IT : Until and unless assessee complied with both conditions of processing and raising of plantation of tea, deduction under section 80-IC(2)(b) cannot be allowed
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[2013] 34 taxmann.com 124 (Kolkata - Trib.)
IN THE ITAT KOLKATA BENCH 'C'
Deputy Commissioner of Income-tax, Circle - 4, Kolkata
v.
Sewujpur Tea Co. (P.) Ltd.*
P.K. BANSAL, ACCOUNTANT MEMBER
AND MAHAVIR SINGH, JUDICIAL MEMBER
AND MAHAVIR SINGH, JUDICIAL MEMBER
IT APPEAL NOS. 740 & 741 (KOL.) OF 2010
[ASSESSMENT YEARS 2005-06 & 2006-07]
[ASSESSMENT YEARS 2005-06 & 2006-07]
MARCH 21, 2013
Section 80-IC of the Income-tax Act, 1961 - Deductions - Special provisions in respect of certain undertakings or enterprises in certain special category States [Processing of tea] - Assessment years 2005-06 and 2006-07 - Whether to claim deduction under section 80-IC(2)(b), an undertaking is required to carry on both activities, i.e., processing and plantation of tea - Held, yes [Para 5.1] [In favour of revenue]
FACTS
Facts
| ■ | The assessee was engaged in processing of tea. It claimed that its case fell under item 12 of Schedule 14 which reads 'processing and raising of plantation crops-tea, rubber, coffee, coconuts etc.' and, thus, it was eligible for deduction under section 80-IC. | |
| ■ | The Assessing Officer held that since the assessee was not engaged in the plantation of tea and was only engaged in the processing of the tea, deduction under section 80-IC could not be allowed. | |
| ■ | The Commissioner (Appeals) allowed the claim of the assessee and held that the deduction under section 80-IC will be available to both the industries which are engaged in processing of tea, coffee etc. or engaged in raising of the plantation of tea, coffee, etc. |
Assessee's contention
| ■ | The word 'and' between 'processing' and 'raising' should be read as 'or'. The deduction is available to any person engaged either in processing or raising of the plantation crops. The assessee is not required to carry on both the activities i.e. processing as well as raising of plantation crops. |
Issue involved
| ■ | Whether assessee was required to carry on both activities i.e. processing as well as raising of plantation tea to claim deduction under section 80-IC(2)(b)? |
HELD
| ■ | In item nos. 1, 2 and 4 of Schedule 14, the nomenclature of the article or things has been mentioned first and activity is given subsequently while in item no. 12, it is the activity which has been mentioned first. An article and things has been mentioned subsequently to that. Between the activities, the word 'or' has been used as is apparent in the case of 'fruit' and 'vegetable', 'processing industries', manufacturing or producing'. Similarly in item no. 2 also, between the activities, the word 'or' has been used, manufacturing or producing. Similarly, in item no. 4 also, the word 'or' has been used between the activities, while in item no. 12, the word 'and' has been used between activities. It clearly denotes that both the conditions, i.e., processing and raising of plantation crops must be specified by an undertaking eligible for deduction under section 80-IC(2)(b). | |
| ■ | This is the settled law that a fiscal statute shall have to be interpreted on the basis of the language used therein and not de hors the same. No words ought to be added and only the language to be used or considered so as to ascertain the proper meaning and intent of the legislation. The Court is to ascribe the natural and ordinary meaning to the words used by the legislature and the Court ought not, under any circumstances, statute to its own impression and ideas in place of the legislative intent as is available from a plain reading of the statutory provisions. [Para 5] | |
| ■ | There is no ambiguity in the provision as stipulated under the said schedule 14 and this is a settled law in view of the decision of the Apex Court in the case of IPCA Laboratory Ltd. v. Dy CIT [2004] 266 ITR 521/135 Taxman 594 that when there is no ambiguity in the provisions of the statute, the provisions cannot be interpreted to confer benefit on the assessee. Even Mumbai High Court in the case of Indian Rayon Corpn. Ltd.v. CIT [1998] 231 ITR 26/97 Taxman 501/(Bom) has categorically held that principles of beneficial interpretation would apply only in a case where the Court is in doubt about the true scope and ambit of the provisions or finds two equally reasonable interpretation where the words of the statute are plain, precise and unambiguous. Therefore, until and unless complied with the conditions of engaging in processing and raising of the plantation of tea, the assessee cannot be allowed deduction under section 80-IC(2)(b). [Para 5.1] |
CASE REVIEW
Bajaj Tempo Ltd. v. CIT [1992] 196 ITR 188/62 Taxman 480 (SC) (para 5.1) distinguished.
CASES REFERRED TO
Bajaj Tempo Ltd. v. CIT [1992] 196 ITR 188/62 Taxman 480 (SC) (para 4), Mysore Minerals Ltd. v. CIT [1999] 239 ITR 775/106 Taxman 166 (SC) (para 4), Orissa State Warehousing Corpn. v. CIT [1999] 237 ITR 589/103 Taxman 623 (SC) (para 5), Govinda Niak v. West Patent PressAIR 1980 Kar. 92 (FB) (para 5), Bhika Renu v. Union of India [1999] 238 ITR 113 (Delhi) (para5), IPCA Laboratory Ltd. v. Dy CIT [2004] 266 ITR 521/135 Taxman 594 (SC) (para 5.1) and Indian Rayon Corpn. Ltd. v. CIT [1998] 231 ITR 26/97 Taxman 501 (Bom) (para 5.1).
Sanjay Mukherjee for the Appellant. Sanjay Bhattacharya for the Respondent.
ORDER
1. These two appeals have been filed by the Revenue against the orders of the CIT(A)-IV, Kolkata dated 17th September, 2009 for the assessment years 2005-06 and 2006-07 respectively. All these appeals are being disposed off by this common order, as the issue involved in all these appeals is common except the change in the figures.
2. The only common issue involved in all the appeals filed by the Revenue relates to the allowability of the deduction under section 80IC(2)(b) of the Income Tax Act.
