This is an appeal filed by the appellant-company arising out of the order of Commissioner(A) XXXI, Mumbai dated 18-2-2002 passed against an order under section 195(2) by Dy. DIT (International Taxation)-2(1), Mumbai. Number of grounds have been raised which are argumentative as well as narrative however, for the sake of clarity reproduced below : "1. The learned Commissioner(A) erred in passing an order, confirming the stand of the assessing officer under section 248 of the Act.
The Appellant submits that the order of Commissioner(A) is bad in law, illegal and without application of proper facts in its proper prospective.
2. The learned Commissioner(A) erred in confirming the stand of the CIT with regard to the direction of the DDI (International Taxation)-2(1), Mumbai with regard to the deduction of tax at source at the rate of 20 per cent while remitting fund to, Deutsche Bank, U.K.The appellant submits that learned Commissioner(A) has not considered the facts as well as the legal submission put forth in its proper prospective and has without application of mind upheld the stand of deducting tax at source.
3. The learned Commissioner(A) grossly erred in confirming the stand of DDI (International)-2(1), Mumbai with regard to rejecting the application made for remitting the funds without deducting tax at source only on the ground that the power to grand exemption for withholding tax lies with Govt. of India who vide letter dated 5-2-2002 have withdrawn the exemption granted earlier under section 10(15)(iv)(f) of the Act.
4. The learned Commissioner(A) grossly erred in not giving direction to DDI (International Taxation)-2(1), Mumbai with regard to taxability of interest payable on the loans.
5. The learned Commissioner(A) grossly erred in directing the appellant to deduct tax at the rate of 20 per cent of all future payment of interest on the said loan." On careful reading of the above grounds it emerges that the issue revolves around the appellant denying the liability to deduct withholding tax at the rate of 20 per cent directed vide an order under section 195(2) on remittance to Deutsche Bank-AG, Winchester House, London and challenged such direction under section 248 of Income Tax Act.
Facts of the case leading to this appeal are that an order under section 195(2) dated 13-2-2002 was passed by Dy. DIT (International Taxation)-2(1), Mumbai, according to which it was directed to remit interest of US $ 105902 to M/s. Deutsche Bank, London after deducting withholding tax at the rate of 20 per cent. For the sake of completeness all the four paras of the impugned order are reproduced below : "1. This is with reference to your letter dated 11-2-2002 seeking a No Objection Certificate to remit interest of US $ 1,05,902.78 to M/s.
Deutsche Bank, AG, Winchester House, 1, Great Winchester Street, London EC2N 2DB, without deduction of withholding tax at source.
2. We have considered the submissions made by you. The power to grant exemption from withholding tax under section 10(15)(iv)(f) the Income Tax Act, 1961 rests with the Government of India, Ministry of Finance, Department of Economic Affairs (GOI). Since the exemption, under section 10(15)(iv)(f) in respect of the above interest payment has been withdrawn by GOI, vide its communication dated 5-2-2002 to you, the above interest would be liable to withholding tax in India.
3. in the absence of details of the Note holders to whom the above interest is due and the countries in which they are tax resident, withholding tax at the rate of 20 per cent as per the provisions of section 11 5A of the Incometax Act should be deducted from the above-mentioned interest payment. You are hereby authorised to remit above interest of US $ 1,05,9102.78 after deducting withholding tax at the rate of 20 per cent.
4. This authorization shall remain in force till 31-3-2002 or the remittance whichever is earlier unless it is cancelled or modified before the expiry of the said financial year. The fact of the cancellation or modification will be intimated to you." Aggrieved by this direction an appeal was instituted before learned Commissioner(A). Background of the grievance as narrated before the first appellate authority was that the appellant-company has raised a foreign currency loan of US $ 150 Million for the purpose of part financing of foreign exchange cost Jamnagar Petro Chemical Complex. The Government of India, Ministry of Finance vide a letter dated 21-7-1997 had conveyed to the company about the approval for raising the foreign currency loan. Through this letter it was conveyed that payment of interest, commission and fees in respect of the above-mentioned loan was exempt from withholding tax under section 10(15)(iv)(f) of Income Tax Act. The appellant was remitting interest on the borrowing till 5-2-2002 without deducting any withholding tax in India. Subsequently the Govt. of India vide a letter dated 5-2-2002 has communicated to the appellant regarding withdrawal of exemption granted under section 10(15)(iv)(f) in respect of above foreign borrowings. The appellant company has narrated that the withdrawal of exemption by the Govt. of India, Ministry of Finance was unjustified and legally incorrect. It was pleaded that the said section does not permit withdrawal of exemption granted earlier, accordingly prayed to allow the appeal.
On the basis of above brief background learned Commissioner(A) has decided the issue in a cursory manner as follows: "4. I have considered the submission of the appellant counsel and the order of the assessing officer dated 13-2-2002. The assessing officer has directed to withhold the tax as the power to grant the exemption on withholding tax under section 10(15)(iv)(f) rests with the Govt. of India Ministry of Finance, Department of Economic Affairs and as the exemption under section 10(15)(iv)(f) in respect of the interest was withdrawn by the Govt. of India vide its communication dated 5-2-2002 he directed the appellant to deduct the tax before remitting the interest on the borrowing. I too feel that the action of the assessing officer is correct as the power of granting exemption and withdrawing it lies with the Govt. of India Ministry of Finance, Department of Economic Affairs, and accordingly, the order of the assessing officer is confirmed. In the result both the grounds are dismissed." So the first appellate authority has concluded that since the exemption has already been withdrawn and the power of granting exemption vests with the Government, therefore, the assessing officer has rightly directed to withhold the tax. Grounds raised in this regard were dismissed at the stage of first appeal.
An another ground was also raised that the Dy. Director (International Taxation) failed to give direction with regard to taxability of interest in future on the said loan. This ground was also dismissed on account of the fact that since the exemption from withholding tax had been withdrawn by the Ministry of Finance so the appellant-company was liable to deduct tax at appropriate rate on any interest remitted in future on the said loan. Due to the dismissal of appeal now the appellant-company is before us.
On behalf of the appellant learned Counsel, Shri A.V. Sonde appeared and argued at length. First of all he has explained the nature of transaction involved in this appeal. During the period 1993 to 1997 the appellant-company had raised Foreign Currency Loan of approximately US $ 1.30 billion. This figure included the impugned foreign currency loan of US $ 150 million from foreign financial institutions for part financing the import of capital goods and services for Petro Chemical Complexes at Hazira and Jamnagar, Gujarat. In this regard correspondence was made with Government of India and the designated authority is the Director (ECB), department of Economic Affairs, Ministry of Finance, North Block, New Delhi. Learned A.R. has explained that ECB stands for External Commercial Borrowings. In this connection a letter dated 29-1-1997 was addressed in the form of an application to raise US $ 425 million to part finance Jamnagar Petro Chemical Complex.
