W.P. (C) No.9100 of 2007 Page 1 of 52

REPORTABLE

* IN THE HIGH COURT OF DELHI AT NEW DELHI

+ W.P. (C) 9100 of 2007

Reserved on: 12

th

July, 2011

% Pronounced on: 12

th

August,2011

GENERAL ELECTRIC COMPANY & ANR .

. . . PETITIONER S

Through : Mr. Harish Salve, Sr.

Advocate with Ms.

Anuradha Dutt, Ms.

Fereshte Sethna, Mr. Anish

Kapur, Ms. Ekta Kapil, Mr.

Kuber Dewan, Ms. Shweta

and Mr. Pratyush Miglani,

Advocates.

VERSUS

DEPUTY DIRECTOR OF INCOME -TAX. . . .RESPONDENTS

CIRCLE 1 (2), NEW DELHI & OTHERS

Through: Mr. Mohan Parasaran,

A.S.G. with Mr. Sanjeev

Sabharwarl, Sr. Standing

Counsel, Mr. Soheb

Horrain, Mr. Alok P. Kumar

and Ms. Aarthi Rajan.

CORAM :-

HON’BLE MR. JUSTICE A.K. SIKRI

HON’BLE MR. JUSTICE M.L. MEHTA

1. Whether Reporters of Local newspapers may be allowed

to see the Judgment?

2. To be referred to the Reporter or not?

3. Whether the Judgment should be reported in the Digest?

W.P. (C) No.9100 of 2007 Page 2 of 52

A.K. SIKRI, J.

1. By the present petition, the petitioners are challenging the

legality and validity of the notices dated 10.04.2007 and

10.10.2007 issued under Section 163 of the Income Tax

Act (hereinafter referred to as „the Act‟) vide which

respondent No.1 proposes to treat respondent no.4 as an

agent of the first petitioner and make an assessment on

respondent No.4 as a representative assessee of the first

petitioner.

2. Vide impugned notices served upon the respondent No.4

treating as a representative assessee of the petitioner

No.1, the Department is seeking to bring within the tax

net the purported income generated by the petitioner No.1

as capital gains arising from the transfer of shares of

respondent No.4 which were held by the petitioner No.1.

The contention of the petitioners is that such a transaction

is not chargeable to tax in India when petitioner No.1, a

non-resident company has transferred the share holding

to another non-resident. However, that was not the issue

canvassed before us. At present, the challenge to the

validity of the aforesaid notice is confined on the ground

W.P. (C) No.9100 of 2007 Page 3 of 52

that the respondent No.4 cannot be treated as

representative assessee of the petitioner No.1 and

therefore, the impugned notice is without any jurisdiction.

We would, thus, like to take stock of the relevant facts

surrounding this issue.

3. The first petitioner is a company incorporated in the State

of New York in the United States of America its principal

place of activity is the United States and it has business

interests all over the world. It has been assessed to tax in

India over the last several years in respect of its income

taxable in India, as a non-resident, initially by the Deputy

Commissioner of Income Tax 1(2) and currently by the

Assistant Director of Income Tax, International Taxation,

3(1) at Mumbai. The second petitioner is a com pany

incorporated in Mauritius that holds shares of group

companies and investments and had a wholly owned

subsidiary in India called GE Capital International Services

(for brevity „GECIS‟), now known as Genpact India, which

is registered under the Compani es Act, 1956 and is

respondent No.4 herein. Respondent No.1 is the Deputy

Director of Income Tax, International Taxation, who has

W.P. (C) No.9100 of 2007 Page 4 of 52

issued a notice under Section 163 of the Act to the

respondent No.4, i.e., impugned in the present petition.

Respondent No.2 is the Assistant Director of Income Tax,

who subordinate to respondent No.1 has taken further

proceedings pursuant to the notice issue d by the

respondent No.1. Although the respondent No.4 is made a

party to the petition, it has been added only as a

proper/proforma party and no relief has been sought or

claimed against it.

4. GECIS was incorporated in or about 1997 under the

Companies Act, 1956 to carry on the business of computer

software, i.e., data entry conversion, data processing,

data analysis, business support billing, etc. The entire

share capital of GECIS was acquired by the second

petitioner along with certain individuals as nominee

shareholders in 1998 with the approval of the Foreign

Investment Promotion Board. The second petitioner is a

wholly owned subsidiary, through various intermediate

holdings, of the first petitioner. The remote business

processing and offshore support operation that provided

specified business process outsourcing services (BPO) to

W.P. (C) No.9100 of 2007 Page 5 of 52

the first petitioner and its affiliates were carried out from

facilities located in India (through GECIS as explained

aforesaid), as well as in China, Hungary, Mexico, the

United Kingdom and the United States of America,

through other, this BPO business grew, acquiring outside

clients apart from the petitioner‟s group of companies and

gathered value. With certain investors evidencing interest

in acquiring 60% of the petitioner‟s BPO business and,

with a view to divesting it worldwide ownership in

companies through which such business was conducte d,

the petitioners‟ along with other affiliated companies

embarked on a series of transactions in December, 2004.

5. The series of transactions entered into in transferring the

shares with the objective of acquiring of the BPO business

of the petitioner is set out in Annexure-A to the writ

petition. Though that may not be very relevant for

deciding the controversy, for the sake of completing the

narration of facts, we are reproducing the same as well:

“Particulars of Series of Transactions Undertaken

in December, 2004

1. The first step in the series of reorganization and

restructuring transactions to consolidate

petitioners‟ BPO business in a single Luxembourg

holding company was the transfer by the second

W.P. (C) No.9100 of 2007 Page 6 of 52

petitioner of the shares it owned in GECIS to GECIS

India Investments by way of a gift. Certain

individuals who were nominee shareholders of

shares of GECIS likewise made a gift of the shares

held by them to GECIS India Holdings GE CIS India

Investments is a Mauritius incorporated company

and a wholly owned su bsidiary of GECIS India

Holding, which is also incorporated in Mauritius and

which, in turn, was set up as a wholly owned

subsidiary of the second petitioner.

