source under section 195  of the Income Tax Act, 1961(“the Act” for   short),     of   a   sum   of     Rs.19,49,400/­.     Such   amount   of Rs.19,49,400/­   was   also   deposited   with   the   Income   Tax department by the petitioner on 1.6.1998.

2.

3 It appears that due to oversight, when the petitioner made ultimate   remittance   of   the   contractual   amount   to   the   foreign company, once again a TDS of Rs.21,82,500/­ was deducted and deposited   with   the   Government   of   India   on   18.8.1998. It   is therefore, the case of the petitioner that the petitioner deducted tax at source twice for the same payment of technical fees to the foreign company. Such tax so deducted at source and also paid to

SCA/11132/2002 3/10 the Government to the excess of the liability of the petitioner should be refunded. When the petitioner realized such a mistake, an application was made to respondent no.1 on 2.11.1998 and claiming refund of excess tax of Rs.19,49,400/­. The petitioner referred  to   and  relied  upon  a   circular   of  CBDT  no.769   dated 6.8.1998 wherein under certain circumstances, according to the petitioner, refund was allowable.

2.

4 Since the petitioner did not receive any response from the respondents, it sent a reminder letter dated 23.9.2000. Yet another letter was sent on 19.1.2001 reiterating the request for refund of excess tax.

2.

5 The   respondents   replied   under   communication   dated 12.3.2001 and required the petitioner to file certain factual details with respect to such claim. The petitioner furnished such details under   communication   dated   13.3.2001. The   respondent   no.1 however,   rejected   the   petitioner's   application   by   impugned communication dated 18.4.2001. Hence the petition.

3.

Counsel   for   the   petitioner   submitted   that   the   respondents committed a grave error in rejecting the request of the petitioner. He pointed out that tax was deducted twice and also deposited with the Government of India. To the extent the same was in excess of the petitioner's liability, the same must be refunded. He submitted that the respondents cannot retain the amount which was deposited under mistake since such deposit cannot partake the character of tax. Such retention of amount would be without authority of law.

SCA/11132/2002 4/10 3.1 Counsel submitted that under circular dated 6.8.1998, the authorities had to consider the refund claim of the petitioner. He submitted that any subsequent change in the position by virtue of circular   dated   20.4.2000,   would   not   justify   rejection   of   the petitioner's refund claim. In this respect counsel relied on decision of the Division Bench of Bombay High Court reported in case of BASF(India) Ltd. v.   W. Hasan, Commissioner of Income­tax  reported in (2006) 151 Taxman 31(Bom).

3.

2   Counsel   submitted   that   the   respondents   consumed inordinately   long   time   in   processing   the   refund   claim   of   the petitioner. For months together, there was no response from the respondents. Despite reminders, no steps were taken to process the claim. In that view of the matter, even on facts subsequent circular dated 20.4.2000 could not have been applied, since had the respondents   decided the refund claim of the petitioner in time, the petitioner would have got the benefit of circular dated 6.8.1998. 4. On the other hand, learned counsel Shri Parikh for the Revenue opposed the petition contending that the liability to pay tax was that of the foreign company. In absence of any specific provision under the Act or the Rules made thereunder, the petitioner cannot claim refund of such an amount. Counsel further submitted that the deduction and deposit of tax at the time of making provision for the ultimate payment to the foreign company was not in the nature of tax at all and therefore, no refund could be claimed. Counsel further submitted that the case of the petitioner was not

SCA/11132/2002 5/10 covered under clause(i)(c) of para.(1) of circular dated 6.8.1998. He   submitted   that     in   any   case   circular   was   superseded   by subsequent circular dated 20.4.2000. He pointed out that in any view  of  the   matter,  by  virtue  of  circulars   dated  6.8.1998   and 20.4.2000, the petitioner cannot claim any interest on such refund claim.

5.