It was explained that the Hazira Petro Chemical Complex was nearing completion and on completion of Phase-II Project the production capacity of RIL was likely to increase upto 300 per cent. In this application it was reminded that to part finance the project cost for Hazira Phase-II Petro Chemical Complex a permission to raise ECB had been given of US $ 914 million. The request for approval was as follows in the said letter dated 29-1-1997.
"An application in the prescribed format duly filled is enclosed for your consideration and approval. As the project is ready to take off with all other required approvals already in place, we would now request your approval leading to financial closure to raise upto US$ 425 million by way of FRNs/Syndicated loans/Private Placements/Bond issues from the international capital markets through various currency options like US Dollar/ Yen/Deutsche Mark/pound Starling, with a minimum average maturity of 7 years." The Ministry of Finance has communicated vide a letter dated 6/10-3-1997 to approach the department for the purpose of ECB only after fully utilizing the ECB already sanctioned for Hazira Phase-II Project. In view of this direction the company had corresponded with Dy. Director (ECB). It was informed to the concerned authority vide a letter dated 4-4-1997 that against the ECB clearance for a total amount of US $ 914 million, commitments in Foreign Exchange loan amounted to US $ 933.53 million. It was mentioned that out of this amount, US $ 708.65 million have already been spent upto 31-1-1997. Through this letter it was also explained that ECB approvals which were given earlier in respect of Hazira Phase-II Project had already been utilized to the extent of 80 per cent and for the balance amount letters of credit have been established. It was stated that the assessee-company confirmed the prescribed ECB guidelines. There was a communication from Dy. Director (ECB) vide a letter dated 24-4-1997 informing the company about the proposal of US $ 425 million through FRN/Syndicated Loans towards implementation Jamnagar Petro Chemical Complex could be considered only when ECB already sanctioned for Hazira Phase-II Expansion Project would stand fully utilized and the project is fully completed. At this juncture learned A.R. has informed that all the conditions imposed earlier were completely fulfilled to the satisfaction of the authorities and there was no violation of any condition. At a latter stage after the borrowings were made certain fresh conditions were imposed which according to learned A.R. should not have been made and were unjustifiable. In this regard an another letter written by the assessee-company to Dy. Director (ECB) dated 5-5-1997 has also been mentioned to establish that everything moved according to the guidelines, for ready reference reproduced below.
"It is true that out of US$ 914 million ECB raised, a sum of US$ 205.35 million is yet to be utilized as of 31-1-1997. You may kindly observe that we have given complete details of Letters of Credit established and outstanding for a total value of US$ 224.88 million for our Hazira Project. These L/Cs will be retired during the course of next few months on the basis of shipments made or collaboration fees paid and these L/Cs would be covered by the yet to be utilized ECB proceeds of US$ 205.35 million. Trust the position is clear.
At this stage, we would like to mention that since 31-1-1997, we have further made payments of US$ 29.1 million towards Hazira Projects totalling to US$ 737.75 million upto 31-3-1997 (Auditor's Certificate enclosed).
In addition, we have spent US$ 2.85 million towards procurement of indigenous equipment for Captive Power Plant taking the total to US$ 75.67 million upto 31-3-1997." It was requested by the Company to process the application regarding raising US$ 425 million towards part - finance on Jamnagar Petro Chemical Complex. The Ministry has responded vide letter dated 19-5-1997 asking the assessee-company to submit a report regarding the physical and financial progress of Hazira Phase-II Expansion Project required in connection with the further processing of foreign currency loan of US $ 425 million towards part finance of Jamnagar Petro Chemical Complex. In compliance on 21-5-1997 information were supplied.
Finally on 21-7-1997 Ministry has approved the sanction communicated through Dy. Director (ECB). The subject as mentioned in the approval was in respect of proposal for a foreign currency loan through Euro Sterling Bond issued and Private Placement Bond issued for part financing project. It was conveyed that the sanctioning of the approval of the Govt. of India, Ministry of Finance for obtaining a foreign currency loan was with certain terms and conditions. learned A.R. at this juncture has vehemently stated that the conditions referred in that letter were fulfilled however, there was no condition about the end use of the loan raised earlier. Referring page 23 of paper book containing photocopy of the said approval dated 21-7-1997 learned A.R.has submitted that the conditions were in respect of arrangement of loans 150 million through Euro Starling Bond issued and another 150 million through Private Placement Bond issued. Repayment term in respect of the bond issued was at the end of 10 years in lump sum however, the repayment term in respect of bond was on final maturity of 10 years and subsequently every five years thereafter. Videpara-4 of this letter the Govt. has -clearly granted the exemption from withholding tax under section 10(15)(iv)(f) of Indian Income Tax Act in respect of the payment of coupon/interest rate, commission and fees.
There was an another condition of approval of RBI, Exchange Control department and Learned A.R. has mentioned that the same was also obtained. The assessee-company has acted upon accordingly. The company has started remitting the interest without withholding tax in India. A letter of thanks was also issued dated 22-7-1997 for the approval of allowing to raise US$ 405 million and it was also communicated that the company had already launched sterling bond issue arranged by M/s. Union Bank of Switzerland, HSBC, Merryllynch. Thereafter a clarification was sought about the utilization of ECB proceeds. In this regard a certificate of a Chartered Accountant was furnished and vide a letter dated 28-11-1996 it. was informed to the Director ECB that as on 31-10-1996, US$ 646.77 million in foreign exchange have been spent to fund the foreign exchange component of the Hazira Phase11 Project. This letter also sought clarification about the utilization of ECB and Learned A.R. has referred it as follows.
It is a fact that we had been seeking your permission to raise ECB for funding foreign currency capital expenditure. However, the guidelines issued by the department on 19-6-1996 expressly permit utilization of ECB proceeds for financing capital expenditure incurred in-rupees. As the expenditure incurred by us on captive power plants conforms to these guidelines, we requested you vide our letter of even reference dated 8-10-1996 to permit utilization of ECB proceeds for rupee related capital expenditure in respect of Captive Power Plant. We hope you will accede to our request." Thereafter the Dy. Director (ECB) has sought further clarification about the ECB aggregating to US$ 600 million for financing the import of capital goods and services for Hazira, Phase-II Project. It was directed to submit details on the draw down against the ECB as well as the purpose for which the amount had been utilized. It was also directed to submit a certificate from the auditor indicating purpose-wise utilization against the ECB raised till that date. Learned A.R. has emphatically mentioned that, that was the turning point as well as the start of the dispute. The first objection raised by learned A.R. is that once an approval has been granted and on the basis of that approval borrowings have been made then there is no authority to impose certain fresh conditions. According to learned A.R. though the fresh conditions imposed have also been fulfilled even then the adverse inference was drawn with the result exemption was withdrawn. Vide letter dated 8-10-1996 the details of approval of US$ 600 million was informed to Dy. Director (ECB) and in that letter it was also informed the utilization of the same. In short it was explained that in respect of Hazira, Phase-II Project the utilization was US$ 609.29 million in foreign exchange to meet part of the foreign exchange component of the project cost and further US$ 62.38 million was towards capital cost of captive power plant. So it was informed that against the approvals of US$ 600 million the funds were utilized to the extent of US $671.64 million. On page 35 of paper book there is a statement of payment of Hazira Project. Further clarifications were sought from the assessee-company and in this regard a letter dated 26-11-1996 was referred by learned A.R. and particularly para (ii) was cited, reproduced below : "The second tranche of US$ 150 million from the initial ECB of US$ 300 million approved to you was drawn on 22-9-1995, whereas prior to this date, you have reported expenditure aggregating to UD$ 324.61 million.