The Second Petitioner had intimated to the Reserve

Bank of India the factum of the gifts of the GECIS

shares held by the First Petitioner as well as the

nominee shareholders. The Reserve Bank of India,

by its letter dated 16

th

June, 2005, had taken the

transactions of the gift on its record as general

permission was available for the gifts and the

GECIS shares had initially been acquired after

obtaining Reserve Bank of India approval. The

petitioners crave leave to refer to and rely upon the

correspondence with Reserve Bank of India when

produced.

2. The next step undertaken was that the Second

Petitioner transferred the shares it held in GECIS

India Investments to another subsidiary company

incorporated in Mauritius viz., GECOS India

Holdings at their fair value and in consideration of

such transfer, it was issued shares in GECIS India

Holdings.

3. Thereafter the Second Petitioner transferred its

shareholding in GECIS India Holdings to another

subsidiary company incorporated in Mauritius viz.,

GECIS India International and in consideration of

such transfer, it was issued shares by GECIS India

International.

4. Thereafter the Second Petitioner transferred the

shares it held in GECIS India International to

another subsidiary, GECIS Gibraltar (set up as a

wholly owned subsidiary of the Second Petitioner)

which was a company incorporated in Gibraltar and

in consideration of such transfer, it was issued

shares in GECIS Gibraltar.

W.P. (C) No.9100 of 2007 Page 7 of 52

5. Simultaneously a company incorporated in

Luxembourg wholly owned by the Second Petitioner

as the new holding company of the Petitioners‟ BPO

business viz., GECIS Global Holdings directly and

indirectly through its subsidiaries bought out the

shares/assets of the other operating companies

which carried on the petitioners‟ BPO business

activity in the United States, the United Kingdom,

Hungary Mexico and China.

6. The Second Petitioner thereafter transferred its

shareholding in GECIS Gibraltar to GECIS Global

Holdings for a consideration which was discharged

by issue of common stock, preferred stock, as well

as a payment of US $37 million in cash by GECIS

Global Holdings to the Secon d Petitioner.

Subsequently GECIS Gibraltar was liquidated and

hence the shares of GECIS India International

which hitherto belonged to GECIS Gibraltar were

distributed to GECIS Global Holdings in liquidation.

7. The Second Petitioner in turn transferred the

preferred stock it received in GECIS Global Holdings

to GE Luxembourg Investments S.a.r.l, a company

incorporated in Luxembourg for a consideration

which was secured by issue of promissory notes by

GE Luxembourg Investment S.a.r.l.

8. GE Luxembourg Investme nts S.a.r.l thereafter

transferred the preferred stock it held in GECIS

Global Holdings to another company incorporated in

Luxembourg called GECIS Global (Lux), and in

consideration of such transfer was issued preferred

and nominal common stock of GECIS Gl obal (Lux).

9. These restructuring and reorganization transactions

detailed in this Annexure A were taken by the

various affiliates of the First and Second Petitioner

pursuant to a Security Purchase Agreement dated

November, 7, 2004 entered into between the First

Petitioner, the Second Petitioner and certain of its

affiliates and General Electric Capital Corporation of

the one part, and Garuda Investments Company

(which was subsequently substituted by GECIS

Investments Co. (Lux), f the other part.

W.P. (C) No.9100 of 2007 Page 8 of 52

10. Ultimately 99.1% of the preferred stock and

60.6% of the nominal common stock held by GE

Luxembourg Investment S.a.r.l in GECIS Global

(Lux) was transferred to GECIS Investments Co.

(Lux) for a consideration equivalent to its cost of

acquisition.

11. The name of GECIS was changed to Genpact

India and the name of GECIS India Investments

was changed to Genpact India Investments. GE

Luxembourg Investment S.a.r.l was liquidated in

December 2006.”

6. As per the petitioners, these operations in different

jurisdictions were carried out through various entities and

controlled through separate entities keeping in mind the

business expediency of the petitioner. The investors who

desired to take over these business entities, were desirous

of acquiring shares of a single holding company entity –

which required a reorganization of the structure. The net

effect of these restructuring and reorganization

transactions which were undertaken pursuant to a

Securities Purchase Agreement dated 07.11.2004 entered

into between the first petitioner, second petitioner and

some of its affiliates and General Electric Capital

Corporation, of the one part, and Garuda Investment

Company (which was subsequently substituted by Gecis

W.P. (C) No.9100 of 2007 Page 9 of 52

Investments Co. (Lux) (hereinafter referred to as the

“Securities Purchase Agreement”) of the other part. An

amendment as well as ancillary agreements was also

executed between these sets of parties.

7. The consequence of these agreements was that:

(a) The shares of the Indian company moved, by a

gift, from GECIM a Mauritius company to GECIS

India Investments – another Mauritius

company.

(b) The shares of the GECIS India Investments

were transferred to a holding company. T he

shares with the holding company were then

transferred and so on in a series of

transactions, and finally the holding company

was GECIS Global Holdings, in which other BPO

businesses from other countries were also

consolidated.

(c) The shares of GECIS Global holdings were sold

to a Luxembourg company, and through a

series of transactions, the holding shares were

acquired by Gecis Investments Co. (Lux).

W.P. (C) No.9100 of 2007 Page 10 of 52

(d) In the aforesaid manner, Gecis Investments

Co. (Lux) acquired 99.1% of the preferred

stock and 60.6% of the nominal common stock

of GECIS Global (Lux) a newly organized

Luxembourg company and which was a transfer

of a capital asset situated outside India – i.e.

shares in a company incorporated in

Luxembourg.

8. As per the petitioners, the only capital asset in India which

was transferred in the course of the restructuring and

reorganization transactions was the gift of the shares of

CECIS by the second petitioner – a Mauritius company and

certain nominee shareholders to GECIS India Investments

and GECIS India Holdings, respectively (each a Mauritius

incorporated company). Therefore, no income had

accrued or arisen or can be deemed to accrue or arise in

India. The Income Tax Department, on the other hand,

maintains that it is a taxable event in India.

9. However, as pointed out above, we are not concerned

with this aspect in the present proceedings. We are at a

stage anterior to that as the question before us is as to

W.P. (C) No.9100 of 2007 Page 11 of 52

whether the respondent No.4 can be treated as

representative assessee of the first petitioner.

