IN IN IN THE HIGH COURT OF JUDICATURE AT BOMBAY THE HIGH COURT OF JUDICATURE AT BOMBAY THE HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORDINARY ORDINARY ORIGINAL CIVIL JURISDICTION ORIGINAL CIVIL JURISDICTION ORIGINAL CIVIL JURISDICTION WRIT WRIT WRIT PETITION NO.2550 OF 2007 PETITION NO.2550 OF 2007 PETITION NO.2550 OF 2007 Vodafone International Holdings B.V., a company incorporated under the provisions of the Companies Act of Netherlands, having its office at Rivium Quadrant, 173, 15th Floor, 2909 LC Capelle aan den IJssel The Netherlands ..Petitioner ..Petitioner ..Petitioner Versus Versus Versus 1. Union of India, Ministry of Finance, New Delhi. 2. Asstt.Director of Income Tax (International Taxation), Circle 2(2), Mumbai having office at 1st Floor, Room No.116, Scindia House, Ballard Estate, N.M.Road, Mumbai - 400 038. ..Respondents ..Respondents ..Respondents Mr.Iqbal Chagla, Senior Advocate with Mr.Dinesh Vyas, Senior Advocate, Mr.Pardiwala, Mr.R.Chagla, Mr.L.Pareira, Mr.Ajit Shah, Mr.Daljeet Bhatia i/b.ALMT Legal for the Petitioner. Mr.M.Parasaran, Additional Solicitor General with Mr.G.Srivastava, Special Counsel with Mr.B.M. Chatterjee Standing Counsel for Respondent Union of India. CORAM CORAM CORAM :- DR.S.RADHAKRISHNAN & :- DR.S.RADHAKRISHNAN & :- DR.S.RADHAKRISHNAN & A.V.NIRGUDE, A.V.NIRGUDE, A.V.NIRGUDE, JJ. JJ. JJ. JUDGMENT JUDGMENT JUDGMENT RESERVED ON : 9TH JULY,2008 RESERVED ON : 9TH JULY,2008 RESERVED ON : 9TH JULY,2008 JUDGMENT JUDGMENT JUDGMENT PRONOUNCED ON : PRONOUNCED ON : PRONOUNCED ON : 3RD DECEMBER, 2008 3RD DECEMBER, 2008 3RD DECEMBER, 2008 P.C. P.C. P.C. 1. Mr.Chagla, the learned Senior Counsel appearing on behalf of the Petitioner broadly made the following four propositions: I. Assuming the validity of the 2008 amendments and further assuming that the transaction is chargeable to tax then nevertheless it is submitted that the Show :2: Cause Notice is without jurisdiction as both before and after 2008 amendment the Petitioner is not deemed to be an assessee in default. II. The provisions of Section 195 have no extra territorial application. In an offshore transaction involving two non residents in respect of a capital asset (i.e. share capital) and payment outside the country, even assuming that such transaction is chargeable to tax, there is no obligation to withhold tax under Section 195. III. The 2008 amendment to the extent that they purport to be retrospective are unconstitutional. Under the unamended Sections 191 and 201 the Show Cause Notice is clearly without jurisdiction. IV. In any view of the matter the transaction in question is not chargeable to tax in India and the Petitioner accordingly was under no obligation to withhold tax as required under Section 195. I.I.I. Non-applicability Non-applicability Non-applicability of Section 201 of Section 201 of Section 201 2. With regard to the first proposition, Mr.Chagla, the learned Senior Counsel, very comprehensively submitted that the Income tax is a tax on the income payable by the recipient. Income tax of the recipient is payable by the payer only in certain limited circumstances, including when the legislature deems the payer to be an "assessee in default" ("AID "assessee in default" ("AID "assessee in default" ("AID for for for short). short). short). 3. Mr.Chagla, further submitted that Section 201 is one such provision which deems a person, not the person liable to pay the tax, to be an assessee in default (AID). In a fiscal statute there is no room for any implication or intendment, necessary or otherwise. Since it is a deeming provision and one contained in a fiscal statute, it must be construed :3: strictly. In that behalf, the learned Senior Counsel relied on a decision in the case of A.V.Fernandez Vs. A.V.Fernandez Vs. A.V.Fernandez Vs. State State State of Kerala AIR 1957 SC 657 of Kerala AIR 1957 SC 657 of Kerala AIR 1957 SC 657, wherein the Hon’ble Supreme Court had held that : 29. It is no doubt true that in construing fiscal statutes and in determining the liability of a subject to tax one must have regard to the strict letter of the law and not merely to the spirit of the statute or the substance of the law. If the Revenue satisfies the Court that the case falls strictly within the provisions of the law, the subject can be taxed. If, on the other hand, the case is not covered within the four corners of the provisions of the taxing statute, no tax can be imposed by inference or by analogy or by trying to probe into the intentions of the legislature and by considering, what was the substance of the matter. We must of necessity, therefore, have regard to the actual provisions of the Act and the rules made thereunder before we can come to the conclusion Ta the appellant was liable to assessment as contended by the Sales Tax Authorities." 