Out of this expenditure, expenditure upto US$ 300 million can be adjusted against the ECB approved to you. in this regard, you are required to submit documentary evidences supported by Auditor's Certificate indicating that the expenditure has been incurred on the items for which ECB was proposed and that this expenditure has been met from your own resources." Learned A.R. has explained the reason for quoting this para is that the Government was very well aware about the utilization of "own resources" towards expenditure incurred on the items for which ECB was proposed.
The company has also moved a proposal for pre-payment/buy back of outstanding ECBs. Through a letter dated 16-12-1998 a request was made for the said approval. In this letter it was stated that RIL has raised an aggregate amount of $ 1.9 billion from the International Debt and Equity Market from 1992-1997. An aggregate amount of nearly $600 million from those proceeds had been repatriated to the country. It was mentioned in the said letter that the balance proceeds of approximately $1.3 billion had been retained off shore. It was mentioned that considerable cost savings have been achieved in the implementation of the project. So the financing pattern of the project had also been altered. Due to this reason ECB proceeds were stated to be no longer required for the specified end uses as the projects for which the borrowings were made have been implemented with rupee resources. In that situation a request was made, seeking approval for permission for pre-payment/buy back of outstanding ECB $1.3 billion. This proposal was with the intention to preserve the available foreign exchange reserve.
However, the same was not approved and vide a letter dated 12-4-1999 Dy, Director (ECB) has rejected the same in the following words : "Please refer to your letter No RIL:DLH:305(a) dated 21-1-1998 and letter dated 16-12-1998 on the above-mentioned subject for prepayment of 20 per cent and 100 per cent of outstanding ECBs respectively, by utilizing, ECB proceeds parked abroad. The matter has been examined.
Since the above requests for the prepayment from ECB proceeds held abroad where not found to be in conformity with the existing guidelines, these cannot be acceded to, 2. Further, it has been noted that the ECB funds raised above had not been utilized for the specified end uses which is one of the essential terms of the ECB approval for availing relevant exemptions under section 10(15)(iv)(f) of Income Tax Act, 1961. You are, therefore, not entitled to any tax benefit in terms of the above provision of the Income Tax Act, 1961." In this regard learned A.R. has vehemently opposed the withdrawal of exemption being done, in his words, arbitrarily by the Government.
According to learned A.R. there was no such condition for utilization of ECB for the specified end use. According to learned A.R. the assessee-company has acted upon in the manner prescribed earlier with the understanding that the exemption under section 10(15)(iv)(f) was available.
On rejection of exemption one more important development took place, as informed by learned A.R. that a writ was filed before the Hon'ble Delhi High Court. This writ was rejected by the Hon'ble Court being not maintainable. It was informed by learned A.R. that the writ petition was filed subsequent to the impugned order passed under section 195(2) dated 13-2-2002 and the order of the first appellate authority, now under appeal, dated 18-2-2002. The said order of Delhi High Court is dated 31-5-2002 reported in Reliance Industries Ltd. v, UOI (2002) 258 ITR 143 (Del), wherein the Hon'ble Court has observed that the Assessing Authority and the Appellate Authority are Quasi Judicial Authorities and by reason of the order impugned in the writ petition Central Government has in no way curtailed the power of a judicial or quasi judicial authority. At this juncture learned A.R. has supported the maintnability of the present appeal being filed before us i.e., ITAT.After narrating the factual background of the withdrawal of exemption, learned A.R. has advanced his arguments on the legality of the issue i.e., application of section 10(15)(iv)(f) He has advanced his arguments on the lines that section 10 provides certain income not to be included and clause 15(iv) states income by way of interest payable by an industrial undertaking falls under the category of exemption on any monies borrowed by it in foreign currency from sources outside India under a loan agreement approved by the Central Government having regard to the need for industrial development in India. Clause (f) provides the approval and prescribes interest rate approved by the Central Govt./ but does not provide the end use of the monies borrowed in foreign currency. Learned A.R. has argued that since there is no clause specifying the end use of the money borrowed, therefore, the withdrawal of exemption by the authorities was beyond their scope. He has also argued that as far as the approval was concerned the same remained unaffected and stood as it was granted, however, only exemption was withdrawn. In this regard he has submitted that several other clauses of section 10 provides end use of the funds or money and some of the clauses do not prescribe such limitations. Referring section 10(15)(iv)(c) learned A.R. has mentioned that the Legislature has chosen such words to specify the usage of moneys borrowed to be in respect of purchase outside India of raw material. Likewise in the same section clause (e) states that where the moneys are borrowed for the purpose of advancing loan to industrial undertaking then the clause is effective. This section specifies end use of the money borrowed by using the words "in respect of" or using the words "for the purpose of". However, according to learned A.R. the word used in sub-clause (f) is "having regard to". Because of this distinction it is argued that the Govt. has wrongly interpreted this section and illegally withdrawn the exemption. As the assessee has utilized the funds by remittance from India thus saved the exchange fluctuation rate by parking the funds outside India, therefore, there was no irregularity at all. This was done by the assessee-company with the concept of fungibility of funds. According to his arguments funds being inter changeable hence either of the two could be used and the choice was with the assessee-company because there was no such restriction imposed under any of the relevant clause of the statute. His other argument was that even if it is presumed that there was a default on the part of the borrower i.e., the assessee-company, even then the lender i.e., the foreign institution should not be penalized. In this regard he has cited a decision of Calcutta High Court in the case of CIT v. Bhartiya Cutler Hammer Co. (1982) 232 ITR 785 (Cal) and another decision of Chotatingrai Tea Estate (P) Ltd. v. CIT (1999) 236 ITR 644 (Gau.). This order of Gauhati High Court was later on approved by Hon'ble Supreme Court, reported in CIT v. Chotatingrai Tea (2002) 258 ITR 529 (SC).
Regarding fungibility of fund he has cited a decision of Hon'ble Calcutta High Court in the case of Woolcombers of India Ltd. v. CIT (1982) 134 ITR 219 (Cal) wherein it was held that in case amount of profits exceeds advance tax liability and the monies are withdrawn from overdraft account both for business purpose and also for payment of advance tax then the presumption is that the advance tax was paid out of profits and not out of over draft account. In support of the arguments of fungibility one more decision of Hon'ble Apex Court in the case of J.B. Boda & Co. (P) Ltd v. CBDT (1997) 223 ITR 271 (SC) was referred wherein the issue was that the appellant instead of remitting the entire amount to the foreign reinsurers and then receiving remittance from the said insurers the commission due to it, entered into an agreement with the foreign reinsurers that while remitting reinsurance premia, the appellant would retain the fee due to it for the technical services rendered and this arrangement stated to be effected only with the concurrence or the permission of the RBI. So the court has observed that a two-way traffic was unnecessary. The court has directed the Board to process the agreement in the light of the principle laid down in the said judgment.