10. The first petitioner had filed its return of income for the

assessment year 2005-06 on 29

th

October, 2005 with the

Assessing Officer, having jurisdiction over the first

petitioner‟s case, viz., the Assistant Director of Income

Tax (International Taxation 3(1), Mumbai. The first

petitioner declared a total income of `2,64,07,840/- that

accrued to it from rendering certain technical services to

GECIS and had filed with its return of income a

computation of its total income as well as the Transfer

Pricing Report required to be furnished in From 3CEB.

11. Thus, the first petitioner though a non -resident is

assessed in India in respect of income which it is earning

from operations in India and which income can be deemed

to accrue or arise out of transactions in India. Fact

remains that the petitioner No.1 is assessable in India and

comes within the jurisdiction of Assistant Director of

Income Tax, Range 3(1), (International Taxation),

Mumbai. As far as the petitioner No.2 is concerned , it

W.P. (C) No.9100 of 2007 Page 12 of 52

had filed its Transfer Pricing Report (International

Taxation) Mumbai stating that other than interest on

which tax was deducted at sourc e at the appropriate

rates, no other income is exigible to tax in India. On the

basis, it was informed that the petitioner No.2 was not

filing in income tax return.

12. Respondent No.1 who is the Deputy Director of the

Income Tax (International Taxation) in New Delhi issued a

show cause notice dated 11.04.2007 to the respondent

No.4. In this notice, it was stated that from the records

available with him, it appeared that General Atlantic

Partners and Oak Hill Capital had purchased 60%

shareholding in respondent No.4 from the first petitioner.

The notice further recites that the said shareholding

transferred which was valued at US Dollar $500 million

and that no application was made under Section 197 of

the Act by the payee “with regard to the transactions

relating to the sale of the stake” in respondent No.4. It

was further stated that the income arising to the first

petitioner from the sale of its direct/indirect stake in

respondent No.4 is liable to tax in India in view of the

W.P. (C) No.9100 of 2007 Page 13 of 52

deeming provisions contained in Section 9(1)(i) of the Act.

It was proposed in the notice to treat the respondent No.4

as an agent and consequently, the representative

assessee of the first petitioner under the provisions of

Section 136 read with Sections 160 and 161 of the Act

and proposed to proceed to act in accordance with law.

This show cause notice also referred to the earlier notice

dated 02.11.2006 issued to the respondent No.4 stating

that such information had not been furnished.

Accordingly, the respondent No.4 was requ ired to show

cause as to why such action of treating the respondent

No.4 as representative assessee be not taken and income

accrued to the petitioner No.1 assessed in accordance with

the law.

13. Respondent No.4 submitted its reply to the said show

cause notice, inter alia, stating that it had no obligation to

deduct the tax at source in respect of such transactions

between the petitioners on the one hand and General

Atlantic Partners and Oak Hill Capital on the other hand.

According to it, merely because by the said transaction,

shareholding of respondent No.4 was transferred by one

W.P. (C) No.9100 of 2007 Page 14 of 52

party to other, both being non-resident, the respondent

No.4 could not be treated as representative assessee.

Since none of the conditions specified in Section 13 of the

Act were fulfilled. It was also submitted that the

petitioner No.1 is not and had never been a direct

shareholder of respondent No.4 and therefore, question of

any income accruing or arising to the petitioner, which is

chargeable to tax in India would not arise.

14. Nothing happened for almost six months. However, a

letter dated 10.10.2007 was addressed by the respondent

No.2 to respondent No.4 asking for some more

information. It is averred in the petition that this letter

could not be served upon the respondent No.4 and,

therefore, it was again sent and served upon the

respondent No.4 along with letter dated 26.10.2007.

From this letter, the petitioners were informed about the

proposed move of the respondent No.1 to 3 to treat the

respondent No.4 as an agent of the first petitioner.

15. After receiving this information, the petitioners filed the

present petition in December, 2007 questioning the

proprietary, validity and legality of the aforesaid show

W.P. (C) No.9100 of 2007 Page 15 of 52

cause notice. Notice in this involved writ petition and stay

application was issued on 06.12.2007, but no ex parte

stay was granted by this Court. Against non-grant of

interim relief, the petitioners filed Special Leave Petition in

which orders dated 14.12.2007 were passed restraining

respondent Nos. 1 to 3 from passing final orders pursuant

to show cause notices issued by the respondents. This

stay was made applicable till 13.02.2008 when the matter

was coming up before this Court. This Court has

thereafter extended the said interim directions from time

to time. Vide orders dated 23.03.2008, the interim orders

passed by the Supreme Court on 14.02.2008 was

continued till the disposal of the writ petition.

16. On 18.01.2008, in reply to show cause notice, an affidavit

was filed on behalf of the respondent Nos. 1 and 2 t o

which rejoinder affidavit was also filed by the petitioners.

However, thereafter a detailed counter affidavit dated

17.07.2008 was filed by the Department which is more

comprehensive and incorporates the submissions made in

earlier affidavit dated 18.1.2008 as well. We would like to

point out at this stage that in the writ petition, the

W.P. (C) No.9100 of 2007 Page 16 of 52

petitioners have also stated that from the transactions in

question, no income has accrued or arisen to the

petitioner No.1 which is taxable in India. This position is

contested by the Official Respondents explaining their

stand in much detailed in the counter affidavit. However,

as pointed out above, since we are not concerned with

that issue in the present petitioner, which was not pressed

or argued by the petitioners, we are avoiding to take note

of such averments for this reason.

17. The respondents have challenged the maintainability of

the writ petition by raising certain preliminary objections.

The main emphasis of the respondents in the counter

affidavit and in particular the argument that was pressed

at the time of hearing was that the matter is still at the

show cause notice as to why the respondent No.4 be not

treated as agent of petitioner No.1 and writ petition

challenging show cause notice is not maintainable and the

statute provides for efficacious remedy of appeal under

the Act. It is also contended that writ petition is pre-

mature as well. Maintainability is also challenged on the

ground that disputed questions of fact arise and the High

W.P. (C) No.9100 of 2007 Page 17 of 52

Court in exercise of its extraordinary jurisdiction under

Article 226 of the Constitution of India would not exercise

its discretionary powers in such a scenario.

