TaxTMI 
TaxTMI 
2010 (11) TMI 393
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....mpliance/defect, etc. Air India terminated the Wetlease on 4th September, 1996. According to Caribjet the termination of the Wetlease Agreement was not correct and demanded on 7th January, 1997 reference of the dispute to arbitration in accordance with the lease agreement. 2.2 The agreement provides for arbitration to be governed by the English laws and accordingly, London Court of International Arbitration was agreed as the venue as the venue for arbitration. An Arbitral Tribunal after hearing at length oral as well as written submissions of both the parties ruled in the Award dated 19-1-1999 that Air India has wrongfully terminated Wetlease Agreement with Caribjet. 2.3 Air India filed an appeal in London Commercial Court against the said award. After hearing the appeal, court rejected Air India's application for leave to appeal as the judge was not satisfied that the Tribunal was "obviously wrong" in its conclusion on the liabilities. Thereafter, Arbitral Tribunal heard the matter of determination of quantum in June 1999. The Arbitral Tribunal determined that Caribjet will receive a total amount of US $ 24.6 millon (termination cost US $ 2.2 million and termination losses U....
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....the Solicitors of both the parties. The Court also referred the tax dispute as a fresh dispute to the same Tribunal which determined the quantum damages. In view of the above fact, after obtaining approval from the RBI an Escrow Account was opened and US $ 21.6 million was remitted on 14-2-2000 with approval of the RBI. The second reference to the Arbitral Court was informed to the IT Department simultaneously for their representation before the court, if any. After hearing Air India's representative and the Caribjet and the IT authorities, the Tribunal, in a majority decision (two out of the three arbitrators) on May 22, 2000, agreed with the view of M/s Caribjet that clause 11.1 did not survive the repudiation of the Wetlease by Air India and the said clause was inapplicable to award on quantum damage and, therefore, Air India cannot deduct the amount, directed by the tax authorities, from the amount awarded by the Tribunal. The copy of this award was communicated to the Income-tax Department vide their letter No. HQ/9-59/1458, dated May 24, 25, 2000. 2.7 Even after the unfavourable award was published, the Air India applied to the commercial court in England for leave to appe....
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....re prevented by English Court from deducting the amount, would not enable M/s Air India to take the plea of English decisions being as reasonable cause. It is sufficient for me to conclude that M/s Caribjet earned sufficient profits due to transactions with Air India and such profits are taxable in India. If Air India has to pay compensation/damages due to its conduct to third parties, this in itself will not absolve it from its responsibility of deducting the due taxes or payment thereof as required by law. The liability of Air India is clear and unambiguous. They have to pay taxes and recover the same from M/s Caribjet through appropriate means. Sovereign dues not be waived, on the plea that the same has been paid to the third parties. Therefore, the plea of Air India that it has paid all the amounts to M/s Caribjet, would not absolve it from the determined tax liability. In view of the above, I hold that Air India is to be treated as an assessee in default and all the consequences of paying the tax, interest under section 201(1A) and levy of penalty under section 221 will follow." Thereafter the Assessing Officer raised a total demand of Rs. 101,16,74,416. Aggrieved, th....
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....ho has deducted" means, present and continues and persons who "failed to deduct" are not covered by these wordings in the statute. In support of his argument he referred to section 198, where the words used are "actually deducted" and to section 205 where the words used is "deductible" and argued that, the Legislature has consciously used different words in each section. Thus he submits that as the assessee has never deducted any tax, he cannot be held to be an assessee in default, in view of the specific wording in section 201 read with section 200(1). 9. The second proposition raised by the learned counsel is that section 195(1) applies only to any sum chargeable to tax, under the provisions of this Act. He argued that a failure can be only with respect to an obligation and an obligation under section 195 arises only if the amount in question is income. Mr. Arvind Sonde submits that the payment made under an arbitral award is a judgment debt and hence not income and hence there is no failure in the obligation to deduct tax at source. For this proposition he relied on the following case laws : 1. All India Reporter Ltd. v. Ramchandra D. Datar [1961] 41 ITR 446 (SC) 2....