The next contention of learned A.R. was in respect of the powers exercised by the Govt. of withdrawal of exemption. In this regard he has vehemently argued that once the approval was granted and the specific condition regarding the need for industrial development in India having been fulfilled along with the rates approved by the Central Govt. then there was no occasion to withdraw the said exemption. He has vehemently argued that section 10(15)(iv)(f) does not prescribe the condition of, "end-user", therefore, the Central Govt.
cannot go beyond the provisions of Income Tax Act by imposing an another condition of utilization of funds directly for the industrial development. In this regard he has clarified that the funds were definitely utilized towards industrial development in India, as explained supra, but due to the availability of surplus funds generated from Indian resources, therefore, there was fungibility of funds and the Indian corpus was utilized instead of wasting foreign corpus. At this juncture learned A.R. has also clarified that since the exemption had been withdrawn under Income Tax Act, therefore, this action of the Govt. is subject to appeal before the Tribunal. Learned A.R. has further advanced his arguments that once there is no condition prescribed in the section itself then the concerned revenue authorities have no power to frame any rule in this regard. He has submitted that the rules are framed only when section provides such rules otherwise there is no sanctity if any such rule is framed. Relying upon CIT v.New Citizen Bank of India Ltd. (1965) 58 ITR 468 (Bom) learned A.R. has mentioned that when a rule is made under a particular section, it is the section which controls and governs the rule and the rule must be construed in the light of the section and not vice versa Another decision of Hon'ble Bombay High Court in the case of CIT v. Abdul Hussain Essaji Arsiwalla (1968) 69 ITR 38 (Bom) is also cited wherein it was held that rules must be incorporated in the light of the section under which they are made.M.C.T. Muthiah Chettiar Family Trust v. Fourth ITO (1972) 86 ITR 282 (Mad) (5) CIT v. Hyderabad Asbestos Cement Products Ltd. ( 1988) 172 ITR 762 (AP)Chief Inspector of Mines v. Lala Karam Chand Thapar AIR According to his arguments based upon. the precedents cited, the provisions of the Act are supreme and next in the line are rules, then notifications and in the last letters of any authority. He has contended that the doctrine of "reading down" has been accepted in principle by several Courts according to which if there is conflict between substantive provision of Act and rule then it is the rule which must give way to the provisions of the Act. Before concluding his arguments, learned A.R. has again reiterated that once a lender of money is entitled for a deduction under section 10(15)(iv)(f) then he should not be penalized by withdrawing the exemption on the ground that the borrower has not complied with certain conditions. The application before the Government Authorities were only in respect of pre-payment of loan which resulted into withdrawal of exemption granted to the lender. In this manner the lenders were penalized without any fault on their part. The action of the withdrawal of exemption was illegal, improper, unwarranted and against the provisions of Income Tax Act.
Learned A.R. has concluded.
On behalf of the revenue learned D.R. Shri O.P. Sharma appeared and also strongly supported the withdrawal of exemption. At first he has challenged the jurisdiction of the Tribunal of entertaining this appeal because according to his arguments the issue has already been resolved in assessee's own writ filed before the Hon'ble Delhi High Court. In his opinion once a writ of the appellant had already been. dismissed by a higher judicial body then the lower judicial forum has no authority to entertain any appeal of the same issue. Further he has argued that there was no illegality in the order passed under section 195(2) of Income Tax Act because the assessing officer being a subordinate authority has simply followed the directions of the Government regarding withdrawal of the exemption. It is the Government who has the power of granting the exemption and simultaneously also has the power of withdrawal of exemption. In the judicial hierarchy system this appeal should not have been filed before the Tribunal by the assessee once he has lost this issue before the Delhi High Court. Learned Departmental Representative has also drawn our attention on the fact that the applicability of section 248 is subject to fulfilment of certain conditions such as deduction of tax and payment of tax. The assessee has to establish that such conditions have been fulfilled.
According to him, even otherwise also the assessing officer has done the right thing by following the direction because the Government had judicially exercised its power of withdrawal of exemption. On merits of the case, the learned Departmental Representative contended that the assessing officer had made an order under section 195(2) in conformity with the decision of the Government of India and, therefore, there was no illegality in the order of the assessing officer. The learned Departmental Representative further submitted that the ITAT had no jurisdiction to revoke the decision of the Central Government. The Departmental Representative took the Hon'ble Tribunal through the various press releases relating to ECB and submitted that the policy of Government was to ration the utilization of the limits of ECB and that object is clarified in the following paras : "The policy seeks to keep on annual cap or ceiling on access to ECB, to ensure that debt is kept at a sustainable level. This would imply strict adherence to approval and monitoring mechanisms." The learned Departmental Representative stressed the terms "cap, ceiling, approval and monitoring". It was contended that the funds borrowed abroad never reached the Appellant in India and, therefore, could not be said to have been utilized. In relation to the initial approval dated 21-1-1997, it was submitted that the terms and conditions applied to the approval and not to the exemption and that the exemption was not granted subject to any terms and conditions and could be withdrawn by the Government at any time. It was submitted that the refusal to give the approval for repayment of ECB because of non-utilization was within the ambit and policy relating to the "monitoring" and its object of keeping a vigil on the utilization. The learned Departmental Representative relied on the decision of the Supreme Court in Bannari Amman Sugars Ltd. v. CTO (2004) 3 RC 622. It was submitted that it was not open to the Appellant to rely on the principle of promissory estoppel. In nutshell learned Departmental Representative has argued that the validity of withdrawal of exemption under section 10(15)(iv)(f) by the Central Government cannot be challenged at the stage of appeal before the Tribunal and the right forum where it can be challenged, had already been exhausted by the assessee. The order passed under section 195(2) is only a consequential order not to be challenged again independently. According to learned Departmental Representative Delhi High Court had already observed that "we do not find that there exists any illegality, irrationality or procedural impropriety in the decision", therefore, not open to again challenge the same. He has concluded that once the Government of India had applied its mind about the utilization of funds and have found certain irregularity resulting into withdrawal of exemption, therefore, all consequential order thereafter should not be further subject to litigation.
In his rejoinder learned A.R. has emphatically opposed the view expressed from the side of the revenue specially the question of jurisdiction of the Tribunal. Learned A.R. has emphasized that only that portion of the Delhi High Court was referred by learned Departmental Representative that too in distorted manner to give a colour as if the issue had been settled by the Hon'ble Court. But the issue was not settled by the Hon'ble Court as is evident from the very next line of the said decision mentioning, "this court is not concerned with the merits of the decision". Now the appellant is challenging the merits of the issue specially the withdrawal of exemption because the prescribed authorities have not heard at all the point of view taken by the assessee. Learned A.R. has further strengthened his arguments by stating that day in and day out a decision of a bureaucracy is challenged before the judiciary, hence this is not a solitary appeal filed before the Hon'ble Tribunal. He has concluded that if such approach of the executive is approved then an honest taxpayer shall always remain in doubt and fear about the concession or exemption already granted.