4. The learned Senior Counsel further placed his reliance on the decision of the Hon’ble Supreme Court in the case of Sales Tax Commissioner Vs. Mods Sugar Sales Tax Commissioner Vs. Mods Sugar Sales Tax Commissioner Vs. Mods Sugar Mills Mills Mills AIR 1961 SC 1047, AIR 1961 SC 1047, AIR 1961 SC 1047, wherein it is held, that; "In interpreting a taxing statute, equitable considerations are entirely out of place. Nor can taxing statutes be interpreted on any presumptions or assumptions. The Court must look squarely at the words of the statute and interpret them. It must interpret a taxing statute in the light of what is clearly expressed. It cannot imply anything which is not expressed; it cannot import provisions in the statutes so as to supply any assumed deficiency." 5. He further placed his reliance on the judgment of the Hon’ble Supreme Court in the case of :4: Smut.Tabulate Smut.Tabulate Smut.Tabulate Shyam Vs. Commissioner of Income Tax Shyam Vs. Commissioner of Income Tax Shyam Vs. Commissioner of Income Tax 108 108 108 ITR 345 (SC), ITR 345 (SC), ITR 345 (SC), wherein, the Hon’ble Supreme Court had held that; "There is no scope for importing into the statute words which are not there. Such importation would be, not to construe, but to amend the statute. Even if there be a casus omissus, the defect can be remedied only by legislation and not by judicial interpretation. . To us, there appears no justification to depart from the normal rule of construction according to which the intention of the legislature is primarily to be gathered from the words used in the statute. It will be well to recall the words of Rowlatt J.in Cape Brandy Syndicate Vs. Inland Revenue Commissioners (1921) 1 KB 64 (KB) at page 71, that: . ".....in a taxing Act one has to look merely at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption as to a tax. Nothing is to be read in, nothing is to be implied. One can only look fairly at the language used." . Once it is shown that the case of the assessee comes within the letter of the law, he must be taxed, however great the hardship may appear to the judicial mind to be. 6. The learned Senior Counsel further relied on a Division Bench judgment of our High Court in the case of Commissioner of Income Tax Vs. Khimji Nenshi 194 Commissioner of Income Tax Vs. Khimji Nenshi 194 Commissioner of Income Tax Vs. Khimji Nenshi 194 ITR ITR ITR 192 (Bom.) 192 (Bom.) 192 (Bom.), wherein our High Court had held that; Moreover, section 64(2)(b) contains a deeming provision and hence requires to be construed strictly. An income which is derived from the profits of the firm and not from the capital contribued as such cannot be considered as income derived from the converted property. 7. He also relied on the decision in Mathuram Mathuram Mathuram :5: Agrawal Agrawal Agrawal Vs. State of Madhya Pradesh AIR 2000 SC 109 Vs. State of Madhya Pradesh AIR 2000 SC 109 Vs. State of Madhya Pradesh AIR 2000 SC 109, wherein, the Hon’ble Supreme Court had held that; The statute should clearly and unambiguously convey the three components of the tax law i.e. the subject of the tax, the person who is liable to pay the tax and the rate at which the tax is to be paid. If there is any ambiguity regarding any of these ingredients in a taxation statute then there is no tax in law. Then it is for the legislature to do the needful in the matter. The The The position pre-2008 amendment: position pre-2008 amendment: position pre-2008 amendment: 8. Mr.Chagla, the learned Senior Counsel for the Petitioner states, that Section 201 on its plain language provides that a person is deemed an AID in only two specified cases viz. where under Section 194 there is a failure to deduct tax on dividend; or when under Section 200 there is a deduction of tax as required by any of the provisions but such tax is not paid to the credit of the Central Govt. Where, therefore, a person withholds tax under Section 195 but does not pay the same to the credit of the Central Govt., such person is deemed to be an AID. Equally, where a person fails to deduct tax on dividend under Section 194 then the very failure to make such deduction would render that person an AID. He further submitted that failure to deduct or to withhold tax in any other case does not render that person an AID. 9. The learned Senior Counsel further submitted :6: that the above is clear not only from the plain language of Section 201 but from the scheme of the Act. i. The provision for deduction and withholding are under the Chapter ‘COLLECTION AND RECOVERY