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.... rest its decision only on these words of section 195 and submitted that the case law is still relevant. He further relied on the decision of the Hon'ble Bombay High Court in the case of CIT v. Primier Tyres Ltd. [1982] 134 ITR 17. He contended that the omission of the words from 1-6-1987, was only to facilitate the accelerated recovery of tax. He pointed out that in this case of the assessee it has not accepted that it is an agent of the non-resident. He contended that the revenue has to choose whether to proceed with section 201 or section 163. 13. The last proposition was that section 195A does not apply to the assessee. He pointed out that the CIT (Appeals) has come to a conclusion that the present case falls within the words "other arrangement", occurring in that section as in his opinion the agreement is no more valid. He submitted that this is a judgment debt and in such a situation it cannot be said that there is an arrangement with any party or person. He contends that this is an obligation under law and hence it does not fall under the term 'arrangement' in section 195A, as a legal obligation cannot be an arrangement. 14. The learned DR, Mr. Narendra Singh, on the o....
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....at nowhere in the various decisions cited by the assessee, a proposition has been laid down by any of the Courts that the award is not income. The proposition laid down was that, deduction of tax at source is not permissible in case of a judgment debt in view of the provisions of the Civil Procedure Code. Mr. Narendra Singh submitted that all foreign awards cannot become a decree of an Indian Court and thus are not judgment debts and that for that a method has been provided under section 48 of the Arbitration Act. He pointed out that in this case the "award" has not come before any Indian Court. He vehemently contended that, if the assessee's contention that the award given by a foreign Tribunal automatically becomes a judgment debt is accepted, then all foreign awards, given by even small Tribunals or arbitrators in foreign countries including Banana Republics would be claimed as judgment debts and this would lead to a very undesirable situation for the Country. On the issue whether there can be simultaneous proceedings under section 163 of the Act as well as under section 201 of the Act, he submitted that the duty cast upon the assessee to deduct tax at source, is entirely differ....
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....nt to the Finance Act, 2008 with effect from 1-6-2002, failure to deduct tax is not covered. All these arguments were considered by the H-Bench of the Tribunal (Special Bench) in the case of Mahindra & Mahindra Ltd. (supra) wherein at page 17 under sub-heading IV "Whether section 201 applies in case of non-deduction of tax at source?", it is held as follows : "13.5 On going through the above Notes on Clauses and Memorandum Explaining the Provisions of the Finance Bill, 2008, it is clearly borne out that section 201(1), even prior to the amendment was applicable not only to the person who is required to deduct tax at source but also not deducting the same. It has further been made clear in the memorandum that the interpretation, as similar to the one suggested by the learned Authorised Representative in the present case "is contrary to the intent of the Legislature" and the amendment was made "to clarify" that a person who is required to deduct any sum in accordance with the provisions of the Act does not deduct or after so deducting fails to pay, the whole or any part of the tax, he shall be deemed to be an assessee in default under section 201(1). It is thus obvious from the am....
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.... or it shall, without prejudice to any other consequences which he or it may incur, be deemed to be an assessee in default in respect of the tax". A cursory look at the section manifests that 'any such person' referred to in the "opening part of the section has connection with" the latter part of the section who "does not deduct or after deducting fails to pay the tax as required by or under this Act". In order to appreciate the meaning of 'such person' in the context of section 201(1) it is relevant to briefly note down the scheme of Chapter XVII, in which this section falls. Under sections 192 to 195 a duty has been cast upon any person responsible for paying or crediting any income under the respective sections to make a deduction of tax at source at the prescribed rates. Again similar duty has been placed under sections 196A to 196D on the person responsible for making payment. Section 197 deals with certificate for deduction at lower rate. Section 198 states that the tax deducted is income received. Section 199 stipulates the year in which the credit for tax deducted shall be given. Then section 200 provides that any person deducting tax in accordance with the 'foregoing provi....
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....R (Ker.) 174/[1987] 166 ITR 278 (Ker.) in which it has been held that "sections 195, 200 and 201 deal with a liability which is at no time ambulatory but which is attracted immediately upon the happening of an event, namely, payment and failure to deduct under section 195 or failure to credit the sum deducted as required by section 200. In the light of the foregoing discussion we hold that the view canvassed by the learned Authorised Representative on this aspect of the matter, is sans merit." In view of the above finding of the Special Bench of the Tribunal, we dismiss this contention of the assessee. The submissions of the assessee against the findings of the Special Bench are novel arguments and these in our humble opinion do not change the binding nature of the decision and that these aspects were considered and decided against the assessee. 21. Coming to the second proposition, the learned counsel argued that section 195(1) applies to any sum chargeable to tax under the provisions of the Act and that there is no obligation to deduct tax at source if the sum payable is not chargeable to tax under the provisions of the Act. He submitted that the payment made under an arbit....