3. Brief facts of the case are that the assessee claimed deduction under section 80IC. The AO issued the show cause notice as to why the deduction should not be disallowed. The assessee stated that the assessee is engaged in the activity of manufacturing of black tea since 1999-2000 and deduction under section 80IB (4) was claimed earlier. The assessee claimed that the assessee is engaged in processing of the tea and therefore, the assessee's case falls under item 12 to Schedule 14, which reads that "Processing and raising of plantation crops-tea, rubber, coffee, coconuts, etc." and the words used and between "processing" and "Raising" represent "Or". The AO was of the view that since the assessee was not engaged in the plantation of the tea and was only engaged in the processing of the tea, therefore, he disallowed the deduction. The assessee went in appeal before the CIT(A). The CIT(A) took the view that the deduction under section 80IC will be available to both the industries which are engaged in processing of tea, coffee, etc. or engaged in raising of the plantation of tea, coffee, etc by holding as under:
"5.2 The way A.O. has interpreted the meaning of the processing and raising that assessee company being only producer of black tea from purchased green leaf is not engaged in processing and raising of plantation crop (in this case tea) and is not entitled to deduction u/s 80IC. Such a narrow interpretation is unwarranted to the fact of the present case. The Part-A of Schedule 14 does not say so. The same has to be interpreted in such a manner as not to make otiose and deterrent [Bama Metal Industries vs. CCE-1996 (82) ELT 81 (Tri)]. It clearly provides the benefit to industries which manufactures or produces 'processing and raising' of plantation crop-tea rubber, coffee, coconut, etc. It means 'processing' as well as 'raising' both activities is covered under the provision. If the intention of the legislature would have been otherwise it would have used the words 'raising and processing' instead of 'processing and raising' in chronological order of the activity.
5.3 Inference and interpretations could be drawn on this point from the other provisions of the Income Tax Act 1961 and the Income Tax Rules, 1962. In section 10(31) of the Act for granting exemption to subsidy granted by tea, coffee, rubber board to the eligible assessee, it has been mentioned for eligibility that the assessee who carries on the business of 'growing and manufacturing 'rubber, coffee, cardamom or such other commodity. It did not start with the word 'manufacturing and growing'. On the other hand, for determining income from manufacture of tea under rule 8(1) income derived from the sale of tea 'grown and manufactured by the seller in India shall be computed as if it were income derived from business, and forty per cent of such income shall be deemed to be income liable to tax. The statute has used the wording 'growing and manufacturing' and not the vice versa 'manufacturing and growing' or 'processing and raising': Therefore, the industries notifies in the impugned notification / Schedule, the Central Government hereby notifies the industries inter alias Item No 12 processing 'as well as' raising of plantation crops tea, rubber, coffee, coconut etc.
5.4 Further the provisions of section 801B(2)(iii) and 801C(2)(b) starts with the wording as to the assessee that it manufactures or produces any article or things etc. prescribed in the impugned Part-A of Schedule l4 or the impugned notification. Even for arguments sake, if the interpretation as given by the A.O. in the impugned order is applied, it would defeat the basic provisions of both the sections to which they are ancillary/corollary and therefore cannot override the parent provisions from where they derive their legal sanctity.
5.5 I agree with the appellant that exemption notifications are beneficial piece of legislation. While interpreting these notifications one must bear in mind that the object being one of granting the exemption. Therefore, an interpretation must be put which does not defeat the whole purpose of the exemption. The present notification/ Schedule is also intended for the benefit of all concerns and deserves a liberal construction. In the manner the meaning of the term 'processing and raising' has been explained in the impugned order by the A.O., it would make it unworkable. The Hon'ble Supreme Court in Collector of Customs vs. United Electrical Industries Ltd. [1999 (108) ELT 609) has rightly held that the notification has to be interpreted to give true import and meaning, not to make it purposeless and nugatory. It is thus submitted that the ground on which the order-in-original has been passed denying the benefit of deduction is not a tenable ground in view of the wordings of impugned notification/schedule.
5.6 As per Rule of beneficial interpretation, if there exists more than one interpretation, the interpretation, which is most favourable to the assessee, shall prevail. Thus, if any sort of confusion prevails on interpretation in the case, the same is mitigated by the Rule of beneficial interpretation. It is recognized principle of interpretation that the administrative authority or the court should not whittle down the plentitude of the exemption or relief granted by the legislation by laying stress on any ambiguity here or there [CIT v Laxmi Metal Industries- (1998) 193-94, 146 CTR(ALL) 722,726]
6. Thus, in my opinion, the appellant engaged in production of black tea from green leaves, is entitled to 100% deduction u/s 80IC for Rs. 20,87,612/-."
4. The ld. A.R. before us vehemently contended that the assessee was claiming the deduction under section 80IB from assessment year 2001-02 to 2003-04 (but no deduction was claimed in the assessment year 1999-2000, 2001-02 and 2004-05 in view of the loss). The assessee, consequent to the amendment in section 80IB, claimed deduction under section 80IC(2)(b) read with item 12 of Schedule 14 which reads that "Processing and raising of plantation crops - tea, rubber, coffee, coconuts, etc.". The assessee is engaged in the manufacturing of black tea since assessment year 1999-2000 and accordingly claimed deduction under section 80IB(4). The AO disallowed the deduction under section 80IC. Before the AO, the assessee took the view that in view of item 12 of Schedule 14, the assessee must be engaged in raising of the plantation as well as processing. The ld. AR before us referred to item no.1,2 and 4 of Schedule 14 and contended that there, the word "and" has been used between the two words "Fruit" and "Vegetable", "Meat and Poultry products", "food" and "Beverages". If the interpretation of the AO be taken, then the industry must be engaged in processing of both fruits and vegetables, meat and poultry products and food and beverage industries. The nature of both the industries is entirely different and both the industries cannot be mixed up. The word "and" can be interpreted only "or" not "and". If the assessee is engaged in any one of the activities i.e. either processing or raising of plantation of crops of tea etc., the assessee must be entitled for the deduction. This is the provision in the taxing statute granting the incentive for promoting growth and development and therefore should be construed liberally. Reliance was placed in this regard on the decision of the Hon'ble Supreme Court in the case of Bajaj Tempo Ltd. v. CIT [1992] 196 ITR 188/62 Taxman 480 (SC). Reliance was also placed on the decision of the Hon'ble Supreme Court in the case of Mysore Minerals Ltd. v. CIT [1999] 239 ITR 775/106 Taxman 166 (SC) where it was held that if there are two possibilities of taxing provisions, the one which is favourable to the assessee should be preferred. Alternately, it was submitted that in case the deduction is not allowed under section 80IC, it should be allowed under section 80IB. The ld. DR relied on the order of the AO.