18. The official respondents have also narrated the facts which

led to the issuance of the show cause notice proposing to

treat the respondent No.4 as the representative assessee.

It is stated in this behalf that the respondent No.4, i.e.,

Genpact India was earlier known as GE Capital

International Services (GECIS)/BPO company. The BPO

company was created for prov iding BPO/IT-enabled

services to petitioner No.1 and its affiliates with a paid up

capital of `3,60,00,000/-, comprising of 36,00,000 equity

shares of `10 each. It was the captive BPO unit of the GE

Group. That out of 36,00,000 shares, GE Capital

International Mauritius (GECIM) (hereinafter referred to as

„the Mauritius company”) was holding 35,99,980 shares till

31.12.2004. The said Mauritius company was in turn held

by another Indian company, i.e., M/s GE Indian Services

Holding Pvt. Ltd., which through the maze of various

intermediate companies was ultimately held by General

Electric Company, a corporation of United States of

W.P. (C) No.9100 of 2007 Page 18 of 52

America, the petitioner herein. The income of BPO

company during Financial Year ended 31.03.2004 and

31.03.2005 was of `2,630 Crores. BPO company has

been claiming deduction under Section 10A of Act for

various years in respect of its income earned from BPO

services. The company had not distributed/paid any

dividends since its inception. The name of GECIS/BPO

company was change d to Genpact India with effect from

06.06.2006, after the so -called reorganization of

December, 2004. Genpact India/BPO company, through

its authorized representative RSM & Co., filed an

application under Section 195 of the Act on 25.07.2006 to

the Income Tax Officer, (TDS), Ward (1), International

Taxation, New Delhi, seeking a „NIL‟ withholding certificate

with regard to payment of `4800 lacs to another Mauritius

company Genpact India Investments, Mauritius for the

proposed buy-back of shares by the BPO company.

Genpact India brought back 32,000 equity shares at a

price of `15,000/- per share. This transaction is different

from the transactions during the year 2004 for which the

petitioners have filed the present writ. During the

W.P. (C) No.9100 of 2007 Page 19 of 52

proceedings under Sect ion 195(2) of the Act, BPO

company submitted that on 30.12.2004, GECIM (Mauritius

company) contributed shares of BPO company to GECIS

India Investments, Mauritius (GII) – another Mauritius

company, which is wholly owned subsidiary of Mauritius

company. This wholly owned subsidiary was incorporated

in Mauritius on 07.12.2004 (i.e., after the Securities

Purchase Agreement of 17.11.2004) and its name was

subsequently changed to Genpact India Investment on

04.10.2005. These facts, which became available,

indicated that the shares of BPO company, which were

valued at `15,000/- per share in 2006 were transferred by

Mauritius company to GII at „Nil‟ value in December, 2004.

In fact, the General Atlantic Partners, General Electric and

Oakhill Capital Partners issued a joint press release on

November 08, 2004. Upon perusal of press release, it is

noticed that the transaction values GECIS/BPO company

at $800 million. Upon closing GE rain a 40% stake in

GECIS and receive cash proceeds approximately $500

million. It also states that the parties aim to complete the

transaction sometime in the next six months. Further,

W.P. (C) No.9100 of 2007 Page 20 of 52

BPO company was carrying on a successful business and

had potential to grow further. Its operations centres were

not confined to Gurgaon only, but were started at other

places also. It had hung reserves and surpluses. The

petitioner No.1 through its various subsidiaries/affiliated

companies sold 60% of its stake in GECIS/BPO company

for approximately US$ 500 million. That on the basis of

information collected during TDS proceedings and also

information available in public domain, a prima facie belief

was form that as per the provisions of Section 9(1)(i) of

the Act, the income arising from these transactions, which

otherwise was taxable in India but had not been offered to

tax. The official respondents have maintained in the

counter affidavit that conditions stipulated in Section 163

of the Act are satisfied and therefore, impugned show

cause notice being perfectly valid, has rightly been issued.

19. Respondent No.4 has also filed the counter affidavit

supporting the aforesaid legal stand taken by the

petitioners questioning the validity of the impugned show

cause notice.

W.P. (C) No.9100 of 2007 Page 21 of 52

20. Mr. Harish Salve, learned Senior Counsel appeared for the

petitioners, has advanced detailed arguments in support

of the plea that the respondent No.4 could not be treated

as representative assessee qua the purported incomes of

the first petitioner as the ingredients of Sections 161 and

163 have not been satisfied in the present case.

21. Frontal attack to the impugned show cause notice by

Mr.Salve was predicated on the admitted position

prevailing on the record of this case, which according to

him, was as follows:

The transaction in relation to which the present

proceedings have been initiated relates to the transfer of

shares of a holding company (which through downstream

companies) controlled indirectly shares in a company was

GE Capital International Services – respondent No.4).

According to him, it is not in dispute that prior to the

transfer (December, 2004), the shares in Genpact India

were held by a Mauritius based entity – GE Capital

International Mauritius (GECIM) – petitioner No.2. Above

GECI, there were other holding companies and the

ultimate controlling interest was with Gener al Electric

W.P. (C) No.9100 of 2007 Page 22 of 52

Company US – petitioner No.1. It is also not in dispute

that as a result of the transfer of the shares of the

upstream holding company, ownership (direct/indirect) to

the extent of 60% approx of the shares of Genpact India

stood transferred, and consequently the control also stood

transferred. The question whether this transfer of shares

of an upstream company resulted in a capital gain in the

hands of the transferor – or petitioner No.1 – is a matter

that would require consideration. The issue of the validity

of the show cause notice has, in the first instance, to be

decided on the applicability of Section 163 on the facts as

alleged in the show cause notice on a demurrer assuming

them to be correct.

Respondent No.4 is the „target company‟, i.e., the

company, the control of which has shifted on account of

sale of shares (of the Luxembourg Company) – prior to

the transaction, it was known as GE Capital International

Services (GECIS India). GECIS India is the Indian

company whose control passed pursuant to the

transaction.