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....e authority for fresh adjudication. The first appellate authority should consider the nature of damages awarded to M/s Caribjet by the Arbitrators and come to a conclusion as to whether such termination losses and damages are chargeable to tax under the Indian Income-tax Act, 1961. We in this order would be considering the other aspects of this case and if necessary would send this issue back to the file of the ld. CIT(A). 23. As we have heard both the parties at length on the other propositions, wherein they have cited a number of case laws, we consider the same and give our findings as under. 24. In the case of Ramchandra D. Datar (supra) the Hon'ble Court was considering the case of an employee, who obtained compensation for wrongful termination of employment, arrears of salary and interest and the Court had passed a decree. The Court held that under the scheme of the Civil Procedure Code, the decree had to be executed as it stood subject to the deduction or adjustment as were permissible under the Civil Procedure Code. It further held that there was no tax liability to which the respondent was assessed to pay, in respect of the amount of the decree. As between the company....
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.... on hand the award has not merged with the decree of any Court as contemplated in the Civil Procedure Code, for being termed as a judgmental debt. 28. The learned counsel also relied on the decision of the Hon'ble Supreme Court in the case of Mahendra Singh Dhantwal (supra). In this case the Hon'ble Court at page 70 held as follows : "The second reason is that the Court desired that Rs. 22,000 lump sum be paid to the appellant which means that if there raises any liability to pay tax, the same shall be borne by the company. That was the intendment of the order of this court. Therefore, it must be held that the respondent company was not justified in deducting Rs. 2,145 from the compensation amount or Rs. 20,000 awarded by this court to the appellant." In this case the Tribunal had awarded back wages and the Hon'ble Supreme Court restored this judgment. The intendment of the order was that, the tax liability would be borne by the Company. In the case on hand, it cannot be said that the intendment of the arbitrators, was that if there arises any liability to pay tax, the same shall be borne by the assessee. In the absence of such intendment, this case does not come to the re....
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..... Datar (supra) and at page 257, plasitum G, made an important observation that, both in the case of Ramchandra D. Dattar (supra) as well as in the present case of Islamic Investment Co. (supra) the defendants did not apply to the Court in the suit for making a provision in the decree for payment of income-tax dues. Thereafter it applied the judgment of the Supreme Court in the case of Ramchandra D. Dattar (supra) and held as follows : "However, as observed by the Supreme Court, when such amount becomes part of the judgment debt, it losses its original character and assumes the character of judgment debt. Once such an amount assumes the character of a judgment-debt, the decree passed by the civil court must be executed subject only to the deductions and adjustments permissible under the Code of Civil Procedure. Learned counsel for the Food Corporation of India has not been in a position to point out any provision under the Income-tax Act or under section 195 in particular or under the Code of Civil Procedure where the amount of the interest payable under a decree is deductible from the decretal amount on the ground that it is an interest component on which tax is liable to be de....
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....e supervisory role of Court and to give speedy justice. In this view, the stage of approaching Court for making award a rule of Court as required in Arbitration Act, 1940 is dispensed with in the present Act. If the argument of the respondent is accepted, one of the objects of the Act will be frustrated and defeated. Under the old Act, after making award and prior to execution, there was a procedure for filing and making an award a rule of Court i.e., a decree. Since the object of the Act is to provide speedy and alternative solution of the dispute, the same procedure cannot be insisted under the new Act when it is advisedly eliminated. If separate proceedings are to be taken, one for deciding the enforceability of a foreign award and the order thereafter for execution, it would only contribute to protracting the litigation and adding to the sufferings of a litigating in terms of money, time and energy. Avoiding such difficulties is one of the objects of the Act as can be gathered from the scheme of the Act and particularly looking to the provisions contained in sections 46 to 49 in relation to enforcement of foreign award. (In para 40 of SCC): (Para 49 of AIR; CLC) of the Thyssen ....
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....ceable. Execution of the award has to proceed as per sections 47 to 49 of the Arbitration and Conciliation Act, 1996. In the case on hand, the Court in India have not been approached for deciding the enforceability of the award. The observation that under the Foreign Award Act a decree follow and whereas, under the New Act "the foreign award is already stamped as a decree" does not in our humble opinion, lead to a conclusion that the "Award" automatically becomes a decree of the Civil Court under the Civil Procedure Code. The object of the Act is no doubt to enforce every final arbitral award, as if it was a decree of the Court. The Arbitral award is deemed a decree only if the court decides it is enforceable. Thus in our humble opinion, we are not able to accept the proposition of the learned counsel for the assessee that in the case of an arbitral Award, it is a deemed decree and hence a judgmental debt. We further discuss the issue in the fallowing paragraphs. 35. The second decision relied by the assessee is in the case of Thyssen Stahlunion GMBH (supra). In this case the Hon'ble Court laid down that section 85(2)(a) of the new Arbitration and Conciliation Act, 1996 saves....