We have carefully heard the submissions of both the sides at length and thoroughly examined the factual as well as legal aspect of the issue raised before us on proper perusal of the material placed before us.
The appellant was aggrieved and the issue arises from an order passed under section 195(2) of Income Tax Act dated 13-2-2002, relevant portion already reproduced supra, through which the assessee was directed to remit the interest only after deducting withholding tax at the rate of 20 per cent. In fact the appellant has moved an application seeking a "No Objection Certificate" in respect of remittance of interest of US $ 1,05,902.78 to M/s. Deutsche Bank, AG London without deduction of withholding tax at source. This request was rejected by the concerned authority i.e., Dy. Director of Income-tax (International Taxation), Mumbai vide impugned order under section 195(2) of Income Tax Act on the ground that the exemption under section 10(15)(iv)(f) in respect of interest payment had already been withdrawn by Government of India vide its communication dated 5-2-2002. So the interest was held to be liable to withholding tax in India. The first appellate authority has also dismissed the plea of the assessee and affirmed the action of the assessing officer in a brief order, relevant portion already reproduced supra We have also narrated in above paras the facts and figures of the External Commercial Borrowings (hereinafter referred to as the ECB) availed in respect of a project of Petro Chemical Complex at Hazira and Jamnagar. To resolve this issue it is in the interest of justice to first of all streamline the question to be answered by us which according to us are as follows : (1) What is the implication of Hon'ble Delhi High Court decision as well as the SLP filed before the Hon'ble Apex Court on the Jurisdiction of the Tribunal? (2) What is the scope of section 10(15)(iv)(f) and whether the exemption was rightly withdrawn considering the utilization of ECB and merits of the case? (3) Whether the assessing officer was right in directing the assessee to deduct withholding tax at the rate of 20 per cent vide an order under section 195(2) of the Income Tax Act.
Even before we proceed to answer the above questions it in pertinent to examine the contents of section 248 of Income Tax Act, which according to both the parties is the only section under which an appeal lies against such direction as made in the impugned order under section 195 of Income Tax Act. The section 248 reads as follows : 248. Any person having in accordance with the provisions of sections 195 and 200 deducted and paid tax in respect of any sum chargeable under the Act, other than interest, who denies his lability to make such deduction may appeal to the Commissioner(A) to be declared not liable to make such section." From plain reading of this section there is no ambiguity that an appeal is provided to a person who, having deducted tax and paid the sum, denies his liability to make such deduction. A person who denies liability to deduct tax under section 195 on the amount payable to a non-resident is entitled to appeal under section 248 and the Commissioner(A) has the jurisdiction to quantify the amount on which alone the tax is deductible. In the case of CIT v. Wesman Engineering Co. (P) Ltd. (1991) 188 ITR 327 (SC) it was held that, "language of section 248 is wide enough to cover any order passed under section 195.
In an another decision Hon'ble Karnataka High Court in the case of Asstt. CIT v. Motor Industries Co. (2001) 249 ITR 141 (Karn) has also entertained this argument that where an assessee was denying the very liability to deduct tax, the Tribunal was justified in entertaining the appeal in respect of the liability under section 195 of the Income Tax Act and appeals relating to levy of interest. These two decisions are sufficient and suffice to state that the first appellate authority as well as the Tribunal both are competent to decide this issue being duly authorised by the above-cited provisions of Income Tax Act.
Now we have to answer the first question about the jurisdiction of this Tribunal keeping in view the order of Hon'ble Delhi High Court and the SLP decided by the Hon'ble Apex Court. On careful reading of the order of the Delhi High Court it is implicit that the court was aware of the fact that vide an order under section 195(2) dated 13-2-2002 the application of the assessee had been rejected. Further the Hon'ble Court was also aware that an appeal had been preferred by the appellant against the said rejection before the first appellate authority i.e., learned Commissioner(A). Vide para 13 the Hon'ble Court in the said order has clearly mentioned about these facts. Being fully aware of the entire situation and the circumstances under which the exemption was withdrawn resulting into direction of 20 per cent deduction of tax the Hon'ble Court at page 159 placitum "H" has observed as follows : "The question which survives for consideration now is as to whether by reason of the impugned order the Central Government issued any direction to the statutory authorities. In the instant case no action had been taken as a result whereof the quasi-judicial authorities became denuded of their quasi-judicial power. Merely communicating the impugned judgment to the effect that such exemption had been withdrawn is communication of a foundation of fact. If, according to the petitioner, the order of the quasi-judicial authority suffers from any illegality they could have carried the matter higher up." So the Hon'ble court has viewed that the quasi-judicial authorities cannot be denuded of their quasi judicial power. Mere communication of withdrawal of exemption according to the view expressed was a foundation of fact to be adjudicated by quasi-judicial authority to determine whether such an order suffers from any illegality. After expressing this view the Hon'ble court has concluded as follows vide placiturn "C" and "D" on page 160.
"There cannot be any doubt whatsoever that the assessing authority and the appellate authority are quasi-judicial authorities. By reason of the order impugned in the writ petition the Central Government has in no way curtailed the power of a judicial or quasi-judicial authority.
(C) It is well-known that the, jurisdiction of judicial review of this court is limited. Having regard to the facts and circumstances, we do not find that there exists any illegality, irrationality or procedural impropriety in the decision. This court is not concerned with the merits of the decision." (D) After hearing the submissions of both the sides and on threadbare reading of the order of the Hon'ble Delhi High Court we find force in the arguments of learned A.R. Having read the paras of the said order it cannot be culled out that final direction of the Delhi High Court was that this issue be decided by the assessing authority and the appellate authority who are the quasi-judicial authorities. Due to this reason the Hon'ble Court has not shown its concern with the merits of the decision. On a conjoint reading of the two paras it is amply clear that the matter was left open to be decided by quasi-judicial authorities after taking into account the merits of the decision of withdrawal of exemption challenged before the Hon'ble Court. So we have to act upon accordingly and following the direction of the Hon'ble Court hereby we are authorised as well as empowered to decide this appeal.
At this juncture, even after deciding the issue of jurisdiction whether lies with the Tribunal or not in above para, still we deem it proper to consider a step further that whether the Tribunal has jurisdiction to look into the question as whether the decision of the Central Government and withdrawal of exemption was correct. In this connection an argument was placed before us that an Act is the supreme considering the hierarchical tends ie., the supreme is the Act, then comes the rules made thereunder, next is the position of notification and the last is letters or approvals. It was argued with supporting case laws that the rules must be sub-servient to the provision of the section enacted in a statute. In the case of New Citizen Batik of India (supra) Hon'ble Bombay High Court has also observed. "when a rule is made under a particular section it is the section which controls and governs the rule and the rule must be construed in the light of the decision and not vice versa".