Having thus heard learned advocates for the parties, we find that material facts are not in dispute. The petitioner at the time of making the provision for technical assessment fees, payable to the foreign company deducted an amount of Rs.19,49,400/­ as TDS and also deposited such sum with the Government of India on 1.6.1998. When the fees for technical assistance were actually remitted,   the   petitioner   once   again   deducted   a   sum   of Rs.21,82,500/­towards tax at source and also deposited the sum with the Government of India on 18.8.1998. When the petitioner realized   such   a   mistake,   an   application   was   filed   with   the respondents on 2.11.1998. Such application was not decided for a long  period of  time.  The petitioner  made  series  of  reminders. Ultimately,   such   application   came   to   be   dismissed   only   on 18.4.2001. In such order, it was conveyed to the petitioner that request cannot be granted in view of clause (i)(c) of para.(1) of circular no. 769 dated 6.8.1998. 6. Before going to the merits of the matter, we may record that since no provision is made in the Act or the Rules for claiming refund of excess TDS deducted, with respect to remittance to the foreign company, CBDT issued  its  circular  no.769   dated 6.8.1998  and made provision for granting such refund to the Indian assessee deductee under the following circumstances :

SCA/11132/2002 6/10 “(i) after the deposit of tax deducted at source under section 195, (a) the contract is cancelled and no remittance is required to be made to the foreign collaborator; (b) the remittance is duly made to the foreign collaborator, but the contract is cancelled and the foreign collaborator returns the remitted amount to the person responsible for deducting tax at source; (c) the tax deducted at source is found to be in excess of tax deductible for any other reason;” ● Under such circumstances it was provided that :

“3. The matter has been considered by the Board. It has been decided that in the type of  cases referred to above, a refund may be made independent of the provisions of the Income­tax Act, 1961 to the person responsible for deducting the tax at source from payments to the non­resident, after taking the prior approval of the Chief Commissioner concerned.”

7.

It is not in dispute that subsequently in the circular no.790 dated 20.4.2000, the third category mentioned in clause(c) of para.(1) of   circular   dated   6.8.1998   came   to   be   deleted   and   only   two categories mentioned in clause(a) and (b) were retained. In para (9)   of the circular dated 20.4.2000, it was clarified that the refund was not to be issued to the deductor of tax in the cases referred to in clause(i)(c) of para.(1) of circular no.769 dated 6.8.1998. 8. In the case on hand, we fail to see how the case of the petitioner was not covered under clause(i)(c) of para.(1) of circular no.769 dated 6.8.1998. Said provision was sufficiently wide and would cover variety of cases of refund of excess tax deducted by source.

SCA/11132/2002 7/10 The petitioner deposited the amount of  tax  twice for the same payment only due to oversight. Such overpayment was required to be refunded. This was the only ground raised in the impugned communication. In the reply filed by the respondents, two more grounds are sought  to be raised. One, that  the circular dated 6.8.1998 was superseded  by subsequent circular dated 20.4.2000, and  two  that the  foreign company  was liable to  pay  tax; the contract was executed as per the agreement and the petitioner was not entitled to any refund. We are not able to accept either of the two objections. The case of the petitioner was  required to be considered under circular dated 6.8.1998 which was prevailing when the application was filed. Any subsequent change made long thereafter, could not be applied in case of the petitioner. We say so because the petitioner filed its application promptly and shortly after the event of deducting the tax in excess of liability. Such an application which was though filed on 2.11.1998, was not decided for a long period of time, despite repeated reminders from the petitioner. Nearly one year and six months passed when the Board issued fresh circular dated 20.4.2000. In that view of the matter, we are clearly of the opinion that subsequent circular could not have been applied.  Even without reference to Bombay High Court judgement in case of BASF(India) Ltd.(supra), this ground must be rejected. Simply because the contract was completed did not mean that the petitioner was liable to deduct tax twice. It was a pure mistake.

9.