W.P. (C) No.9100 of 2007 Page 23 of 52

22. Mr. Salve‟s argument was that the aforesaid facts clearly

demonstrate that conditions stipulated in Section 163 of

the Act for the purpose of treating respondent No.4 as an

agent of the petitioner No.1 had not been fulfilled. His

submission was that Section 163 of the Act has to be read

in conjunction with Section 161, which provides that the

specified person can be treated as assessee “…as regards

the income in respect of which he is a representative -

assessee…” Therefore, an agent can only be a

representative-assessee as regards the income in respect

of which the alleged agent has business connection and/or

from or through directly and/or indirectly the income was

received.

23. In support of the aforesaid propositions, Mr. Salve relied

upon the following case laws:

(1) The Commissioner of Income Tax Vs.

Currimbhoy Ebrahim and Sons [AIR 1936

P.C. 1].

(2) Ramnarayan Rajmal Vs. Commissioner of

Income Tax [(1953) 24 ITR 442.

W.P. (C) No.9100 of 2007 Page 24 of 52

(3) P. Subramania Chetty Vs. Commissioner

of Income Tax [(1962) 46 ITR 724 Mad.]

(4) C.R. Nagappa Vs. Commissioner of Income

Tax [(1969) 73 ITR 626 (SC)].

(5) CIT Vs. Toshoku Ltd. [(1980) 125 ITR 525]

(6) CIT Vs. Fertilizers & Chemicals

(Travancore) Ltd. [(1987) 166 ITR 823.

24. Mr. Mohan Parasaran, learned A.S.G. pressed for dismissal

of the writ petition as pre-mature and not maintainable at

the show cause notice stage, forcefully contending that

the matter was still at the stage of investigation and was

being investigated. According to him, it was in the realm

of disputed questions of fact and further facts could be

gathered during investigation and therefore, this Court

should not interfere at this stage, particularly, when the

petitioners were not remediless, as the statute, viz.,

Income Tax Act provides for the remedies of appeal, w rit

petition, etc. In the wake of such alternative remedies

available, the writ petition should be thrown at the

threshold, was the vehement submission of Mr. Parasaran.

He further submitted that in any case the main notice vide

W.P. (C) No.9100 of 2007 Page 25 of 52

which the respondent No.4 was sought to be assessed as

the representative assessee of the petitioner No.1 was

perfectly in accordance with the law as all the conditions

for treating it as an agent of petitioner No.1 w ere

satisfied. Referring to Section 163 of the Act, he

submitted that any agent in relation to a non -resident

includes any person in India, who has business connection

with non-resident which fact was established on record in

the present case. In this behalf, he submitted that the

business connection between the peti tioner No.1 and

respondent No.4 were clearly established in view of the

following factual position:

The Secretariat for Industrial Approvals, Foreign

Collaboration-II Section of the Government of India had

allowed GE Capital Services India Ltd., New Delhi to have

GE Capital Services, USA as the foreign collaborator for

setting up the wholly owned subsidiary companies to

undertake the business of hire purchase and lease

financing and financial billing and services company.

The Government of India, Ministry o f Industry,

Department of Industrial Policy and Promotion, Secretariat

W.P. (C) No.9100 of 2007 Page 26 of 52

for Industrial Assistance, EOU Section vide letter

No.FC/98/EOP/46/97 had allowed M/s GE Capital

International Services, AIFACS Building, 1 Rafi Marg, New

Delhi had conveyed approval to their foreign collaboration

proposal. The name of foreign collaborator and country

was GE Capital International (Mauritius), Mauritius (a

subsidiary of M/s General Electric Capital Corporation,

USA). The approval was for the manufacture of computer

software. This approval dated 09.01.1998 was amended

on 02.03.1998 as per request letter dated 20.02.1998 of

M/s GE Capital International Services. As per the

amendment, the foreign collaborators were M/s GE Capital

International (Mauritius), Mauritius and M/s GE Capital

Indian Service, Netherlands. The approved items of

manufacture were computer software (data entry,

conversion, data processing, data analysis, business

support, billing, etc.) GE Capital International Services

(Genpact India) has rendered I T-enabled services to

General Electric Corporation and its affiliated companies

since its incorporation in India. During the year ended

31.03.2005, the income of respondent No.4 form IT -

W.P. (C) No.9100 of 2007 Page 27 of 52

enabled services were of `13,518,433,002/-. Such

income was `12,788,233,532/- for the year ended

31.03.2004. The accounts of the company show the

following transactions with the related parties with regard

to each income:

Particulars Holding Companies Fellow subsidiary companies

31

st

March,

2005

31

st

March,

2004

31

st

March,

2005

31

st

March,

2004

Income from

IT enabled

services

6,153,984,825 3,675,372,862 7,129,591,134 8,746,058,412

Further, the respondent No.4 (Genpact India) was a

wholly owned subsidiary of the first petitioner and the

latter is carrying on its IT-enabled services business in

India through this subsidiary. This is an admitted position

in para No.8 & 9 of the writ petition. The term business

connection is not exhaustively defined in the Income Tax

Act, 1961. However, various authorities have time and

again interpreted this term.

25. In support of his submissions, he relied upon the

judgment of the Supreme Court in the case of Income

Tax Vs. R.D. Aggarwal and Co. [1965 AIR 1526]

wherein the Apex Court had enumerated the broad

W.P. (C) No.9100 of 2007 Page 28 of 52

characteristics of the concept of business connection in

the following words:

“Business connection contemplated by section 42

involves a relation between a business carried on by

a non-resident which yields profits or gains and some

activity in the taxable territories which contributes

directly or indirectly to the earning of those profits or

gains. It predicates an element of continuity

between the business of the non -resident and the

activity in the taxable territories, a stray or isolated

transaction not being normally regarded as a

business connection. Business connection may take

several forms: It may include carrying on a part of

the main business or activity incidental to the main

business of the non-resident through an agent, or it

may merely be a relation between the business of

the non-resident and the activity in the table

territories, which facilitates or assists the carrying on

of that business. In such cases the question whether

there is business connection from or through which

income, profits or gains arise or accrue to a non-

resident must be determined upon the facts and

circumstances of the case. The expression „business

connection‟ postulates a real and intimate relation

between he trading activity carried on outside the

taxable territories and the trading activity within the

territories, the relation between the two contributing

to the earning of income by the non-resident in his

trading activity.”