So the basic question is that once because of the letter or notification the provisions of the statute have been negated or diminished by an executive order then what is the course left to a taxpayer. Naturally the answer is that a taxpayer has no option but to knock the door of the judiciary. In a plethora of decisions it was unequivocally held that the full effect of the provision has to be given in preference to supporting legislation such as rules, notifications, approvals etc. Some of the decisions in this regard are worth quoting as follows.
(i) Abdul Hussein Essaji Arsiwalla's case (supra) wherein the Hon'ble Court at page 44 has observed as under : "It is a cardinal principle of interpretation that it is this main statute which will govern the rules made under the rule making power given under the Act and not vice versa If the interpretation of the provision of the statute is clear, a rule framed under the rule making power given under the statute, cannot affect it. It is well-settled that rules must be interpreted in the light of the section under which it is made and no exercise of the rule-making power can affect or derogate from the full operative effect of the provisions of the statute." (ii) Taj Mahal Hotel case (supra) wherein vide para 49 the Hon'ble Court has observed as under : "It has been rightly observed that the Rules were meant only for the purpose of carrying out the provisions of the Act and they could not take way what was conferred by the Act or whittle down its effect." (iii) M.C.T. Muthiah Chettier Family Trust's case (supra) wherein at page 88 observed as under : "The role of subordinate or delogated legislation and the part it could play as an ancillary body to the primary legislative authority is very well channelised by rules of interpretation. Any such delegated power being essentially subordinate in its nature, is limited by the terms of the enactment whereunder it is delegated. It is, therefore, necessary that the delegated authority must be exercised strictly in accordance with the powers creating it and in the light and spirit of the parent or enabling statute. It cannot be postulated that the right of delegation can be unlimited in its scope .....................
All rules or forms which are creatures of such rules, prescribed for the purpose of effectuating the policy of the statute, must be read in the light of the statutory provisions in the main enactment under which they are made and, therefore, such rules or forms cannot contradict or create an irreconcilable position resulting in an anomalous situation.
The primary and the only object of the Income Tax Act is to tax, tax and tax the income if the Legislature in its wisdom grants a concession and by creating a concession on reciprocal right or privilege is vested in an assessee, such a reciprocal right cannot be widly dealt with so as to negate its usefulness by making a rule which cannot be reconciled with the main statutory provision. The object of the subordinate legislation is to carry out the statutory provisions effectively and not to neutralize or contradict them. The rules made under the rulemaking power should strictly conform with the intendment of the main provisions of the statute and be consistent therewith ........................
(iv) Bombay State Transport Corporation's case (supra) wherein vide page 405 observed as under : "It would appear to us that there is much to be said in favour of the view that this is not within the competence of the rule-making authority. To put it in other words, a rule made in this manner which provides for a nil percentage of depreciation on a certain class of assets, or in class of cases, to use the language of section 10(2)(vi), cannot be accepted as a rule made for carrying out the purposes of the Act; indeed, such a rule may be regarded as patently violative of the purposes of the Act, i.e., of section 10(2)." (v) Hyderabad Asbestos Cement Products Ltd's case (supra) wherein the Hon'ble Court at page Nos. 775 & 776 has observed as under : "Learned counsel for the assessee invited our attention to the decision of the Supreme Court in CIT v. S. Chenniappa Mudaliar (1969) 74 ITR 41 (SC ). Relying on this decision, learned counsel represented that if the notification should be held to be inconsistent in any manner, it should given way to the statutory provisions contained in section 36(1)(iv) of the Act and, therefore, it is riot strictly necessary for this court to strike down condition Nos. 2 and 3 of the notification in question...............
In all these cases, the courts were dealing with the constitutional validity of the provisions as opposed to the validity of subordinate legislation with reference to the provisions of the Act itself. Learned standing counsel does fairly admit that the Supreme Court decision referred to above does provide that even in a reference proceeding, if the subordinate legislation is held to be in excess of the power conferred, it could be ignored and the matter decided keeping in mind the provisions of the Act which are paramout.
We think that in the facts and circumstances of this case, we must invoke the doctrine of "reading down" and apply the principle enunciated by the Supreme Court in the above referred case. We may refer to the following observation of the Supreme Court (p. 48): "It is true that the Tribunal's powers in dealing with the appeals are of the widest amplitude and have, in some cases, been held similar to, and identical with, the powers of an appellate court under the Civil Procedure Code." (vi) CIT v. Sirpur Paper Mills (1999) 237 ITR 41 (SC), as per the head notes relevant observation of the Hon'ble Court is as follows.
"The section states that the deduction shall be wholly allowed. it permits the Board to specify conditions but these conditions cannot have the effect of curtailing the scope of the deduction granted by the section. The amplitude of the deduction permitted by the section cannot be cut down under the guise of imposing a "condition". In fact, this is not a condition but an impermissible attempt to rewrite the section.
The last condition imposed by the said notification is that the deduction shall be spread out equally over a period of five years commencing with the assessment year relating to the previous year in which the amount was paid. This too is in "condition" but a provision super added to the section which does not contemplate any such distribution of the deduction. Under the section the deduction is available in the assessment year relating to the previous year in which the payment was made and it must be so granted. The second and third conditions aforesaid are not valid." The purpose of above discussion by reproduction of relevant extracts of certain precedents is to ascertain whether the Tribunal has its role in deciding the issue cropped up on account of a rule or notification or any* such decision taken by sub-ordinate quasi-judicial authority. On careful reading of the above decisions it is implicit that the Tribunal does have the power to deal with the validity of such rules or notification and by applying the doctrine of "reading down" can strike down such rules if held to be in contradiction with the provisions of the statute itself. The gist of all the above decisions is that the rules are made only for the purpose of carrying out the provisions of the Act which cannot be taken away or whittle down the effect conferred by the statute. With the result we hereby agree with the contentions of learned A.R. that the ITAT has both, the power and duty, to deal with such rules or notification and decide whether the same are in agreement with the main provisions of the statute. In view of above discussion, in the present appeal, now we have to decide the validity of the withdrawal of exemption as has been done by the subordinate competent authority. For this purpose first of all we have to examine the language of the relevant section and its scope as well as its Application.
The section under which exemption is granted is section 10 (15)(iv)(f) of Income Tax Act, reads, as follows : 10. In computing the total income of a previous year of any person, any income falling within any of the following clauses shall not be included.
