CBDT order rejecting TDS refund on penal interest treating it non-exempt u/s 10(15)(iv)(c) quashed

In a latest judgment, Delhi High Court has quashed CBDT order rejecting refund of TDS deducted on penal interest treating it non-exempt u/s 10(15)(iv)(c) considering it as a result of violation/transgression of the loan agreement.

The Court observed that the penal interest was imposed as part of the conditions of the Agreement itself. Therefore, the payment of penal interest could not be said to be for breach of the terms of the conditions but in terms of the conditions imposed for condoning such breach and therefore CBDT, proceeded on an erroneous interpretation of the clauses of the Agreement.

Case Law Details:
W.P.(C) 3244/1999
Ceat Limited (Petitioner) vs. The Central Board of Direct Taxes (CBDT) & Ors. (Respondents)
Date of Judgment: 07/04/2016
Coram: Justice S. Muralidhar and Justice Vibhu Bakhru

Brief facts of the Case:

The Petitioner entered into an agreement with Sanwa International Finance Limited (SIFL), Hong Kong, representing a consortium of banks to finance the cost of the Petitioner’s tyre cord plant at Madhya Pradesh. The loan agreement stipulated that all sums payable by the Petitioner under the agreement were to be paid without deduction or withholding any tax leviable in India.

Prior to entering into the agreement on 23rd November, 1989, the Department of Economic Affairs (DEA), Ministry of Finance (MoF) granted approval including payment of interest at 0.5% over the LIBOR rate as well as payment of interest and management fee, etc. exempting such payment under Section 10(15)(iv)(c) of the Income Tax Act, 1961.

Petitioner was unable to maintain the ratio of actual indebtedness to net worth as stipulated in the loan agreement for the financial year ending 30th June 1993 and 30th September 1994, and consequently the lenders imposed a normal penal interest of 1% from 1st July, 1993 onwards. The agency fee was also increased by additional one-time payment of US$ 8,000. The DEA also accorded approval for payment of the same and accordingly the petitioner remitted a sum of Rs. 6,51,41,380 Japanese Yen. by deducting Rs.49,51,049 as TDS.

Meanwhile the Petitioner decided to disinvest the tyre cord division. On 20th April 1995, the Petitioner received in principle approval of the lenders for sale of the tyre cord division subject to two conditions – (i) that the outstanding loan balance along with the regular interest must be settled in full; and (ii) an additional penal interest at 2% per annum for the period from 1st January, 1995 till the date of payment should be made to the consortium of lenders. The Petitioner agreed to the said condition. the DEA also conveyed its approval in this regard. Accordingly,  the Petitioner paid a sum of 1,66,90,711 Japanese Yen after deduction of tax at source Rs.15,02,165 which was deposited with CBDT/MoF.

The petitioner on 5th June, 1995 wrote to the Assessing Officer (AO) under Section 237 claiming refund of the aggregate TDS of Rs. 64,53,214. The main submission of the Petitioner was that the penal interest was “interest” within the meaning of Section 2(28A) and as such it has specifically approved as exempt from tax. Accordingly it was contended that the Petitioner was entitled to refund of the tax wrongly deducted from the prepayments of the loan to SIFL.

The Income Tax Officer (ITO), (TDS), Mumbai wrote to the Petitioner stating that refund could be granted only in respect of excess tax deducted and/or deductible under Section 192 to 194D but not the tax deducted under Section 195. The Petitioner simultaneously appealed against the said order before the Commissioner of Income Tax (Appeals) [CIT(A)] and also filed a rectification application before the ITO, (TDS) Mumbai under Section 154.

The Petitioner’s application under Section 154 of the Act was rejected by the ITO for two reasons; one was that since the petitioner stated that the tax had been paid by it on behalf of SIFL, the refund of excess tax, if any, paid can only be made by SIFL under Section 237 of the Act. Further as per CBDT’s circular No.285 dated 21/10/1980 as to when “a person other than an Assessee” could claim refund of tax.

Later, CIT, wrote to the Petitioner stating that it could declare itself as a representative assessee of SIFL under Section 161 and thereafter file refund claim. The alternative was to approach the CBDT to persuade it to exercise its powers under Section 119(2)(a).

The appeal(s) of the petitioner was disposed off by CIT(A) holding that it was an administrative matter leaving no scope for any adjudication. By this time, the CBDT had come out with circular No.769 dated 6th August, 1998 granting powers to the ITO to grant refund under Section 195 of the Act. Again on 09/10/1998, petitioner wrote to the CIT, drawing its attention to the said Circular, for issuing a direction to the DCIT to grant refund. However, The DCIT rejected the application for refund. on the basis of CBDT letter dated 08/12/1998 in which it was observed that the interest paid to SIFL did not qualify for exemption as the payment was not related to the borrowings made for the purpose stated in section l0(15)(iv)(c).

Thus, the first issue before the Delhi High Court was whether the payment of penal interest and other charges would fall within the definition of ‘Interest’ under Section 2(28A) of the Income Tax Act, 1961. It was also observed that MoF while granting approval never objected that such payments did not constitute ‘interest’ within the meaning of Section 2(28A). The Court observed that petitioner was justified in requesting refund on the basis of CBDT’s circular No.769 . The Court also held that CBDT did not give the Petitioner any opportunity of being heard.

Important Excerpts from High Court Judgment:

Thus, it is seen that the expression ‘interest’ is meant to encompass all kinds of payments in respect of moneys borrowed or debt incurred. It need not be interest per se but it could be a discharge of any other ‘similar right or obligation’. It could include a ‘service fee’. It could include any other ‘charge’. It is in this context that one has to examine the clauses in the Agreement entered into between the Petitioner and SIFL on 20th September, 1990.

It appears to the Court that a considered decision was taken by the MoF to grant approval not only to the Agreement as entered into between the Petitioner, the SIFL and the consortium of banks containing all of the aforementioned conditions but also to the payments made on two occasions without raising any objection that such payments did not constitute ‘interest’ within the meaning of Section 2(28A) of the Act or that since such payments were occasioned by a breach of contract by the Petitioner, they did not qualify as payments towards servicing the loan availed of by the Petitioner under the Agreement. Therefore, the said objection raised by the CBDT at the subsequent stage cannot be countenanced.

It appears to the Court that in the light of the law explained in GE India Technology Centre Private Limited (supra), the Petitioner in the present case was justified in going before the ITO with an application dated 14th September, 1998, requesting that the CBDT’s circular No.769 dated 6th August, 1998 be applied.

The order of the CBDT does not state that the Petitioner otherwise does not satisfy the conditions contained in the CBDT’s circular dated 6th August, 1998. It also does not state that the said circular would not apply to the Petitioner’s application for refund. This is yet another reason why the Court is not prepared to entertain the plea of the Revenue to the above effect because that was not the ground on which the CBDT rejected the Petitioner’s application

In the considered view of the Court, therefore, the impugned order dated 8 th December 1998 of the CBDT rejecting the Petitioner’s application for refund is unsustainable in law.

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