5. We have carefully heard the rival submissions and perused the materials on record along with the orders of the taxing authorities. It is not denied by the ld. DR that the assessee was entitled for the deduction in the earlier years under section 80IB and deduction under section 80IC claimed by the assessee for the first time in assessment year 2005-06. We also noted that in view of the proviso (3) inserted by the Finance Act, 2003 w.e.f. 01.04.2004 under section 80IB(4), an assessee is not entitled for the deduction under section 80IB(4) in case, the assessee is fallen within the provisions of section 80IC(2). The main issue involved in both these appeals relates to the interpretation of the word "and" in item no.12 given in Schedule 14. Section 80IC(2), sub-section (b) allows the deduction to an assessee along with other conditions. If the assessee produces an article or things, prescribed in the Schedule 14, the assessee's claim is that his case falls in item 12 of Schedule 14, as the assessee is engaged in the business of processing of black tea. Item 12 of Schedule 14 reads as "Processing and raising of plantation crops - tea, rubber, coffee, coconuts, etc." The contention of the assessee is that the word "and" between "processing" and "raising" should be read as "or". The deduction is available to any person engaged either in processing or raising of the plantation crops. The assessee is not required to carry on both the activities i.e. processing as well as raising of plantation crops. For coming to this interpretation, the assessee basically relies on item nos. 1,2 and 4 of Schedule 14. We have gone through item nos. 1,2 and 4 of Schedule 14. We noted that in these items, the nomenclature of the article or things has been mentioned first and activity is given subsequently while in item no.12, it is the activity which has been mentioned first. An article and things has been mentioned subsequently to that. If we see the activities in item no.1 between the activities, the word "or" has been used as is apparent in the case of "fruit" and "vegetable", "processing industries, manufacturing or producing". Similarly in item no.2 also, between the activities, the word "or" has been used, manufacturing or producing. Similarly, in item no.4 also, the word "or" has been used between the activities, while in item no.12, the word "and" has been used between activities. It clearly denotes that both the conditions, i.e., processing and raising of plantation crops must be specified by an undertaking eligible for deduction under section 80IC(2)(b). This is the settled law that a fiscal statute shall have to be interpreted on the basis of the language used therein and not de hors the same. No words ought to be added and only the language to be used or considered so as to ascertain the proper meaning and intent of the legislation. The Court is to ascribe the natural and ordinary meaning to the words used by the legislature and the Court ought not, under any circumstances, statute to its own impression and ideas in place of the legislative intent as is available from a plain reading of the statutory provisions. The Hon'ble Supreme Court in the case of Orissa State Warehousing Corpn v. CIT [1999] 237 ITR 589/103 Taxman 623 has clearly held that an exemption is an exception to the general rule and since the same is opposed to the natural tenure of the statute, the entitlement for exemption, ought not to be read with any latitude to the taxpayer of even with a wider connotation to restrict its application to the specific language used depicting the intent of the Legislature. The decision of the Hon'ble Supreme Court is binding on us. This decision is delivered subsequent to the decision of the Hon'ble Supreme Court in the case of Bajaj Tempo Ltd. (supra) on which the ld. A.R. has vehemently relied on. This is the settled law in view of the decision of Govinda Niak v. West Patent Press AIR 1980 kar. 92 (FB) andBhika Ram v. Union of India [1999] 238 ITR 113 (Delhi) that even there is a conflict between the two decisions of the Supreme Court, the one decided by a Larger Bench is binding. If both decisions are rendered by the Bench consisting of equal number of Judges, the latter decision is binding.
5.1 We have also gone through the decision of Bajaj Tempo Ltd. (supra). The issue involved in this case was entirely different. In this case, the assessee has claimed the deduction under section 15C(1) and the AO did not dispute that the assessee has complied with all the conditions stipulated therein but in view of section 15C(2), the AO was of the view that the assessee was formed by splitting by transfer to a new business of building, machinery or plant, previously used in other business. Sub-section (2) is a restrictive clause and denies the benefit even if an undertaking complies with all the conditions as given under section 15C(1). The assessee in this case has taken the building on payment of monthly rent on lease. The AO took the view that the undertaking was formed by transfer to a new business of building. In this context, when the matter traveled to the Supreme Court, the Supreme Court took the view that the transfer, to take the new undertaking, out of the purview of sub-section (1), must be such that, but for the transfer, the new undertaking could not have come into being and held that in their opinion on the facts found by the Tribunal, the part played by taking the building on lease was not dominant in the formation of the company. In this context, the Hon'ble Supreme Court has observed that by that clause, the Legislature intended to control any attempt or effort to abuse the benefit intended for new undertaking by changing the label. The intention was not to deny the benefit to genuine new industrial undertaking but to control the mischief, which might have otherwise taken place. Adopting a literal perception would result in defeating the very purpose of section 15C. In the case before us, the question is whether the assessee complied with the primary conditions of carrying on the activities as stipulated under item 12 of Schedule 14. Things and articles are different from the activities. This decision, in our opinion, is not applicable to the case of the assessee. The stress given under item 12 of Schedule 14 is that the assessee must be engaged in both the activities i.e. processing and raising of plantation crops- tea, rubber, etc. In this case, even the theory beneficial construction will not apply as there is only one interpretation that the assessee must carry out both the activities. We are of the view that there is no ambiguity in the provision as stipulated under the said schedule 14 and this is a settled law in view of the decision of the Hon'ble Supreme Court in the case of IPCA Laboratory Ltd. v. Dy CIT [2004] 266 ITR 521/135 Taxman 594 that when there is no ambiguity in the provisions of the statute, the provisions cannot be interpreted to confer benefit on the assessee. Even Mumbai High Court in the case of Indian Rayon Corporation Ltd. v. CIT [1998] 231 ITR 26/97 Taxman 501 (Bom) has categorically held that principles of beneficial interpretation would apply only in a case where the Court is in doubt about the true scope and ambit of the provisions or finds two equally reasonable interpretations where the words of the statute are plain, precise and unambiguous. In view of our aforesaid discussions, we are of the firm view that until and unless complied with the conditions of engaging in processing and raising of the plantation of tea, the assessee cannot be allowed deduction under section 80IC(2)(b).
5.2 Now coming to the alternate submission of the ld. A.R. that the assessee is entitled for the deduction under section 80IB, which was allowed to the assessee in the earlier years also, since this issue has come up before us for the first time and the ld. D.R. also did not deny that the assessee was allowed deduction earlier under section 80IB, we, therefore, in the interest of justice and fair play to both the parties, set aside the order of the CIT(A) and restore this issue to the file of the AO with the direction that the AO shall examine the plea of the assessee whether the claim of the assessee falls under section 80IB. In case, the AO finds that the claim of the assessee falls under section 80IB, the deduction to the assessee under section 80IB be allowed, after giving proper and reasonable opportunity of being heard to the assessee to submit the evidence and documents, on which the assessee may rely in this regard.
6. In the result, the appeals filed by the Revenue in both the assessment years are allowed for statistical purposes.
[2013] 34 taxmann.com 60 (Article)
TDS on Commission paid to foreign agents - Divergent views!
RAGHAV KUMAR BAJAJ
CA
Over the past few decades India's contribution to the international trade has increased noticeably. Consequently, more and more Indian exporters are appointing foreign agents who work on commission basis for the Indian exporters. The foreign agents explore the overseas markets, find more and more customers and then forward the list of such probable customers to the Indian enterprises. Then the Indian enterprises deal with such probable customers on their own, carry forward the export to such customers and finally realize the sale considerations from the customers on their own account directly. For the services rendered by the overseas agents, they are paid export commission by the Indian enterprises. The issue that arises in such type of transactions is whether the Indian enterprise is required to deduct tax at source under the Income-tax Act, 1961 ("the Act") from the payment made to the foreign agent ? There have been divergent views available on this issue. Through this article the author has attempted to briefly state the current legal position in this regard.