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....hat the foreign award is enforceable under that Act the Court shall order the award to be filed and shall proceed to pronounce judgment accordingly and upon the judgment so pronounced a decree shall follow. Sections 7 and 8 of the Foreign Awards Act respectively prescribe the conditions for enforcement of a foreign award and the evidence to be produced by the party applying for its enforcement. Definition of foreign award is same in both the enactments. Sections 48 and 47 of the new Act correspond to sections 7 and 8 respectively of the Foreign Awards Act. While section 49 of the new Act states that where the Court is satisfied that the foreign award is enforceable under this Chapter (Chapter I, Part II, relating to New York Convention Awards) the award is deemed to be decree of that Court. The only difference, therefore, appears to be that while under the Foreign Awards Act a decree follows, under the new Act foreign award is already stamped as the decree. Thus if provisions of the Foreign Awards Act and the new Act relating to enforcement of the foreign award are juxtaposed there would appear to be hardly any difference." A perusal of this does not lead us to the conclusion th....
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....l award may also be refused if the Court finds that- (a) the subject-matter of the difference is not capable of settlement by arbitration under the law of India; or (b) the enforcement of the award would be contrary to the public policy of India. Explanation.-Without prejudice to the generality of clause (b), of this section, it is hereby declared, for the avoidance of any doubt, that an award is in conflict with the public policy of India if the making of the award was induced or affected by fraud or corruption. (3) If an application for the setting aside or suspension of the award has been made to a competent authority referred to in clause (e) of sub-section (1) the Court may, if it considers it proper, adjourn the decision on the enforcement of the award and may also, on the application of the party claiming enforcement of the award, order the other party to give suitable security. 49. Enforcement of foreign awards.-Where the Court is satisfied that the foreign award is enforceable under this Chapter, the award shall be deemed to be a decree of that Court." [Emphasis supplied] From a perusal of the above it is very clear that only when a Court is sat....
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....to seek its execution in accordance with the provisions of the Civil Procedure Code." [Emphasis supplied] From the above, the legal position is clear. As in this case the parties have not approached the Court, the question of the court declaring that the "Foreign Award" is enforceable, does not arise and it cannot be considered a deemed decree. Thus for all these reasons, we reject the second proposition canvassed by the learned counsel for the assessee. 37. Even otherwise, looking at the facts of the case, the assessee approached the Court of appeal in London for permission to deduct tax at source from the award amount. Caribjet, on the other hand, argued that article 11(1) of the agreement did not survive the repudiation of the wetlease agreement by Air India and thus the assessee cannot deduct any portion of the tax from the award on quantum. It was also argued that foreign revenue laws cannot be enforced in U.K. and hence TDS cannot be recovered. Caribjet also argued that the Indian Income-tax Department had committed a complete volete face from the position it had originally adopted throughout the operation of wetlease, wherein only 2.75 per cent was the withholding tax ....
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....sition and on the contrary had submitted that the Income-tax authorities have not yet made up their minds as to whether the petitioner is to be treated as an agent under section 163 of the Act or is to be proceeded with as "any person within the meaning of section 195 thereof". Under those circumstances the notice issued was held to be without jurisdiction. The learned Judge in this case has made it clear that he is not pronouncing any opinion on the merits of the other contentions raised by the petitioners. In this decision, we have to note the wording of section 195(1) as it then existed as brought out at page 96. We extract the same for ready reference : "195. (1) Any person responsible for paying to a non-resident, not being a company, or to a company which is neither an Indian company nor a company which has made the prescribed arrangements for the declaration and payment of dividends within India, any interest, not being 'interest on securities', or any other sum, not being dividends, chargeable under the provisions of this Act, shall, at the time of payment, unless he is himself liable to pay any income-tax thereon at the rates in force : Provided that nothing in this ....
