- An Indian company cannot be considered as an agent of its non-resident shareholders in relation to the overseas transfer of its shares.
- Show cause notice on the Indian target entity as a representative assesse of a non-resident seller held to be without jurisdiction.
- The availability of alternate remedies such as the right of reply to a show cause notice will not be a bar to the High Court exercising its writ jurisdiction in such cases.
Recently, the High Court of Madras (the "High Court"), in WABCO India Ltd v. Deputy Commissioner of Income Tax, Chennai1, held that an Indian company has no role to play in the transfer of shares which took place outside the territorial limits of India. Accordingly, such Indian company could not be treated as an agent or representative assessee of the non-resident taxpayer for the purposes of the Income Tax Act, 1961 ("ITA").
The taxpayer in this case (the "Taxpayer") is engaged in the business of designing, manufacturing and marketing conventional braking products, advance braking systems and other related air assisted products and systems. 75% of the shares of the Taxpayer were held by a holding company based in the United Kingdom, ("Hold Co.") and balance being held by the public. In 2014, Clayton transferred its entire shareholding in the Taxpayer to a group company in Singapore ("Singapore Co.").
A share transfer agreement was entered into between both the parties. In exchange for shares of the Taxpayer, Hold Co. received 50,55,05,000 shares of Singapore Co. as a sale consideration (the "Transaction"). These shares of Singapore Co. were valued at approximately INR 2347 Crores leading to capital gains to the tune of INR 2147 Crores (approx.) in the hands of Hold Co. The Deputy Commissioner of Income Tax had furnished a certificate under Section 197 of ITA to Hold Co. contemplating 'NIL' withholding of taxes.
A show-cause notice ("SCN") was issued under Section 163 (c) of the ITA,2 seeking a reply in writing from the Taxpayer as to why it shouldn't be treated as agent of Hold Co. in terms of the provision of Section 160 to 163 of the ITA in respect of the Transaction. In the SCN, it was alleged that during scrutiny assessment of Hold Co., that the place of effective management of Hold Co. was found to be the United Kingdom but Hold Co. had created a paper transaction to obtain the benefits of the India-Netherlands Double Taxation Avoidance Agreement. On this basis, it was argued by the tax authorities that the Transaction had resulted in a tax liability amounting to around INR 429 Crores (approx.) in the hands of Hold Co. and a draft assessment order was issued to this effect. The tax authorities took a position that these capital gains had directly arisen as a result of the consideration received from the Taxpayer.
The Taxpayer had filed a writ petition under Article 226 of the constitution of India before a Single Bench of the High Court which was dismissed on the ground that the Taxpayer had a right to reply to the SCN and no order had been passed by the revenue authorities up to that point. The Taxpayer was directed to reply to the SCN within 6 months of the dismissal of this writ petition. The Taxpayer filed an intra-court appeal against the order of dismissal of this writ petition.
Whether the SCN issued by the tax authorities could be set aside by the High Court in exercise of its writ jurisdiction?
Power of High Court to quash SCN:
The High Court observed that while it is true that typically, a High Court should not exercise its writ jurisdiction in cases where an alternate remedy exists, it has been consistently held by the Supreme Court that this bar will not operate in at least the below three situations:
- where the writ petition has been filed for the enforcement of a fundamental right;
- where there has been a violation of principle of natural justice; and
- where an order or alternatively proceedings are without jurisdiction or the constitutional vires of an Act is under challenge.3
The High Court agreed that a SCN is not ordinarily interfered with in proceedings under Article 226 of the Constitution of India. However, it also observed that in cases where a SCN is issued without jurisdiction or where the pre-requisite conditions for its issue have not been satisfied or where acts alleged in the SCN do not disclose any case for action against the notice, the High court may intervene and quash such a SCN.
The High Court noted that it was settled law that no authority, especially a quasi-judicial authority (such as the revenue authorities) can confer jurisdiction on itself by deciding a question of its jurisdiction erroneously.4 In view of the same, it disagreed with the approach of the Single Bench of the High Court and held that the Taxpayer's writ petition ought not to be dismissed merely because the Taxpayer had a right to reply to the SCN and the Single Bench should have satisfied itself on the question of jurisdictional facts which lead to the issue of the SCN.