OF TAX’. That Chapter does not contain charging provisions but only provides for a convenient machinery for the recovery of tax. ii. Section 191 provides that even where there is failure to deduct tax in accordance with the provisions of that Chapter, "income-tax shall be payable by the assessee direct". In other words, the liability to pay tax is that of the assessee and not of any other person. The Explanation, however, is the counter-part of Section 201: for the removal of doubts it declares that in the special cases of Sections 194 and 200, the defaulting persons shall be deemed to be AID as referred to in Section 201. (NB : Prior to its amendment in 2002 Section 201 did not define "such person". The words "referred to in section 200" were inserted after "such person". A consequent amendment was made in 2003 by the addition of the Explanation to Section 191). iii. Failure to deduct or to withhold tax is visited with the penal consequences as provided in :7: Section 271C, and by virtue of Section 273B no penalty shall be imposed if it is proved that "there was reasonable cause for the said failure". iv. Therefore, by reason of failure to deduct or withhold tax other than under Section 194, the payer is liable to be penalized under Section 271C but he does not become liable for the tax. That liability is and remains that of the payee who is the assessee, a position that is clarified by Section 191. v. A person who fails to deduct or withhold tax and who is not the assessee can be made liable for the tax only by a legal fiction, a legal fiction that deems the payer to be an assessee in default when he is not. Such a legal fiction must be construed strictly and be applied to only such persons as are specifically mentioned and no others. vi. Section 201 creates the legal fiction that deems the person who has failed to deduct tax under Section 194 and the person who has deducted tax but failed to pay to the credit of the Central Government as required under Section 200 alone to be AID. That these are the only cases in which the legal fiction is applicable is clarified by the Explanation to Section 191. vii. All other persons failing to deduct tax, :8: including those mentioned in Section 195, may be liable to be penalized but are not AID. POSITION POSITION POSITION POST 2008 AMENDMENT: POST 2008 AMENDMENT: POST 2008 AMENDMENT: a. Even assuming the Petitioner was under an obligation to withhold tax under Section 195, under Section 191 the primary liability to pay the tax remains that of the payee. b. The amended Section 191 provides for a cumulative test: to be an assessee in default the person should have failed to deduct tax and that the assessee has failed to pay the tax. In fact the amended provision reinforces and emphasizes that the primary obligation is of the assessee and that his failure to pay the tax is a condition precedent to the payer being deemed to be an assessee in default. c. Both before and after the amendments, the provisions of Section 191 and Section 201 are to be construed harmoniously so as to avoid any part of the provisions being rendered redundant. The condition precedent, therefore, of Section 191 to the imposition of liability on the payer must be read into Section 201. In other words, Section 201 can be invoked and a show cause notice issued only when the payee fails to make payment. In this behalf, the learned Senior Counsel for the Petitioner relied on a decision of the Hon’ble Supreme Court in the case of Sultana Begum Vs. Sultana Begum Vs. Sultana Begum Vs. :9: Premchand Premchand Premchand Jain (1997) 1 SCC 373 Jain (1997) 1 SCC 373 Jain (1997) 1 SCC 373, wherein it is held, that; d. Therefore, by reason of failure to deduct or withhold tax, the Petitioner is liable to be penalized under Section 271C but his liability to pay the tax arises only when the payee fails to pay the tax. e. It is the admitted position in the present case that the payee has not been called upon to pay the tax and the payee cannot be said to have failed to pay the tax, in which case the condition precedent to the applicability of the deeming provision is not fulfilled and the Petitioner cannot be deemed to be an assessee in default for the tax liability of the payee. f. The impugned Show Cause Notice, therefore, purporting to be under Section 201, asking the Petitioner why it should not be deemed to be an AID for failing to withhold the tax allegedly due by the payee is ex-facie without jurisdiction. II. Section Section Section 195 has no extra territorial 195 has no extra territorial 195 has no extra territorial operation: operation: operation: 10. With regard to second proposition that section 195 has no extra territorial operation, Mr.Chagla, the :10: learned Senior Counsel submitted as under: 11. Although the Indian Parliament is competent to enact legislation which may have extra-territorial operation (Article 245 of the Constitution), such legislation, if it were to operate extra territorially, must require clear and cogent language to that effect. 