Introduction
1. Over the past few decades, India's contribution to the international trade has increased noticeably. Just to put the things into proper perspective: India's total merchandise trade increased over three-fold from US$ 252 bn. in FY 2006 to US$ 792 bn. in FY 2012. Furthermore, the Exports-GDP ratio increased from 12.3% in FY 2006 to 16.3% in FY 2012 [Source: http://www.eximbankindia.com/fore-trade.pdf].
This steep rise in India's share in the international trade could not be possible if the Indian enterprises wished to carry out their operations entirely from India. For better exploitation of the business opportunities available in the overseas markets, the Indian enterprises have increased the appointments of foreign agents who work on commission basis for the Indian businesses.
The modus operandi in which this transaction moves forward is that the Indian enterprise appoints a foreign party as its agent for the purpose of soliciting customers for the overseas business of the Indian enterprise. The foreign agent explores the overseas market, finds more and more customers and then forwards the list of such probable customers to the Indian enterprise. Then the Indian enterprise deals with such probable customers on its own, carries forward the export to such customers and finally, realizes the sale consideration from the customers on its own account directly. For the services rendered by the overseas agent, he is paid an export commission by the Indian enterprise.
The Issue that generally arises in such transactions
2. The issue that generally arises in such type of transactions is whether the Indian enterprise is required to deduct, tax at source under the Income-tax Act, 1961 ("the Act") from the payment made to the foreign agent.
Analysis
3. Section 195 of the Act deals with the deduction of tax at source from the payments made to non-residents. The relevant extracts of section 195 of the Act are reproduced herein for the sake of ready reference:—
"Any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest or any other sum chargeable under the provisions of this Act (not being income chargeable under the head 'Salaries' shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force :"
In section 195(1), the crucial expression is 'any other sum chargeable under the provisions of this Act'. It would, thus, mean that the person making payment to the non-resident would be liable to deduct tax, if the payment so made is chargeable to tax under the Act. Impliedly, if the payment is not chargeable to tax under the Act, the payer would not be liable to deduct tax at source. The chargeability to tax mentioned in the above provision is directly linked with section 4, which is the main charging section. In other words, if the charge under section 4 fails, automatically section 195 would be inapplicable. Section 195 of the Act will be applicable only if the payment made to the non-resident is chargeable to tax. At this juncture, it would be pertinent to refer to the section 4, the relevant provisions of which are as under:—
"Where any Central Act enacts that income-tax shall be charged for any assessment year at any rate or rates, income-tax at that rate or those rates shall be charged for that year in accordance with, and subject to the provisions (including provisions for the levy of additional income-tax) of, this Act in respect of the total income of the previous year of every person".
Thus, section 4 makes it evident that the income-tax shall be charged for a particular year in accordance with the provisions of this Act. In this regard section 5 of the Act which deals with the scope of total income, in the case of a non-resident assessee, inter alia, provides as under:—
"Subject to the provisions of this Act, the total income of any previous year of a person who is a non-resident includes all income from whatever source derived which—
| (a) | is received or is deemed to be received in India in such year by or on behalf of such person ; or | |
| (b) | accrues or arises or is deemed to accrue or arise to him in India during such year. | |
| | Explanation 1.—Income accruing or arising outside India shall not be deemed to be received in India within the meaning of this section by reason only of the fact that it is taken into account in a balance sheet prepared in India. |
The plain language of section 5 provides that in the case of a non-resident assessee, the total income takes within its ambit two types of incomes: one, the income which is received or is deemed to be received in India, and second, the income which accrues or arises or is deemed to accrue or arise to him in India. In the present case, we are concerned with the latter limb of this scope. Section 9 of the Act provides for the income deemed to accrue or arise in India. This is a fiction created by the enactment which is essential in fixation of the charge under the Act. The relevant extracts of section 9 are reproduced herein for the sake of ready reference:—
"(1) The following incomes shall be deemed to accrue or arise in India:—
| (i) | all incomes accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India, or through the transfer of a capital asset situate in India : | |
| "Provided that such business connection shall not include any business activity carried out through a broker, general commission agent or any other agent having an independent status, if such broker, general commission agent or any other agent having an independent status is acting in the ordinary course of his business : | ||
| Provided further that where such broker, general commission agent or any other agent works mainly or wholly on behalf of a non-resident (hereafter in this proviso referred to as the principal non-resident) or on behalf of such non-resident and other non-residents which are controlled by the principal non-resident or have a controlling interest in the principal non-resident or are subject to the same common control as the principal non-resident, he shall not be deemed to be a broker, general commission agent or an agent of an independent status. |
Section 9, as aforesaid, creates a legal fiction and provides that certain income shall be deemed to accrue or arise in India. In the present case, we are concerned with clause (i) and clause (vii) of the section 9(1). Let us analyze each of these clauses one-by-one:
Section 9(1)(i): Business connection
| ♦ | The plain language of section 9(1)(i) of the Act provides that all income accruing or arising, whether directly or indirectly, through or from any business connection in India, shall be deemed to accrue or arise India. Applying the above legal provisions of the Act to the factual matrix of the case, it becomes apparent that the question which needs to be addressed is whether the income earned by foreign commission agents, whose work is limited to soliciting customers in relation to the overseas business of the Indian enterprise and forwarding the list of such probable customers to the Indian enterprise, accrues or arises from any business connection in India. In other words, does this foreign agents commission have any business connection with India ? | |
| ♦ | This issue has been the subject matter of various circulars issued by the Central Board of Direct Taxes (CBDT). The relevant extracts of one such circular is as under: | |
| Circular No.23, dated 23 July, 1969: | ||