Lack of Jurisdiction
The Taxpayer argued that the SCN lacked jurisdiction as the pre-requisite conditions for issuance of notice under Section 163 (1)(c) of the ITA had not been satisfied. In the instant case, the non-resident seller, i.e., Hold Co., was not in receipt of any money from the Taxpayer which is required under Section 163 (1)(c) of the ITA. The High Court relied on the judgment of the Supreme Court of India in the case of Clagget Brachi Co. Ltd. v. CIT,5 where it was held that it was open to an Income Tax Officer to assess either a non-resident taxpayer or to assess the agent of such non-resident taxpayer. However, once an assessment had been made on one, there could be no assessment on the other. In the instant case, a draft assessment order had already been issued to Hold Co. regarding its capital gains tax liability arising from the Transaction, and subsequently, a SCN was issued to the Taxpayer in respect of the same tax liability in its capacity as an agent of Hold Co. The High Court was further informed that this draft assessment order had been finalized and a final assessment order had been issued user Section 143(3) read with Section 144C of the ITA.
The High Court placed reliance on a judgment of the Delhi High Court in the case of General Electric Co. and another v. Deputy Director of Income-Tax and Others,6 involving strikingly similar facts. In this case through a series of transfers, the shares of an Indian company were ultimately transferred to a Luxembourg company. A show cause notice was issued to the Indian company alleging that the income arising to the foreign company from the sale of its direct/indirect stake in the Indian company was liable to tax in India in view of the deeming provisions in Section 9(1)(i) of the ITA. It was, thus, proposed to treat the Indian company as the representative assesse or agent of the non-resident taxpayer. The writ petition by the taxpayer challenged this show cause notice. The Revenue contended that the matter was still at the show cause notice stage and hence, the writ petition was premature.
The Delhi High Court had stressed on a harmonious reading of Sections 160 to 163 the ITA and struck down the show cause notice on the basis that the Indian entity / taxpayer cannot be a representative assesse of the transferor. The conclusion was based on the fact that (a) the transaction involved a transfer of shares to a third party situated outside India; (b) the Indian company had no role in the transfer and (c) merely because those shares related to the Indian company, that would not make the Indian company as agent of the foreign company which had made the capital gains.
The High Court found itself in complete agreement with the Delhi High Court and dismissed the argument of the tax authorities that the decision should not be relied upon as the revenue had appealed against it. Accordingly, the High Court allowed the appeal and set-aside the impugned order of the Single Bench as well as the SCN.
The judgment of the High Court is a welcome one for taxpayers as it clearly holds that the tax authorities may not issue a show cause notice in the absence of a clear case against the noticee. This will especially bring relief to taxpayers where the tax department seeks to issue multiple proceedings on multiple parties in the same transaction, without cause.
The decision of the High Court also re-affirms the well-established principle that a notice cannot be issued without jurisdiction, and such a notice can still be struck down by the High Court under its writ jurisdiction, even though there may in fact be an alternate remedy.
The contention of the revenue department that it was not open to taxpayers to "pre-maturely" challenge a show cause notice in the absence of orders being passed by the revenue department was dismissed. This approach followed by the High Court in this case will save taxpayers from harassment by way of getting embroiled in unwarranted tax litigation on account of frivolous notices.
1 W.A. No. 884 of 2018.
2 163. (1) For the purposes of this Act, "agent", in relation to a non-resident, includes any person in India—
(a) who is employed by or on behalf of the non-resident; or
(b) who has any business connection with the non-resident; or
(c) from or through whom the non-resident is in receipt of any income, whether directly or indirectly; or
(d) who is the trustee of the non-resident;
and includes also any other person who, whether a resident or non-resident, has acquired by means of a transfer, a capital asset in India....
3 State of U.P. v. Mohd. Nooh A.I.R. 1958 S.C.
86; A.V. Venkateswaran, Collector of Customs vs. Ramchand
Wadhwani AIR 1961 SC 1506; Calcutta Discount Co. Ltd v. ITO Companies Distt. I., A.I.R. 1961 S.C. 372; Whirlpool Corporation vs. Registrar of Trade Marks (1998) 8 SCC 1.
4 Raza Textiles Ltd. v. Income Tax Officer (1973) 1 S.C.C. 633.
5 (1989) 44 Taxman 186 (SC).
6 (2012) 347 I.T.R. 60 (Del.).
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