(f) By an industrial undertaking in India or any money borrowed by it in foreign currency from sources outside India under a loan agreement approved by the Central Government having regard to the need for industrial development in India, to the extent to which such interest does not exceed the amount of interest calculated at the rate approved by the Central Government in this behalf, having regard to the terms of the loan and its repayment." On plain reading of this section it is clear that certain conditions are required to be fulfilled for availing the tax exemption such as, firstly -the person taking the loan must be an industrial undertaking, secondly the loan must be in foreign currency from outside India, thirdly the loan agreement must be approved by the Central Government having regard to the need for industrial development in India and lastly the rate of interest payable on the said loan should not exceed the rate approved by the Central Government having regard to the terms of the loan and its repayment. While considering the arguments of learned A.R. Supra, we have examined the procedure adopted by the appellant as well as the prescribed authority before approving the loan. The company had raised foreign currency loan in the past as an External Commercial Borrowings (ECB). In this regard several correspondence had been made with the Government of India and the loan was approved by the Director (ECB), Department of Economic Affairs, Ministry of Finance, North Block, New Delhi. As far as the approval of loan and the sanctioning of agreement is concerned the same is not in dispute and it is an admitted fact supported by several correspondence and letters written way back since 1993 onwards. There is a reference of such correspondence in the above paras of this order and the paper book contains the copies of all those letters and approvals. To finance its project of Jamnagar Petro Chemical Complex, External Borrowings were made in terms of the policy of Government of India granting permission for ECB to be utilized by industrial undertakings in India.
Under this plan the company had made several applications to Government of India from time to time and obtained permission to raise ECB loans in foreign exchange. Further an application was moved to raise the loans upto US$ 4.25 million. In this regard Dy. Director (ECB) vide a letter dated 6-10-1997 has raised a question about the utilization of ECB already sanctioned in the Hazira Phase-II Expansion Project. The utilization ECB was explained by the company that out of the US$ 914 million ECB received. US $205.35 million was yet to be utilized as on 31-1-1997. The explanation was given in respect of the said unutilized ECB that there were letters of credit to the tune of US $ 224.88 million. So at that time it was mentioned that the conditions were satisfied as the entire amount of ECB obtained for Hazira Phase-II Project was either utilized in the Project or kept for Forex commitment. On page 15 of the compilation placed on record there is a detailed working of the amount utilized and also kept for Forex commitment. Subsequently a request was made to grant permission to pre-pay/buy back up to 20 per cent of outstanding ECB per year. A proposal was made to the concerned Ministry in the year 1998. In response to this proposal of buy back of ECB a show cause was issued by the Ministry of Finance on 12-4-1999, After prolonged correspondence between the appellant-company and the Ministry there was a proposal from Dy. Director ECB for withdrawal of tax exemption granted under section 10(15)(iv)(f). The main objection of the appellant in this regard is that the concerned authorities have arbitrarily decided to withdraw the exemption though there was no withdrawal as far as the approval of loan and agreement was concerned. The basic objection of the appellant company is that the approval originally granted in the year 1997 remained in tact and the same was not rejected or withdrawn, however, the Dy. Director (ECB) had decided to withdraw the exemption.
The consequence of the said withdrawal was that the assessee-company wanted to remit interest to a foreign bank, already mentioned above, without deduction of tax at source. That application was rejected by the impugned order under section 195(2) dated 13-2-2002 and it was directed to deduct tax at the rate of 20 per cent. The pertinent question which is to be answered is whether it was justifiable on the part of the Dy. Director (ECB) to change the rules in mid-way when the entire scheme was near to its completion and the appellant-company had sought permission of pre-payment. The plea before us is that once the Government had granted the approval and there was no change in the conditions prescribed then it is functous offico. It was pleaded that once a loan agreement was approved then it was obligatory in law to grant exemption to such interest which became payable as a result of a loan agreement. It is also stressed before us that not only the exemption was withdrawn but in the mid-way a condition of end use of ECB proceeds was arbitrarily and illogically imposed. Argument in this regard was that there was no such condition of specific end use of ECB proceeds in the provisions of the statute. As there was no such condition laid down in the statute itself, then a rule or any such direction should not be imposed which happened to be in contradiction of the main governing section, in this regard several case laws were cited. The provision of the statute provides in an unambiguous term to grant exemption in respect of interest payable to an international investor who has lent money to industrial undertaking in India under a loan agreement as approved by the Central Government. The counsel from the side of the appellant has emphasized the phrase "having regard to the need for industrial development in India" used in the said provision. The Government of India has properly regarded the need for industrial development only thereafter issued the notification and floated this scheme of ECB. The arguments have further been advanced that whenever or wherever the legislation decides to ascertain the usage of money the suitable language is used in the body of the statute itself. For example section 10(15)(iv)(c) has mentioned the end used of money borrowed and specifically directed to be "in respect of the purchase outside India of raw material or capital plant and machinery".
So the end use in the said section is categorically specified. Few more sections have also been quoted in support of this argument, therein also the phrase was distinctly used. Another example cited of the phraseology used in section 10(15)(iv)(e) wherein the language used is, "where the moneys are borrowed either for the purpose of advancing loan to industrial undertakings in India for purchase outside India of raw material or capital plant and for the purpose of importing any goods".
So the section clearly laid down the purpose of utilization of monies borrowed. Thus the argument before us is that the purpose of utilization of ECB is missing in the statute, therefore, imposition of such condition through a letter by Dy. Director (ECB) was illegal and against the intention of the Legislature.
We have examined the several connected provisions referred supra and also the case laws in this regard and arrived at the conclusion that the revenue Authorities have to act upon in the light of the statute and the provisions of the Act and not empowered to exercise discretion by making the rules or notification/ order which derogate or deviate from the provisions of the statue. It is a cardinal principle, as made by several Hon'ble Courts that it is the main statute which will govern the rules provided under an Act and not vice versa. As far as the section now for our consideration is concerned it is amply clear that no criteria has been laid down for the end use of the money borrowed.
The term used in that section is "having regard to the need for industrial development in India*, in contrast to the phrase used in other section wherein the utilization as well as the purpose is mentioned and also directed the end use of the monies borrowed. So we can safely state that by imposing a condition by Dy. Director (ECB) during the progress of the scheme was like changing the rules of the game in mid-way and the change of the rule was in respect of a game already played to alter its outcome. A retrospective or ex-post facto change in such a manner is an arbitrary approach having no legal sanctity.
. Nevertheless, on merits as well it was argued that the funds were rightly utilized as prescribed under the scheme. While discussing the arguments of learned A.R. in above paras we have noticed that an explanation was offered about the utilization of ECB. In those paras we have noted that learned. A.R. has referred certain letters addressed to the Dy. Director (ECB) giving details of the utilization of ECB. For the sake of brevity there is no need to reiterate again the submissions in this regard. On page 40 of the compilation there is a letter dated 26-11-1996 issued by Ministry of Finance seeking details of utilization of ECB proceeds and therein para (ii) was specifically mentioned, verbatim reproduced hereinabove, through which it was indicative that the authorities were aware about the utilization of ECB by adopting two modes i.e., funding through foreign currency and also utilization of own resources. In para (i) of the said letter dated 26-11-1996 the Dy.