| | "Foreign Agents of Indian Exporters: - A foreign agent of Indian exporter operates in his own country and no part of his income arises in India. His commission is usually remitted directly to him and is, therefore, not received by him or on his behalf in India.Such an agent is not liable to income-tax in India on the commission." | |
| ♦ | The above mentioned Circular No.23 mentions that the foreign agents of Indian exporters are not liable to income-tax in India on the commission. This circular was relied upon by the Hon'ble Supreme Court of India in the case of CIT v. Toshoku Ltd.[1980] 125 ITR 525 wherein the Apex Court held as under:— | |
| "...if no operations of business are carried out in the taxable authorities, it follows that the income accruing or arising abroad through or from any business connection in India cannot be deemed to accrue or arise in India. . . The commission amounts which were earned by the non-resident assessee for services rendered outside India cannot, therefore, be deemed to be incomes which have either accrued or arisen in India..." |
Section 9(1)(vii): Fees for technical services
| ♦ | If the amount paid by the Indian enterprise to the foreign agent is in the nature of 'fees for technical services' as defined in theExplanation 2 to section 9(1)(vii) of the Act, then such income in the hands of the foreign agent shall be deemed to accrue or arise in India, and, consequently, such foreign agent's commission shall be chargeable to tax in India, and, consequently, the Indian business enterprise shall be liable to deduct tax at source from such foreign agent's commission under section 195 of the Act at the rates in force. | |
| ♦ | In this regard, the relevant extracts of the ruling pronounced by the Authority for Advance Rulings (AAR), in the case of Spahi Projects (P) Ltd., In re [2009] 315 ITR 374/183 Taxman 92 (AAR-New Delhi) are as under: | |
| "...Explanation 2 to section 9 contains an inclusive definition of business connection but it applies only to a business activity carried out through a person acting on behalf of a non-resident. That situation does not exist here. Where no business operations are carried out in India by Zaikog, the attribution in terms of cl. (a) of the Explanation is not possible and, therefore, no income can be deemed to accrue or arise in India merely because Zaikog promotes the business of the applicant in South Africa. As the income of Zaikog on account of the commission paid to it by the applicant is not chargeable to tax in India by virtue of the article 7 of the DTAA and section 9(1)(i) r/w the Explanation thereto, the applicant is not obliged to deduct the tax at source under section 195. . . | ||
| There could possibly be no controversy that Zaikog will not be rendering services of a managerial, technical or consultancy nature and, therefore, the liability to tax cannot be fastened on it by invoking the provisions dealing with fee for technical services. .". | ||
| ♦ | Thus, the AAR, in the above case, has categorically stated that the amount paid by an Indian business enterprise to its foreign agent as commission will not covered in the definition of 'fees for technical services' as defined in the Explanation 2 to section 9(1)(vii) of the Act. |
TDS liability under section 195 of the Act
Once it is established that the amount of commission paid by the Indian enterprise to its foreign agent is not chargeable to tax under the provisions of the Act, it becomes evident that the payer of such commission shall not be required to deduct tax at source under section 195 of the Act from such commission.
This position has been further strengthened by the clarification given by the CBDT in its Circular No.786, dated 7 February, 2000. The relevant extracts of the said circular are reproduced herein for the sake of ready reference:
"The deduction of tax at source under section 195 would arise if the payment of commission to the non-resident agent is chargeable to tax in India."
A bare perusal of the above mentioned circular makes it apparent that no tax is required to be deducted by the Indian exporters from commission to their foreign agents, since such payments are not taxable in India.
Conflicting position
4. The crux of the aforesaid circulars [Circular No. 23, dated 23 July 1969 and Circular No. 786, dated 7 February 2000] is that as regards extent of profits attributable to India, only that portion of the profit, which can reasonably be attributed to the operations of the business carried out in India, is liable to tax. Further, the TDS provisions under section 195 of the Act are not applicable to the commission paid by the Indian exporters to their foreign agents. However, subsequently, the CBDT issued Circular No. 7/2009, dated 22 October, 2009 withdrawing the aforesaid circulars. The reason mentioned for such withdrawal was that interpretation of the Circular (No. 23, dated 23 July, 1969) by some of the taxpayers to claim relief is not in accordance with the provisions of section 9 of the Income-tax Act, 1961 or the intention behind the issuance of the Circular (No. 23, dated 23 July, 1969). As a result, the matter became a subject of opposing views.
Furthermore, the AAR, in the case of SKF Boilers and Driers Pvt. Ltd., In re [2012] 206 Taxman 19/18 taxmann.com 325 (AAR-New Delhi), has pronounced the following ruling:
"We are concerned with the source of income of the two non-resident agents who had earned commission from the business activity of the applicant. Sections 5 and 9 of the Act, thus, proceed on the assumption that income has a situs and the situs has to be determined according to the general principles of law. The words 'accrue' or 'arise' occurring in section 5 have more or less a synonymous sense and income is said to accrue or arise when the right to receive it comes into existence. No doubt, the agents rendered services abroad and have solicited orders, but the right to receive the commission arises in India when the order is executed by the applicant in India. The fact that the agents have rendered services abroad in the form of soliciting the orders and the commission is to be remitted to them abroad are wholly irrelevant for the purpose of determining the situs of their income. We follow the ruling of this Authority [Rajive Malhotra AAR 671 of 2005, 284 ITR 564]. We, therefore, hold that the income arising on account of commission payable to the two agents is deemed to accrue and arise in India, and is taxable under the Act in view of the specific provision of section 5(2)(b), read with section 9(1)(i) of the Act. The provision of section 195 would apply, and the rate of tax will be as provided under the Finance Act for the relevant year."
Conclusion
5. After the above discussions, one thing is certain that post the issuance of Circular No.7/2009 and the ruling of the AAR in the case of SKF Boilers and Driers (P.) Ltd. (supra), the Pandora's Box has been opened and the matter has again become an issue for litigation. Having said that, one thing that still remains in favour of the non-applicability of the TDS provisions under section 195 of the Act is that as on date, the judgment of the Hon'ble Supreme Court in the case of Toshoku Ltd. (supra)is still the law of the land as regards the applicability of TDS provisions to foreign agents' commission paid by Indian exporters.
IT : Interest on NPAs cannot be included in income of a co-operative banking society on accrual basis
■■■
[2013] 34 taxmann.com 128 (Chandigarh - Trib.)
IN THE ITAT CHANDIGARH BENCH 'B'
Assistant Commissioner of Income-tax, Circle - 2(1), Chandigarh
v.