12. Where a non-resident has no presence in or nexus with India Parliament’s competence to legislate in respect of such person has been doubted. In this behalf, the learned Senior Counsel Mr.Chagla placed his reliance on the decision of the Hon’ble Supreme Court in the case of Electronics Corporation of India Electronics Corporation of India Electronics Corporation of India Ltd. Ltd. Ltd. Vs. Commissioner of Income Tax 183 ITR 43 (SC) Vs. Commissioner of Income Tax 183 ITR 43 (SC) Vs. Commissioner of Income Tax 183 ITR 43 (SC) 52 52 52, wherein it is held that; The general principle, flowing from the sovereignty of States, is that laws made by one State can have no operation in another State. The apparent opposition between the two positions is reconciled by the statement found in British Columbia Electric Railway Co.Ltd. Vs. King (1946) AC 527 (PC). "A Legislature which passes a law having extra-territorial operation may find that what it has enacted cannot be directly enforced, but the Act is not invalid on that account, and the courts of its country must enforce the law with the machinery available to them." In other words, while the enforcement of the law cannot be contemplated in a foreign State, it can, none the less, be enforced by the courts of the enacting State to the degree that is permissible with the machinery available to them. They will not be regarded by such courts as invalid on the ground of such extra-territoriality. :11: But the question is whether a nexus with something in India is necessary. It seems to us that, unless such nexus exists, Parliament will have no competence to make the law. It will be noted that article 245(1) empowers Parliament to enact laws for the whole or any part of the territory of India. The provocation for the law must be found within India itself. Such a law may have extra-territorial operation in order to subserve the object and that object must be related to something in India. It is inconceivable that a law should be made by Parliament in India which has no relationship with anything in India. The only question then is whether the ingredients, in terms of the impugned provision, indicate a nexus. The question is one of substantial importance, specially as it concerns collaboration agreements with foreign companies and other such arrangements for the better development of industry and commerce in India. In view of the great public importance of the question, we think it desirable to refer these cases to a Constitution Bench, and we do so order. 13. Alternatively, if it is held that Parliament’s competence to legislate is plenary then, unless the language of the provision permits only one construction giving such provision extra territorial operation, there would be a presumption or a rule of construction that Parliament did not intend to exceed its territorial jurisdiction or violate the rules of international law. This presumption or rule of construction would apply more so in the case of a provision in respect of which a default thereunder entails penal consequences. To support this contention, Mr.Chagla, the learned Senior Counsel relied on a judgment in the case of Clarke (Inspector Clarke (Inspector Clarke (Inspector of of of Taxes) Vs. Oceanic Contractors Inc - (1983) 1 ALL Taxes) Vs. Oceanic Contractors Inc - (1983) 1 ALL Taxes) Vs. Oceanic Contractors Inc - (1983) 1 ALL ER ER ER 133, 133, 133,, wherein, it is held that; :12: Put into the language of today, the general principle being there stated is simply that, unless the contrary is expressly enacted or so plainly implied that the courts must give effect to it, United Kingdom legislation is applicable only to British subjects or to foreigners who by coming to the United Kingdom, whether for a short or long time, have made themselves subject to British jurisdiction. Two points would seem to be clear: first, that the principle is a rule of construction only and, second, that it contemplates mere presence within the jurisdiction as sufficient to attract the application of British legislation. Certainly there is no general principle that the legislation of the United Kingdom is applicable only to British subjects or persons resident here. Merely to state such a proposition is to manifest its absurdity. Presence, not residence, is the test. But, of course, the Income Tax Acts impose their own territorial limits. Parliament recognises the almost universally accepted principle that fiscal legislation is not enforceable outside the limits of the territorial sovereignty of the kingdom. Fiscal legislation is, no doubt, drafted in the knowledge that it is the practice of nations not to enforce the fiscal legislation of other nations. But, in the absence of any clear indications to the contrary, it does not necessarily follow that Parliament has in its fiscal legislation intended any territorial limitation other than that imposed by such unenforceability. 