26. Mr. Parasaran submitted that the issue of jurisdiction for

the issue of notice under Section 163 of the Act came up

for consideration before the Kerala High Court. The Kerala

High Court in the case of Commissioner of Income Tax

Vs. Fertilizers and Chemicals (Travancore) Ltd.

[(1987) 166 ITR 0823] held that a non-resident may have

W.P. (C) No.9100 of 2007 Page 29 of 52

several representative assessees in respect of several

heads under which income is derived by him. There can,

therefore, be more than one assessment in respect of

income accrued or arisen to a non-resident provided that

there is more than one representative assessee. Direct

assessment on the non-resident in respect of other

income would not affect the jurisdiction of the Income Tax

Officer to assess the agent of the non-resident on income

arising to the non-resident through him. Moreover, the

respondent No.2 exercises jurisdiction in resp ect of

persons being non-residents including foreign companies

within the meaning of sub-section (23A) of Section 2 of

the Act and having a permanent establishment “in terms

of the applicable Double Taxation Avoidance Agreement in

the areas lying within the territorial limits of National

Capital Territory of Delhi or having a business connection”

or having any source of income accruing or arising or

deemed to be accruing or arising in the areas lying within

the territorial limits of National Capital Territory of Delhi.

Respondent No.4 (Genpact India) is a company

incorporated under the Companies Act, 1956 and having

W.P. (C) No.9100 of 2007 Page 30 of 52

its registered office at Delhi Information Technology Park,

Shastri Park, Delhi – 110053. Therefore, the jurisdiction

over the first petitioner, who is having business

connection as well as the source of income within the

territorial limits of National Capital Territory of Delhi lies

with respondent No.2.

27. In order to appreciate their respective contentions and to

find out as to whether the conditions stipulated in Section

163 read with Section 161 of the Act for the purposes of

treating the respondent No.4 as representative of

petitioner No.1 is satisfied or not, it would be apposite to

first take note of the relevant provisions of the statute.

These provisions fall in Chapter XV with caption “Liability

in Special Cases”. Section 159 fastens the liability upon

the “Legal Representatives” under certain circumstances

when a person is liable to pay tax dies. Section 160

defines “Representative Assessee” and Section 161 gives

the circumstances under which liability of representative

assessee arises. When representative assessee has to

pay tax on behalf a person, Section 162 of the Act confers

right upon such representative assessee to recover the tax

W.P. (C) No.9100 of 2007 Page 31 of 52

paid from person on whose behalf it is paid. Section 163

of the Act comes under Chapter XV -C titled

“Representative Assessee – Special Cases” and stipulates

as to who may be regarded as an agent. Since in the

present case, we are concerned with Sections 160 to 163

of the Act, relevant portions of the se provisions are

extracted below:

“B-Representative assessees – General provisions

Representative assessee

160. (1) For the purposes of this Act,

"representative assessee" means –

(i) In respect of the income of a non -resident

specified in sub-section (1) of section 9, the agent of

the non-resident, including a person who is treated

as an agent under section 163;

xxx xxx xxx

(2) Every representative assessee shall be deemed

to be an assessee for the purposes of this Act.

Liability of representative assessee.

161. 1) Every representative assessee, as regards

the income in respect of which he is a representative

assessee, shall be subject to the same duties,

responsibilities and liabilities as if the income were

income received by or accruing to or in favour of him

beneficially, and shall be liable to assessment in his

own name in respect of that income; but any such

assessment shall be deemed to be made upon him in

his representative capacity only, and the tax shall,

subject to the other provisions contained in this

Chapter, be levied upon and recovered from him in

like manner and to the same extent as it would be

W.P. (C) No.9100 of 2007 Page 32 of 52

leviable upon and recoverable from the person

represented by him.

Right of representative assessee to recover tax

paid.

162.(1) Every representative assessee who, as such,

pays any sum under this Act, shall be entitled to

recover the sum so paid from the person on whose

behalf it is paid, or to retain out of any moneys that

may be in his possession or may come to him in his

representative capacity, an amount equal to the sum

so paid.

(2) Any representative assessee, or any person who

apprehends that he may be assessed as a

representative assessee, may retain out of any

money payable by him to the person on whose

behalf he is liable to pay tax (hereinafter in this

section referred to as the principal), a sum equal to

his estimated liability under this Chapter, and in the

event of any disagreement between the principal and

such representative assessee or person as to the

amount to be so retained such representative

assessee or person may secure from the Assessing

Officer a certificate stating the amount to be so

retained pending final settlement of the liability, and

the certificate so obtained shall be his warrant for

retaining that amount.

(3) The amount recoverable from such

representative assessee or person at the time of final

settlement shall not exceed the amount specified in

such certificate, except to the extent to which such

representative assessee or person may at such time

have in his hands additional assets of the principal.

C-Representative assessees – Special cases.

163. Who may be regarded as agent

(1) For the purposes of this Act, 'agent', in relation

to a non-resident, includes any person in India -

(a) Who is employed by or on behalf of the non -

resident; or

W.P. (C) No.9100 of 2007 Page 33 of 52

(b) Who has any business connection with the non -

resident; or

(c) From or through whom the non -resident is in

receipt of any income, whether directly or indirectly;

or

(d) Who is the trustee of the non -resident; and

includes also any other person who, whether a

resident or non-resident, has acquired by means of a

transfer, a capital asset in India :

xxx xxx xxx

Explanation.- For the purposes of this sub-section,

the expression “business connection” shall have the

meaning assigned to its in Explanation 2 to clause (i)

of sub-section (1) of section 9 of this Act.

(2) No person shall be treated as the agent of a non-

resident unless he has had an opportunity of being

heard by the Assessing Officer as to his liability to be

treated as such.”

28. A conjoint reading of the aforesaid provisions would show

that under the given circumstances, certain persons can

be treated as representative assessee on behalf of non -

resident specified in sub-section(1) of Section 9 of the Act.