Punjab State Co-op. Bank Ltd.*
T.R. SOOD, ACCOUNTANT MEMBER
AND MS. SUSHMA CHOWLA, JUDICIAL MEMBER
AND MS. SUSHMA CHOWLA, JUDICIAL MEMBER
IT APPEAL NOS. 1112 (CHD.) OF 2010
AND 776 (CHD.) OF 2011
[ASSESSMENT YEARS 2007-08 & 2008-09]
AND 776 (CHD.) OF 2011
[ASSESSMENT YEARS 2007-08 & 2008-09]
MARCH 6, 2013
I. Section 43D of the Income-tax Act, 1961 - Public Financial Institution - Special provisions in case of [Interest on NPAs] - Assessment years 2007-08 and 2008-09 - Whether provisions of section 43D override other provisions of Act and said provisions are applicable in case of assessee, being scheduled bank - Held, yes - Whether once certain loans given by assessee had become NPAs and assessee had opted to account for interest on such NPAs only on recovery of same, law recognizes such treatment of interest on NPAs as valid in view of provisions of section 43D and interest on such NPAs could not be included in assessee's income on accrual basis - Held, yes [Para 14] [In favour of assessee]
II. Section 37(1) of the Income-tax Act, 1961 - Business expenses - Year in which deductible [Audit fee] - Assessment years 2007-08 and 2008-09 - Assessee provided for audit fee of Rs. seven lakhs in books of account as on 31-3-2006 on basis of old rates fixed by Registrar of co-operative societies which was paid on 31-7-2006 - By letter dated 17-8-2006, Registrar raised audit fee from Rs. 7 lakhs to Rs. 10 lakhs and Chief Auditor requested for depositing audit fee for year 2005-06 on new rate, i.e., Rs. 10 lakhs - In that situation, assessee had to debit Rs. 3 lakhs to profit and loss account for which provision was not made - Whether amount of Rs. 3 lakhs was allowable in relevant year - Held, yes [Paras 17 and 18] [In favour of assessee]
FACTS-I
| ■ | The assessee was a co-operative society engaged in business of banking and extending credit facilities to various members/nominal members, etc. It had not made provision for interest earned on certain outstanding loans on accrual basis claiming that the said accounts had become Non-performing Assets (NPAs) and as per instructions of the RBI, it was not required to provide for the interest on the said loans on accrual basis, particularly where the assessee had filed claims by way of Court cases and no amount had been recovered from the said parties. The auditor in the audit report had reported that the assessee was following mercantile system of accounting and in respect of items of interest on NPAs, it was accounted for on receipt basis. | |
| ■ | The Assessing Officer did not accept assessee's claim and added interest on NPAs to assessee's income. | |
| ■ | On appeal, the Commissioner (Appeals) deleted the addition. | |
| ■ | On revenue's appeal: |
HELD-I
| ■ | The provisions of section 43D override any other provision of the Act and it is provided that in the case of public financial institution or scheduled bank or other bodies, the income by way of interest in relation to such categories of bad or doubtful debts, as may be prescribed, shall be chargeable to tax in the previous year in which the same is credited to the profit & loss account for that year or as the case may be, in which year it is actually received by the institution or bank or other bodies, whichever is earlier. [Para 13] | |
| ■ | In the instant case, loans in question were advanced since 1999 and they had become NPAs against which suits for recovery were filed by the assessee in various Courts. In view of the assessee having neither received the loans or part thereof nor any interest therefrom, no interest was provided in the books of account as the recovery of the loans itself had become difficult. Admittedly, the assessee was following mercantile system of accounting under which income is to be recognized when the same accrues irrespective of the fact whether the same is received or not. However, in respect of the interest due on NPAs special provisions are provided under section 43D which is non obstante clause and in case of NPAs, i.e.,the debts, recovery of which had become bad, interest is to be provided on the recovery, i.e., the year in which it is actually received by the institution or the bank or other body or when it is charged to the profit & loss account whichever is earlier. The provisions of section 43D override other provisions of the Act and said provisions are applicable in the case of assessee, being scheduled bank. Once the loans had become NPAs and the assessee had opted to account for the interest on such NPAs only on recovery of the same, the law recognizes such treatment of interest on NPAs as valid in view of the provisions of section 43D. [Para 14] | |
| ■ | In view of the abovesaid provision of the Act, there is no merit in the order of the Assessing Officer in charging interest on NPAs in the case of the assessee during the period under consideration. [Para 15] |
CASE REVIEW-I
Karnavati Co-op. Bank Ltd. v. Dy. CIT [2012] 134 ITD 486/17 taxmann.com 239 (Ahd.) (para 15) followed.
CASES REFERRED TO
Karnavati Co-op. Bank Ltd. v. Dy. CIT [2012] 134 ITD 486/17 taxmann.com 239 (Ahd.) (para 8), Vijaya Bank v. CIT [2010] 323 ITR 166/190 Taxman 257 (SC) (para 8) and TRF Ltd. v. CIT [2010] 323 ITR 397/190 Taxman 391 (SC) (para 8).
Amarveer Singh for the Appellant. M.R. Sharma for the Respondent.
ORDER
Ms. Sushma Chowla, Judicial Member - Both the appeal are by the Revenue against separate orders of CIT(A) dated 31.5.2010 and 27.5.2011 relating to Assessment years 2007-08 and 2008-09 against the order passed u/s 143(3) of the Act.
2. Both the appeals filed by the Revenue relating to the same assessee on similar issues were heard together and are being disposed off by this consolidated order for the sake of convenience. Reference is made to the facts in ITA No. 1112/Chd/2010 in order to dispose off the issue.
3. The Revenue has raised the following grounds of appeal in ITA No. 776/Chd/2011:
| "1. | The CIT(A) has erred in deleting the addition of Rs. 9,13,10,579/- on account of interest on outstanding loans. | |
| 2. | The appellant craves to add or amend any ground any grounds of appeal before the appeal is heard or disposed off. | |
| 3. | It is prayed that the order of the ld. CIT(A) be cancelled and that of the AO may be restored." |
4. The Revenue has raised the following grounds of appeal in ITA No. 1112/Chd/2010:
| "1. | The CIT(A) has erred in deleting the addition of Rs. 3,94,62,336/- on account of interest on outstanding loans. | |
| 2. | The ld. CIT(A) has erred in deleting the addition of Rs. 3,00,000/- out of the Audit fee paid. | |
| 3. | The appellant craves to add or amend any ground any grounds of appeal before the appeal is heard or disposed off. | |
| 4. | It is prayed that the order of the ld. CIT(A) be cancelled and that of the AO may be restored." |
5. The brief facts of the case are that the assessee was a cooperative-society engaged in business of banking and extending credit facilities to various members/nominal members etc. The Registered office of the assessee was at Ropar with headquarters at Chandigarh. During the course of the assessment proceedings the assessee was asked to furnish details of loans/advances to corporate/nominal members and the details of interest earned or provision thereof on accrual basis. The assessee furnished reply dated 21.9.2009 which is incorporated under para 3 of the assessment order. The explanation of the assessee in respect of various parties from whom loans were outstanding, was that the said parties had not deposited either interest or principal or part thereof during the year under consideration or in the earlier years and as such interest income arising thereof, was not reflected. Further plea of the assessee was that whenever the same would be recovered, the income would be declared in that year. However, in the case of Brahma Stey Tractors Ltd. it was explained that the said party had paid rescheduled installments and interest thereof, which had been accounted for in the books of account. As per the aforesaid list, the total number of parties were 10. The AO because of the scheme of the assessee i.e. special settlement scheme for borrowers of PSCB, was of the view that charging of simple interest @ 12% was necessary and the assessee was liable to show interest on the said loans @ 12% as it was following mercantile system of accounting. The auditor in their method of accounting had reported that the assessee was following mercantile system of accounting except income on NPAs was accounted on cash basis. Rejecting the explanation of the assessee and in view of the clarification of the ld. counsel for the assessee on 24.12.2009, the said loans were held to be part of NPAs and thus interest @ 12% of amount of loans of Rs. 32.88 crores amounting to Rs. 3,94,62,336/- was included as income of the assessee. Further out of fee paid to the auditors, a sum of Rs. 3.00 lakhs relating to financial year 2006-07 was disallowed.