The opposition in respect of both the counts therefore, must fail. Firstly, as already noted, we are unable to see how as contended by   the   respondents   case   of   the   petitioner   did   not   fall   under clause(i)(c)   of   para.(1)   of   circular   no.769   dated   6.8.1998. SCA/11132/2002 8/10 Subsequent deletion of such provision by virtue of circular dated 20.4.2000 could not have been applied to the petitioner. Quite independent of both the circulars, we are of the opinion that deduction of tax at source and depositing with Government twice was a pure mistake. The respondents cannot retain any amount that the petitioner paid under pure mistake particularly, when the refund thereof was claimed shortly after the second payment was made and mistake was detected. Contention of the counsel for the respondent that deduction at the time of remittance was not a tax and therefore, not refundable is self contradictory when he also contends that refund of tax is not covered either under circular dated 6.8.1998 or under circular dated 20.4.2000. If the amount deposited with the Government of India was not taxable at all, there was no question of holding  on such amount deposited with the Government under mistake. 10.The facts  are  thus  more than sufficiently   clear.  The  petitioner though not required to deposit any tax at the time of making mere provision for payment of technical fees to the foreign company, deducted   sum   of   Rs.19,49,400/­   and   also   deposited   with   the Government. At the time of subsequent remittance, the petitioner deducted yet again a sum of Rs.21,82,500/­ and also deposited with the Government. Such deposit of the amount twice was a mere mistake and the respondents ought to have refunded the original sum of Rs.19,49,400/­  to the petitioner on the application being made. 11.Under the circumstances, we are of the opinion that such amount must be refunded. We are also of the opinion that such refund should carry reasonable interest at­least after reasonable period of

SCA/11132/2002 9/10 the   petitioner   making   application   for   such   refund.   We   are conscious that in circular dated 6.8.1998, as also in circular dated 20.4.2000, it is clarified that on such refund, no interest under section 244A of the Act would be payable since such amount is not a tax. However, such provision cannot be applied in the present case. Firstly, we are of the opinion that present is not a case of tax deducted at source which was later on found to be in excess of the petitioner's liability. Present is a  case where out of sheer mistake, an   amount   was   deducted   twice   and   also   deposited   with   the Government.   As   per   the   counsel   for   the   Revenue   himself,   the deduction of Rs.19,49,400/­ and depositing with the Government at the time of making provision for payment was not a tax at all. If that be the position, such amount which was deposited with the Government under mistaken belief ought to have been refunded, even without reference to any of the circulars. Both the circulars essentially governed the situations where the tax at the time it was deducted at source is rightly deducted and deposited. However, due   to   subsequent   developments   such   tax   deposited   with   the Government   turns   out   to   be   in   excess   of   the   liability   of   the deductee. Such deductee would be entitled to refund thereof. But being a foreign company and not regularly assessed to tax in India, may not be interested in  pursuing such refund claims. To obviate such   hardship,   circulars   made   special   provision   enabling   the assessee   to   claim   refund   under   certain   circumstances.   In   the present case the petitioner deposited an amount which was at the outset was not required to be deposited at all. Such amount was deposited purely on mistake. Respondents could not and should not have tried to capitalise on such a mistake. On the respondents passing the refund claim,   within a reasonable period from the petitioner   making   application   for   such   purpose,   the   interest

SCA/11132/2002 10/10 liability to that extent could have been avoided. However, such application was firstly not decided for a long time and thereafter, was according to us wrongly rejected. The respondents must pay reasonable interest. 12.Under   the   circumstances,   petition   is   allowed   with   following directions : 1) Impugned communication dated 18.4.2001 at Annexure­A is quashed and set aside. 2) The respondents shall refund sum of Rs.19,49,400/­ with simple interest at the rate of 9% for the period after  expiry of four months from the date of receipt of the application dated 2.11.1998 till actual payment. 3) Such refund however, would be open to be adjusted against any existing tax liability of the petitioner. After verifying such aspect,   actual   refund   shall   be   made.   Entire   exercise   shall   be completed preferably within four months from the date of receipt of this order. 13.The petition is disposed of. Rule made absolute to above extent with no order as to costs. (Akil Kureshi,J.) (Harsha Devani,J.) (raghu)

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