This would include an agent of non-resident and also who

is treated as an agent under Section 163 of the Act.

Section 163 deals with special cases where a person can

be regarded as an agent. These are:

(i) who is employed by or on behalf of the non -

resident: or

W.P. (C) No.9100 of 2007 Page 34 of 52

(ii) who has any business connection with the non-

resident; or

(iii) from or through whom the non -resident is in

receipt of any income, whether directly or

indirectly; or

(iv) who is the trustee of the no-resident; or

(v) any other person, a resident or even a non -

resident, who has acquired a capital asset in

India by means of transfer.

29. Once a person comes within the net of any of the

aforesaid Clauses, such a person would be the „agent‟ of

the non-resident for the purposes of the Act. However,

merely because a person is an agent or is to be treated as

an agent, it would lead to an automatic conclusion that he

becomes liable to pay taxes on behalf of the non-resident.

That would only mean that he would be treated as

representative assessee. However, l iability of such a

representative assessee only if the eventualities stipulated

in Section 161 of the Act are satisfied. Section 161 of the

Act makes a representative assessee liable only “as

W.P. (C) No.9100 of 2007 Page 35 of 52

regards the income in respect of which he is a

representative assessee”.

30. Of course, once a representative assessee is held liable,

then he will be liable in the same manner as a non -

resident and tax shall be levied and recovered from him in

the same manner it could be recovered from the person

represented by him. Since tax is recovered from such a

representative assessee treating him as agent of other

person, Section 162 of the Act gives representative

assessee right to recover the sum paid by him from the

person on whose behalf it is paid. This Section even

makes a provision allowing representative assessee to

retain out of any moneys that may be in his possession or

may come to him in his representative capacity, an

amount equal to the sum so paid. In the event, the

principal question is right to retain such an amount, the

representative assessee or person may secure from the

(Assessing) Officer a certificate stating the amount to be

so retained pending final settlement or the liability, and

the certificate so obtained shall be his warrant for

retaining that amount. Issuance of such certificate even

W.P. (C) No.9100 of 2007 Page 36 of 52

secures the representative assessee as at the time of final

settlement, the amount recoverable form such

representative assessee or person at the time of final

settlement shall not exceed the amount specified in such

certificate. The only exception is that when such

representative assessee or person may at such time may

have in his hands additional assets of the principal, as in

that even, even if excess amount stipulated in certificate

is recoverable from the representative assessee, he is

secured by having additional assets of the principal in his

hands from where the representative assessee can always

recompense.

31. In the present case we proceed on the premise that the

respondent No.4 has business connection with the

petitioner No.1 as explained by the official respondents on

the basis of business relation between them reflected

through the transactions entered into between the

petitioner No.1 and respondent No.4 over a period of time.

Therefore, conditions prescribed in Clause (b) of sub -

section (1) of Section 163 can be treated to have been,

prima facie, fulfilled. Thus, respondent No.4 can be

W.P. (C) No.9100 of 2007 Page 37 of 52

treated as “an agent in relation to the petitioner No.1 – a

non-resident”. As an agent respondent No.4 would be the

representative assessee within the meaning of Section

161(1) of the Act. The question before us is as to whether

in its capacity as representative assessee of the petitioner

No.1, liability of the respondent No.4 arises within the

meaning of Section 161 of the Act and it would be

assessed in that representative capacity. To put it

otherwise, whether the purported income earned by the

petitioner No.1 through transfer of shares can be treated

as the income in respect of which he is a representative

assessee. It is because of the reason that Section 161

makes him liable only as regards that particular income.

32. This very aspect has been considered and explained in

various judgments. In fact, similar provision existed in

the Income Tax Act 1922 which repeatedly came up

before the Courts for interpretation. We may start our

discussion from the Privy Council‟s judgment rendered in

1936. Name of the case is Commissioner of Income

Tax, Bombay Presidency, and Aden Vs. Currimbhoy

Ebrahim and Sons, Ltd. [AIR 1936 Privy Council 1].

W.P. (C) No.9100 of 2007 Page 38 of 52

That was a case where the respondent company was

assessed as agent of His Exalted Highness the Nizam of

Hyderabad. The order was made in respect of income tax

for the year of assessee 1931 -32. Two items were

included in the order, viz:

(i) The sum of `27,960/- being income tax claimed to

be due from the Nizam under the head “property”

in respect of house property in Mumbai of which

he was the owner.

(ii) A sum of `3,15,214/- being the amount received in

the year of account by the Nizam from the

respondent company as interest due upon a loan

of `50,00,000 made by Nizam to the respondent

company upon the terms of a written instrument

dated 16.08.1929.

33. The question was as to whether the assessee could be

treated as representative assessee qua the interest

income earned by the Nizam in the aforesaid

circumstances. As pointed out above, this interest income

was earned by the Nizam from the property in Mumbai

and insofar as this property is concerned, representative

W.P. (C) No.9100 of 2007 Page 39 of 52

assessee had no concern or connection therewith. The

business connection of the representative assessee was

only qua the interests paid by it in respect of loan taken

from the Nizam. On these facts, the Privy Council held

that the income from house property could not be

assessed at the hands of the respondent and the

respondent could not be treated as representative

assessee qua that income as it had no connection with the

same. Following observations of the Privy Council, in the

process, are worth to quote:

“14. In the result, therefore, their Lordships come to

the conclusion that the interest income in respect of

which the respondent company has been assessed to

tax as agent for the Nizam, is not to be deemed to

have accrued or arisen within British India at all, and

is, therefore, not liable to tax. The Income -tax

Officer's order of June 5, 1931, whereby the

respondent company was deemed to be an agent of

the Nizam and liable to be made assessee in respect

of these monies is without foundation and altogether

invalid. In these circumstances it does not appear to

their Lordships to be necessary that they should

discuss any of the questions raised under Section 44

of the Act. It would indeed be strange if the

respondent company as mere debtors t o a non-

resident paying him outside British India monies

which are not assessable to Indian income-tax at all,

could be made liable for the income-tax due on the

nonresident's house property in Bombay with which

they had no concern, and this notwithstanding that

tax had hitherto been duly assessed upon and paid

by the person managing the property on behalf of

the non-resident……….”