6. The CIT(A) allowed the claim of the assessee vide para 8 of the appellate order observing as under:-
"8 After considering rival contentions, I find that the AO has mentioned in the assessment order that the amount of loan had not been recovered and despite this finding, an addition of interest was made on the entire amount of the loan without giving any relief for NPA. The loans advanced have become non performing assets as per norms fixed by the RBI. It has also been observed that the Bank has taken legal action in each case. It is seen that despite best efforts, the Bank was unable to recover the principal amount. Keeping the facts of the case in view, addition of notional interest on accrual basis is not warranted.
9. I also find that whatever interest was recovered and received by the appellant, has been duly accounted for in the books of account."
The CIT(A) also deleted the addition of Rs. 3.00 lakhs out of audit fee account.
7. The Revenue is in appeal against the order of the CIT(A) vide ground Nos. 1 & 2 has raised the aforesaid issues. The ld. DR for the revenue pointed out that the assessee was following mercantile system of accounting and had not reflected interest on loans as part of its income. The ld. DR for the revenue further stated that the CIT(A) had deleted the addition without going into the facts of the case.
8. The ld AR for the assessee pointed out that where the assessee had deposited the loan recoverable and interest, the interest had been credited and accounted for in the books of account and shown as income for the year under consideration, but where litigation was pending and even the recovery of the said loan could not be effected, no provision for interest on accrual basis, was made. The ld AR for the assessee further placed reliance on the under mentioned ratios:
| (i) | Karnavati Co. op. Bank Ltd. v. Dy. CIT [2012] 134 ITD 486/17 taxmann.com 239 (Ahd.) : | |
| (ii) | Vijaya Bank v. CIT [2010] 323 ITR 166/190 Taxman 257 (SC) : and | |
| (iii) | TRF Ltd. v. CIT [2010] 323 ITR 397/190 Taxman 391 (SC). |
9. We have heard rival contentions and perused the record. The assessee before us was a cooperative society engaged in business of banking and extending the credit facilities to various members/nominal members etc. The Registered office of the assessee was at Ropar with headquarters at Chandigarh. The AO during the course of assessment proceedings asked the assessee to furnish the details of loans/advances made to the corporate or nominal members and also requisitioned the details of interest on the said loans or provision thereof on accrual basis. The assessee in his reply filed before the AO tabulated the details of loans and advances which were outstanding as on 31.3.2007. The said details are incorporated under para 3 of the assessment order.
10. The claim of the assessee was that the above said accounts had become Non Performing Assets (NPA) and as per instructions of the RBI, the bank was not required to provide for the interest on the said loans on accrual basis, particularly where the assessee had filed claims by way of Court case/s and no amount had been recovered from the above said parties. The assessee had treated the said loans as bad and doubtful debts and as such claims not to have provided for interest on those loans as even the principal was not recoverable. Thus the income on the said loans, even if treated as the income of the assessee, would be entitled to deduction u/s 36(1)(vii) of the Act. Further the assessee during the year under consideration had declared income of Rs. 1,28,16,757/- on account of interest on loans as a result of one time settlement or under the waiver scheme of the bank.
11. Perusal of the details of loans and advances as tabulated in para 3 of the assessment order reveals that in respect of party No. 1, BIFR had declared company as sick unit on 10.7.2006 and the settlement in the case was approved on 10.9.2009. Similarly in respect of party No.2, dispute was pending before the court and the company had opted for special settlement scheme on 31.12.2007. However, during this year the assessee had received and credited Rs. 3,60,713/- as interest income on the said loan. In respect of party No. 3 though award was passed on 13.09.2006, no amount had been paid by the borrower and auction of the mortgage property had been initiated. In respect of party No. 4, the amount was fully adjusted and interest of Rs. 8,82,805/- was credited as income of the assessee. In respect of party no. 5, the amount has been settled during Assessment Year 2007-08. In respect of party No.6, the assessee claims that no recovery was made during the year under consideration. The said party is Heels & Toes Footwears (P.) Ltd. and Civil Suit was pending. In respect of party No. 7 where one time settlement of loan outstanding was made, was without charging interest thereof. In respect of party No. 8 and 9, as per the assessee there was no recovery of any part of the loan or interest during the year. In respect of party No. 10, the account has been settled during the year and interest of Rs. 9,57,272/- was recovered and reflected as income for year under appeal.
12. The auditor in the audit report had reported that the assessee was following mercantile system of accounting and in respect of items of interest on NPAs, it was accounted for on receipt basis.
13. The provisions of section 43D of the Act, over writes any other provision of the Act and it is provided that in the case of public financial institution or scheduled bank or other bodies, the income by way of interest in relation to such categories of bad or doubtful debts, as may be prescribed, shall be chargeable to tax in the previous year in which the same is credited to the Profit & Loss Account for that year or as the case may be, in which year it is actually received by the institution or bank or other bodies, which ever is earlier.
14. In the facts of the present case the above said loans were advanced since 1999 and they had become NPAs against which suits for recovery were filed by the assessee in various Courts. In view of the assessee having neither received the loans or part thereof nor any interest therefrom, no interest was provided in the books of account as the recovery of the loans itself had become difficult. Admittedly, the assessee was following mercantile system of accounting under which income is to be recognized when the same accrues irrespective of the fact whether the same is received or not. However, in respect of the interest due on NPAs special provisions are provided under section 43D of the Act, which is non obstante clause and in case of NPAsi.e. the debts recovery of which had become bad, interest is to be provided on this recovery, i.e. the year in which it is actually received by the institution or the bank or other body or when it is charged to the Profit & Loss Account whichever is earlier. The provisions of section 43D of the Act override other provisions of the Act and said provisions are applicable in the case of assessee, being Scheduled Bank. Once the loans had become NPAs and the assessee had opted to account for the interest on such NPAs only on recovery of the same, the law recognizes such treatment of interest on NPAs as valid in view of the provisions of section 43D of the Act.
15. In view of the above said provision of the Act we find no merit in the order of the Assessing Officer in charging interest on NPAs in the case of the assessee during the period under consideration. We find support from the ratio laid down in Karnavati Co. op. Bank Ltd. (supra). Upholding the order of CIT (Appeals) we dismiss the grounds of appeal raised by the Revenue.
