2002 (5) TMI 19 - HC - Income Tax

Petition Dismissed: Gov't Withdraws Tax Exemption for Non-Compliance with ECB Approval Terms

Reliance Industries Ltd. And Another Versus Union Of India And Another.

Reliance Industries Ltd. And Another Versus Union Of India And Another. - [2002] 258 ITR 143, 176 CTR 443, 124 TAXMANN 246 Issues Involved:1. Approval and Utilization of External Commercial Borrowings (ECBs).2. Exemption from Withholding Tax under Section 10(15)(iv)(f) of the Income-tax Act, 1961.3. Compliance with Terms and Conditions of ECB Approvals.4. Withdrawal of Tax Exemption by the Central Government.5. Jurisdiction and Authority of the Central Government and Assessing Authorities.Detailed Analysis:1. Approval and Utilization of External Commercial Borrowings (ECBs):The first petitioner, a public limited company, sought permission to raise ECBs amounting to US $300 million to finance their projects. Initial approvals were granted for US $150 million each. The petitioner entered into a syndicated loan agreement and raised the balance through a bond issue. They expended approximately US $325 million from their rupee resources towards project costs while awaiting approval. Subsequent approvals for additional ECBs were granted, and the funds were deposited in bank accounts abroad as per RBI guidelines.2. Exemption from Withholding Tax under Section 10(15)(iv)(f) of the Income-tax Act, 1961:The petitioner applied for and was granted exemption from withholding tax under Section 10(15)(iv)(f) of the Income-tax Act. This exemption was contingent upon compliance with the terms and conditions of the ECB approvals. The Central Government granted further approvals with the condition that the payment of interest would be exempt from withholding tax under the said section.3. Compliance with Terms and Conditions of ECB Approvals:The petitioner requested that expenditures incurred prior to the approvals be treated as part utilization of ECB proceeds. The second respondent required clarification and documentary evidence to support the eligibility of these expenditures. The petitioner argued that the funds drawn against ECBs were fungible and could be adjusted towards expenditures incurred from their rupee resources.4. Withdrawal of Tax Exemption by the Central Government:The second respondent rejected the petitioner's proposal to utilize ECB proceeds retained abroad for prepayment/buyback of outstanding ECBs, citing non-compliance with existing guidelines. A notice was issued to the petitioner proposing to withdraw the tax exemption granted under Section 10(15)(iv)(f) due to breach of the terms of ECB approvals. The petitioner contended that the withdrawal was unjustified as they had complied with the conditions and that the exemption should not be conditional upon the specific end-use of the proceeds.5. Jurisdiction and Authority of the Central Government and Assessing Authorities:The Central Government's authority to grant and withdraw exemptions under Section 10(15)(iv)(f) was challenged by the petitioner. The court held that the Central Government had the jurisdiction to impose terms and conditions for the approval of ECBs and the corresponding tax exemptions. The court emphasized that the exemptions were granted to serve a public purpose, specifically the industrial development of India, and any breach of the conditions justified the withdrawal of the exemption.Conclusion:The court dismissed the petition, upholding the Central Government's decision to withdraw the tax exemption due to the petitioner's non-compliance with the terms of the ECB approvals. The court found no illegality, irrationality, or procedural impropriety in the decision, emphasizing that the exemptions were contingent upon the specified utilization of the ECB funds for industrial development.