14. He further relied on a Governor General Vs. Governor General Vs. Governor General Vs. Raleigh Raleigh Raleigh Investment AIR 1944 FC 51 at page 60, Investment AIR 1944 FC 51 at page 60, Investment AIR 1944 FC 51 at page 60, If the language of the Constitution Act clearly indicates that the legislative power of the subordinate Legislature is subject to specified territorial limitations or if, on the other hand, the language authorizes expressly or by necessary implication extra-territorial legislation by the subordinate Legislature, the position is simple enough. Where, however, the language of the Constitution Act does not contain a sufficiently clear indication one way or the other, two views are possible : One is that :13: the language of that statute should be construed conformably to a general presumption against authorizing extra-territorial legislation and the other view is that the statute should be construed on the basis that there is no such presumption or limitation. 15. He also relied on the State Vs. Narayandas State Vs. Narayandas State Vs. Narayandas AIR AIR AIR 1958 Bom 68 (FB) at page 71. 1958 Bom 68 (FB) at page 71. 1958 Bom 68 (FB) at page 71. 16. The learned Counsel for the Petitioner further placed his reliance on the decision of the Hon’ble Supreme Court in the case of Tolaram Vs. State of Tolaram Vs. State of Tolaram Vs. State of Bombay Bombay Bombay AIR 1954 SC 496 AIR 1954 SC 496 AIR 1954 SC 496. 17. The learned Senior Counsel submitted that Section 1(2) of the Income Tax Act provides that the Act "extends to the whole of India" and does not purport to give the Act extra-territorial operation unlike other statutes like FERA, FEMA, Foreign Contribution Regulation Act, Official Secrets Act, Information Technology Act, Indian Passport Act, etc. 18. In view of Section 1(2), provisions of the Income Tax Act must be assumed to operate territorially except where such provision permits only one construction that it is to operate beyond the boundaries of India or in respect of a person not resident within India. The learned Counsel for the Petitioner referred to Section 9, which deems certain income earned by a non-resident to be income earned within India. :14: 19. The learned Senior Counsel submitted that the definition of "person" ex-facie includes a foreign company. In this behalf he referred to Section 2(31) r/w.2(17) which reads as under: 2[(17) "company" means - (i) any Indian company, or (ii) any body corporate incorporated by or under the laws of a country outside India, or (iii) any institution, association or body which is or was assessable or was assessed as a company for any assessment year under the Indian Income Tax Act,1922 (11 of 1922), or which is or was assessable or was assessed under this Act as a company for any assessment year commencing on or before the 1st day of April, 1970 or (iv) any institution, association or body, whether incorporated or not and whether Indian or non-Indian, which is declared by general or special order of the Board to be a company: Provided that such institution, association or body shall be deemed to be a company only for such assessment year or assessment years (whether commencing before the 1st day of April, 1971, or on or after that date) as may be specified in the declaration;] 2(31) "person" includes - (i) an individual, (ii) a Hindu undivided family, (iii) a company, (iv) a firm, (v) an association of persons or a body of individuals, whether incorporated or not, (vi) a local authority, and (vii) every artificial juridical person, not falling within any of the preceding sub-clauses. :15: [Explanation - For the purposes of this clause, an association of persons or a body of individuals or a local authority or an artificial juridical person shall be deemed to be a person, whether or not such person or body or authority or juridical person was formed or established or incorporated with the object of deriving income, profits or gains.] 20. The learned Senior Counsel also contended that the definition must be read contextually. 21. Mr.Chagla pointed out that this is made