ITA No. 1112/Chd/2010
16. The facts in ITA No. 776/Chd/2011 are identical to the facts in ITA No. 1112/Chd/2010 and the facts of the same shall apply mutatis-mutandi in this appeal.
17. Another issue remaining for adjudicated is the deletion of addition of Rs. 3.00 lakh out of audit fee paid. The CIT(A) had allowed the claim of the assessee observing as under:-
"14 After considering the rival contention, I find that the audit fee pertaining to the AY ending 31.3.2006 was received as per letter dated 25.7.2006 by Registrar, Cooperative Societies, Punjab, Chandigarh vide letter No. 70/17/90/C-I(5)/8775. The earlier fee of Rs. 7 lacs was provided in the books of account as on 31.3.2006 on the basis of old rates which were revised and paid by the assessee on 13.7.2006 vide State Bank of India draft bearing No. 385926 dated 13.7.2006 (Account No. 01000140211). It is also revealed from record that revised fee has been charged in all subsequent years.
15. Since it is an expense sanctioned/reviewed by the Government of Punjab during the year under consideration and paid to the Government of Punjab, such expense is in any case admissible. The assessee could not have claimed this amount in the financial year relevant to the AY 2006-07 since the rates were revised in July 2006. The assessee had also replied to Registrar, Cooperative Societies, Punjab, Chandigarh vide letter dated 29.9.2006 stating as under:
"The letter dated 17.8.2006 raising the audit fee from Rs. 7.00 lakhs to Rs. 10.00 lakhs has been made effective from 1.4.2006 whereas the Chief Auditor has requested for depositing the audit fee for the year 2005-06 on the new rats i.e. Rs. 10.00 lakhs."
16. In my view, when the assessee was faced with this situation, it had to debit Rs. 3 lakhs to profit and loss account for which provision was not made. As such, I find that the contention of the assessee carries weight. The addition so made is deleted, allowing assessee's plea on this ground."
18. We are in conformity with the order of the CIT(A) where the assessee was found not to have debited Rs. 3.00 lakhs to the profit and loss account for which only provision was made. Thus we dismiss ground No. 2 raised in ITA No. 1112/Chd/2010.
19. In the result, both the appeals filed by the Revenue in ITA No. 776/Chd/2011 and in ITA No. 1112/Chd/2010 are dismissed.
VARSHA Retrospective amendments to tax laws - Vandana Global case controversy
NIDHI GUPTA
Introduction
1. Unless the contrary intention appears, an enactment is presumed not to be intended to have a retrospective operation1.
The essential idea of a legal system is that current law should govern current activities. If we do something today, we feel that the law applying to it should be the law in force today, not its tomorrow's backward.
Retrospectivity is artificial, deeming a thing to be what it was not. So, the Courts apply the general presumption that an enactment is not intended to have retrospective effect. "Nova Constitutio Futuris Formam Imponere Debet Non Praeteritis".2But that does not mean that the Parliament does not have power to make retrospective laws or amendments; there is no prohibition, as such.
Article 265 of the Constitution of India reads: "No tax shall be levied or collected except by authority of law." Hence, any tax has to be backed by the authority of law. Any retrospective tax can also be levied and collected if it is backed by law. There is no bar on this power. It is then for the Courts to decide if such retrospective tax is unjust, unfair and against fundamental rights of the taxpayers. Hence, if the Parliament uses an express expression that such an Act or amendment will have retrospective operation, that is completely valid, unless struck down by the Courts for other grounds.
At times, the Parliament or the delegated authorities make an amendment to the tax statute without expressly stating whether such an amendment will have retrospective operation or not? Then there arises the problem before the Courts to decide if such an amendment is retrospective or not?
Vandana Global's case
2. Recently, in case of Vandana Global Ltd. v. CCE3, the Court faced the same problem. When an amendment was made to the definition of the input Cenvat Credit Rules, 2004 from 7-7-2009 which read as follows:
Explanation 2 to Rule 2(k) of the CENVAT Credit Rules, 2004, will exclude cement, angels, channels, Centrally Twisted Deform Bar (CTD) or Thermo Mechanically Twisted Bar (TMT) and other items used for:-
| (i) | construction of factory shed, building; or | |
| (ii) | laying of foundation; or | |
| (iii) | making of structures for support of capital goods. | |
| | (Emphasis Supplied) |
Now the question before the Court was, whether such an amendment was retrospective? The Court tried to identify the legislative intention behind this amendment. The Court looked into the Explanatory Memorandum presented to the Parliament, amending notification and departmental clarification showing that cement and steel items used for construction of shed, building or structure for support of capital goods was never intended to be included under "inputs"-Rule 2(k).4
Thus, the impugned amendment was nothing but mere clarification and, hence, retrospective.
Analysis
3. In case an amendment is brought with express language of retrospective operation there is no problem. Problems arise when the amendment is silent on this point.
If there is no mention about retrospectivity of an amendment, such an amendment will become retrospective only and only if it is clarificatory in nature. Clarificatory amendment is to clear the intention of the Legislature. It simply explains the law as it has always been in the main provision and is always retrospective.
Hence, the question before the Court in such cases and in Vandana Global's case was to determine if impugned amendment was clarificatory or not?
In case of Union of India v. Martin Lottery Agencies Ltd5. the core question which arose for consideration of SC was whether theExplanation appended to sub-clause (ii) of section 65(19) was clarificatory or declaratory in nature so as to be construed having retrospective effect and retroactive operation?
The Parliament by the Finance Act, 2008 inserted an Explanation in sub-clause (ii) of section 65(19), which came into force on or about 16-5-2008 and reads as under :
'for the removal of doubts "service in relation to promotion or marketing or service provided by client" includes service in relation to marketing or promotion of lottery.'
The Court held that it is a prospective amendment as the amendment is not clarificatory in nature but it introduces a new concept and widens the tax net. The Court held that even the words, "for the removal of doubts" are not conclusive words. The law before the amendment was clear and not vague or ambiguous and, hence, there was no need for clarification but under the guise of clarification the Parliament introduced a new tax and, hence, it was not retrospective unless mentioned explicitly.
Difference between these two cases can be summarized as under:
| Martin Lottery | Vandana Global |
| Not clarificatory amendment | Clarificatory amendment |
| Law was unambiguous before amendment | Law was ambiguous before amendment |
| Tax net widened | Cleared the intention of the Legislature |
| Prospective amendment | Retrospective amendment |
Conclusion
4. A conclusion can be drawn that in judging whether an amendment is clarificatory or not, the question that Court poses for itself is whether before amendment there were two views possible regarding the impugned section, and, if so, whether one of the views is what has been brought by amendment? If the answer to this two pronged test is in the affirmative, then the amendment is clarificatory, otherwise not.
Regards,
Pawan Singla
BA (Hon's), LLB
Audit Officer
__._,_.___
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