Director (ECB) has indicated the utilization of foreign currency expenditure. Learned A.R. has informed that Director (ECB) has made it clear that the foreign currency expenditure incurred after the date of application but before the date of borrowing was considered as eligible expenditure for utilization of ECB. The subsequent para also approved as per learned A.R. the expenditure incurred on item for which ECB was proposed which had been made from the appellant's own resources incurred upto 22-11-1995. So it was argued that it was very much within the knowledge of the concerned authority about the fungibility of funds. The said mixed method of utilization of funds was in a way accepted by the Ministry in the past. As far as the concept of fungibility of funds is concerned that is not a new concept and it is approved by several judicial authorities. We have perused the precedents cited in this regard in the light of the prevailing circumstances of the appeal in hand. In one of the case of Woolcombers of India Ltd. (supra) the concept of fungibility was considered and it was held that the profits were sufficient to meet the advance tax liability as the profits were deposited in the overdraft account, so the taxes were not paid out of overdraft account but out of the profits of the relevant year. An another case of Hon'ble Supreme Court has also been cited, decided in the case of J.B. Boda & Co. (P) Ltd. (supra) wherein Their Lordship have expressed that, "A two way traffic is unnecessary. To insist on a formal remittance first and thereafter to receive the commission from the foreign reinsurer, will be an empty formality and a meaningless ritual, on the facts of this case." In that case the assessee was a reinsurance company. The gross, premium was payable in foreign exchange and the assessee retained the commission and then remitted US dollars equal to premium. The broker claimed that the brokerage retained was convertible foreign exchange and the mere fact that it was designated in rupees would not detract from the position that it was in effect foreign exchange. It was contended that the assessee instead of remitting the entire amount to the foreign reinsurers and then receiving remittance in foreign currency from the said reinsurers the commission due to it, entered into an agreement with the foreign reinsurers, that while remitting the reinsurance premium, the assessee would retain the fee due to it for the technical services rendered. The Supreme Court upheld the contention of the assessee and held that two way traffic was unnecessary, To insist on a formal remittance to the foreign reinsurers first and thereafter to receive the commission from the foreign reinsurer would be an empty formality and a meaningless ritual. The statement of remittance having been filed with the Reserve Bank of India; in effect the income was received in convertible foreign exchange in a lawful and permissible manner.
On relying upon these decisions the alternate plea as made before us is that even assuming that end user restriction could have been imposed by the Central Government ex-post facto even then the appellant-company had in fact invested or utilized far more foreign currency in US dollar for capital goods and services in respect of the Jamnagar Petro Chemical Complex. To establish the total utilization of funds certain facts and figures in the form of charts have been placed before the concerned authorities and it was argued that the figures shown were not in dispute. It is also argued that the undisputed and unchallenged factual position was. that the total utilization of funds was much more the ECB availed under the Scheme. Let it remain undisputed and without entering into dispute which is more in the nature of findings of fact we have to concentrate on the core issue of withdrawal of exemption.
The Legislature has granted exemption to the lender i.e., the foreign institution and not to the borrower ie., the appellant-company. If there was a mistake, for arguments, if at all committed by the borrower even then the lender cannot be punished by withdrawal of exemption.
This view of ours gets fortified by a decision of Hon'ble Apex Court in the case of Chotatingrai Tea (supra).
After an elaborate discussion made hereinabove we deem it proper to summarize the gist of those elongated paras. First of all we want to observe that if the bureaucracy or executive is acting in an unjustifiable manner then the only course left to a citizen is to approach the judiciary for legitimate redressal. This is what exactly had been done in this appeal by the appellant-company. At first the company had tried to convince the authorities concerned i.e., Dy.
Director (ECB) about the utility of foreign currency loan already approved, but, on failure knocked the door of the judiciary by filing a writ to Hon'ble Delhi High Court. Special Leave Petition has also been filed, however, the Hon'ble Apex Court vide an order dated 31-5-2002 has observed as follows.
"Be that as it may, since this issue of utilization or pre-payment of the ECBs is not before us, we will not go into that question, if the petitioners are aggrieved by any such action of the respondents by which their utilization or pre-payment of the ECBs are also restricted, it is open to them to challenge the same in appropriate proceedings if permissible in law." A mere dismissal of SLP does not mean that the judgment of a High Court stands affirmed by the Supreme Court. The effect of dismissal is that no appeal was permitted and not that an appeal against the said judgment was dismissed by the Supreme Court affirming the view of the High Court, nor does it mean that the judgment of High Court has been approved by the Supreme Court or merits as indicated by the Hon'ble Apex Court, case laws relied upon are J.K. Charitable Trust v. WTO (1996) 222 ITR 523 (All) and CIT v. Quality (1997) 224 ITR 77 (Pat).
Both the Hbn'ble Courts have expressed that it is open to the appellant-company to challenge the same in appropriate proceedings if permissible in law. Following the view expressed by Their Lordship in the said judgment the appellant-company has thereafter approached the quasi judicial and judicial authorities step by step. All such attempts of redressal remained unsuccessful so the issue has now reached upto the stage of second appeal i.e., before us. In other words, an order under section 195(2) was passed which was challenged by invoking the provisions of section 248 before the first appellate authority i.e., learned Commissioner(A) and on rejection of appeal the matter was carried further, so the jurisdiction of the Tribunal does lie to adjudicate upon this appeal. An ancillary issue of withdrawal of exemption was raised and it was necessary to first settle that issue to arrive at a right conclusion to get this appeal decided. As we have already observed the executive has changed the rules of the scheme in mid-way which had already been followed as well as acted upon and the change was such to alter its outcome altogether. As we have observed supra the issue of utilization of ECB funds was for the first time raised when the entire scheme was at its fag end. According to the company the time had come for repayment or buy back of the outstanding loans. It was a commercial decision taken by the company in the capacity of a prudent businessman. At that juncture the clock could not be set into reverse motion. Certain steps already taken by the appellant-company which were well within the knowledge of the concerned authority could not be retracted. As the facts indicate retrospectively the mode of utilization of the funds could not be altered. Rather the sanctioning authority has not checked at that very point of time when according to them, if at all there was mis-utilization of ECB borrowings. On the contrary the claim of the assessee was that the utilization was in accordance with the scheme though by the process of fungible funds, the obligations were satisfied and the conditions were fulfilled. So according to us, at that stage, it was catastrophic to withdraw the exemption already granted under section 10(15)(iv)(f). Due to the withdrawal of the exemption the impugned order under section 195(2), now under dispute was passed directing to deduct withholding tax at the rate of 20 per cent. To arrive at a logical conclusion first we hold that, considering the totality of the facts, circumstances, conditions of the scheme, evidences of utility of the funds and the legal matrix of the case; the withdrawal of exemption was unwarranted.
Consequent thereupon we also hold that the appellant-company was not liable to deduct withholding tax at the rate of 20 per cent in respect of the interest payment of US $ 1,05,902 to M/s. Deutsche Bank AG. With the result, we hereby quash the order passed under section 195(2) of Income Tax Act as well as reverse the findings of Learned Commissioner(A). We order accordingly.