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....xpression of the legislative intention that these two groups of sections are entirely independent of each other and are mutually exclusive." This proviso has since been omitted from the statute. All the argument are based on provisions of law which have been amended. Such arguments based on old law cannot be entertained. In the absence of this proviso in the statute, in our opinion, these case laws have no application. The legal position has changed long back. 41. On the other hand the Special Bench of the Tribunal in the case of Mahindra & Mahindra Ltd. (supra) had considered the issue, though in a different context, and concluded that non-initiation of proceedings under section 163, treating the payee as an agent of a non-resident within the time provided under the Act for time barring, would result in the order passed under section 201 being barred by limitation. At page 646 it concluded as follows : "(xiii) No order under section 201(1) or (1A) can be passed where the Revenue has not taken any action against the payee and further the time-limit for taking action against the payee under section 147 has also expired." This shows that the Special Bench was of the opini....
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.... 2,36,35,251 into Government Treasury, in an order under section 195(2). The assessee approached the Court of Appeal in London for being permitted to deduct the tax from the award amount. Caribjet opposed the same on various grounds. Pending stay, the assessee was directed by the Court of Appeals in London to remit the amount in the Escrow account maintained in the names of Solicitors of both the parties. Subject to the remittance they referred the dispute to the same Tribunal which determined the quantum damages. The Income-tax Department was informed and RBI permission taken and the amount was remitted to Escrow account. The reason for the same was that the assessee had assets in England and there was a serious risk of attachment of its overseas assets which would seriously affect the financial credibility of the assessee. The assessee took two senior officials of the Income-tax Department to London, in order to observe the hearings and to assist them before the Tribunal, on the issue of deducting tax at source. The Tribunal in a majority decision had held that no tax can be deducted at source from the arbitration award. The assessee carried the matter in appeal and the Commercia....
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....ntrollable circumstances, the performance of the obligation to deduct tax at source and remit the same to the Government became impossible. The impossibility of performance releases the assessee from its obligation to deduct tax at source under section 195 of the Act. A default occurs only when an obligation is not performed. When the assessee is released from the obligation, it cannot be said he is in default. Thus when the assessee is prevented from deducting tax under section 195, the question of his not performing the obligation under law does not arise and thus he cannot be held a defaulter. 47. For coming to such a conclusion we draw strength from the following case laws. The proposition is "when the assessee is prevented from performing his obligations under the law, despite his bona fide efforts, due to impossibility of performance, he would be discharged from such an obligation and hence cannot be regarded a defaulter" In the case of ITO v. L.I.C. of India [2001] 79 ITD 278 (Cal.) it was held as fallows : "When the assessee deducted the tax or was required to deduct the tax at source, the City Compensatory Allowance was not taxable as held by the jurisdictional Hi....
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....may also quote the following observations from the decision of the Hyderabad Bench of the Tribunal in the case of Asstt. CIT v. Jindal Irrigation Systems Ltd. [1996] 56 ITD 164 at page 167 :- "6. When the law creates a duty or charge and the party is disabled to perform it, without there being any default on his part, and there is no remedy for him, the law will in general excuse him. When the obligation is one implied by law, impossibility of performance is a good excuse, say, impotentia excusat legem. 7. Even under the Control Act, dealing with private rights and obligations of a party to the agreement, the contract is deemed to be void on account of impossibility of performance (section 56). The law regards the order and course of nature and will not force a man to demand that which he cannot recover. The law will not itself attempt to do an act which would be vain - lex nil frustra facit - nor enforce one which would be frivolous - lex neminem cogit ad vana seu inutilia - the law will not force any one to do a thing vain and fruitless." This was a case where the assessee had not yet started earning income and, therefore, the Tribunal held, how can the law expect him to....
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....nder section 11(5) was caused due to the garnishee proceedings initiated by the TRO. Because of such proceedings the assessee was unable to make the investment in conformity with the provisions of section 11(5) of the Act. 8. In the case of Krishnaswamy S. Pd. v. Union of India [2006] 201 CTR (SC) 183 : [2006] 281 ITR 305 (SC), the Hon'ble Supreme Court has held that the maxim actus curiae neminem garvabit, i.e., an act of Court shall prejudice no man, is founded upon justice and good sense which serves a safe and certain guide for the administration of law. The other relevant maxim is lex non cogit dimpossibilia - the law does not compel a man to do what he cannot dossibly perform. The law itself and its administration is understood to disclaim as it does in its general aphorisms, all intention of compelling impossibilities, and the administration of law must adopt that general exception in the consideration of particular cases. 9. It is abundantly clear from the records that the trust did its best to take back the money from M/s Egmore Benefit Fund Society Ltd. Money could not be recovered because of the pendency of garnishee proceedings. As the investment was not under the....