W.P. (C) No.9100 of 2007 Page 40 of 52

34. Next case of some relevance would be the judgment of

Bombay High Court in the case of Ramnarayan Rajmal

Vs. Commissioner of Inc ome Tax, Bombay South,

Bombay [(1952) 22 I.T.R. 241]. In that case, M/s

Ramnarayan Rajmal Rathi was treated as representative

assessee by the Department an d the assessment was

made on it as against the non-resident, M/s. Shivnarayan

Brothers of what was t he former Hyderabad State.

Ramnarayan Rajmal were the agent of the non -resident in

respect of transactions effected by the non -resident

principal through the assessee and it was not disputed

that they had been rightly appointed an agent under

Section 43 of the Income Tax Act, 1922 (which

corresponds to Section 161 of 1961 Act). There was, thus,

a business connection between the assessee/agent and

the non-resident. However, the question was as to

whether income which accrues to or earned by non -

resident from business done through parties other than

the agent and whether the appellant could be treated as

representative assessee/agent. Answering this question in

the negative, the Court held that even if because of

W.P. (C) No.9100 of 2007 Page 41 of 52

business connection such an appellant is treated as agent,

its liability was restricted to the income earned through his

agency, i.e., income arising in respect of head qua which

he was an agent. The Court relied upon the judgment of

Privy Council in Currimbhoy Ibrahim & Sons Ltd.

(supra) for arriving at this conclusion. The Court was of

the opinion that provisions of Section 42 incorporated the

principle of „vicarious liability‟ and the limit of that liability

was that the agent must be concerned with the head in

respect of which the principal is sought to be taxed. There

was an interesting argument raised by the Department,

viz., if this be accepted, then it may lead to multiplicity of

assessments at the hands of several agents in respect of

several heads under which the income is deemed to

accrue or arises. The Court answered by observing that

there could be more than one assessments, in the

following words:

“8. It is then urged by Sir Nusserwanji that this

interpretation might lead to multiplicity of the

assessments. It is said that a non-resident may have

several agents in respect of several heads under

which income is deemed to accrue or arise within the

taxable territories. We see no objection in principal

as to why there should not be more than one

assessment. If the taxing Department chooses to tax

non-resident in his own name, no difficulty can arise,

W.P. (C) No.9100 of 2007 Page 42 of 52

because then there would be one assessment. But if

the taxing Department chooses to tax a non-resident

in the name of his agent, then in respect of each

agency there must be a separate assessm ent

because each agent is a separate assessee and

treated as an assessee for all purposes under the

Act. Therefore it is not a case of multiplicity of

assessments in respect of one assessee. What Sir

Nusserwanji overlooked is that each agent in respect

of each business or each head under Section 42 is a

separate assessee and there must be a separate

assessment in respect of every assessee under the

Indian Income-tax Act. Therefore we see no

objection on principle to several agents of the non-

resident being assessed and there being separate

assessments.”

35. According to the High Court, the Department was making

an almost impossible claim by seeking to tax the appellant

as agent on behalf of principal in connection with qua a

particular income with which there was no connection.

The judgment opened with the following interesting

remarks:

“1. The Income-tax Department is known to cast its

net very wide in order to collect as much tax as

possible. To the extent that its activities are legal

and supported by the law, we have given every

encouragement to the Department, but this is a

striking case where there does not seem to us the

slightest justification for the attempt made by the

Department to collect the tax from this particular

assessee.”

36. The Supreme Court has also accorded the same reasoning

in the case of C.R. Nagappa Vs. Commissioner of

W.P. (C) No.9100 of 2007 Page 43 of 52

Income Tax [73 ITR 626]. In that case, the Apex court

was concerned with the present Income Tax Act of 1961

and the same provisions, viz., Sections 160 and 161 of the

Act, though these provisions came up for interpretation in

the context of assessment of income at the hands of

trustee under Section 64(v) of the Act. We may quote the

following passage from the said judgment for our benefit:

“14. In our view Chagla C.J. was right in observing in

Balwantrai Jethalal Vaidya's case in dealing with the

scheme of section 41 of the Income- tax Act, 1922,

that

"....... it is clear that every case of an assessment

against a trustee must fall under section 41, and it

is equally clear that, even though a trustee is being

assessed, the assessment must proceed in the

manner laid down in Chapter III.... Section 41 only

comes into play after the income has been

computed in accordance with Chapter III. Then the

question of payment of tax arises and it is at that

stage that section 41 issues a mandate to the

taxing department that, when they are dealing with

the income of a trustee, they must levy the tax and

recover it in the manner laid down in section 41."

37. The issue came up for consider ation, in a more direct

manner, before the Supreme Court in the case of

Commissioner of Income Tax, A.P. Vs. Toshoku Ltd.

[125 ITR 525]. In that case, during the previous year,

relevant to the assessment year 1962-63, B, a dealer in

tobacco in India, purchased tobacco and exported it to

W.P. (C) No.9100 of 2007 Page 44 of 52

Japan and France through non -resident sales agents, a

Japanese company and a French business house

respectively. Under the terms of the agreement, the

Japanese company, which was appointed as exclusive

sales agent in Japan for tobacco exported by B., was

entitled to a commission of 3 per cent of the invoice

amount. The sale price receivd on the sale in Japan was

remitted whooly to B in India and B debited his

commission account and credited the amount of

commission payable to the Japanese company in his

account books and later remitted the amount to the

Japanese company. There was a similar agreement with

the French business house in relation to the corresponding

area and similar credit and debit entries and subsequent

remittance of the commission were made. The question

was whether the commission earned by the non -resident

sales agents could be taxed in India, treating B as a

representative assessee under Section 161 of the I.T. Act,

1961. The Court held as under:

“It could not be said that the making of the entries in

the books of B amounted to receipt, actual or

constructive, by the non-resident sales agents as the

amounts so credited in their favour were not at their

W.P. (C) No.9100 of 2007 Page 45 of 52

disposal or control; they could not, therefore, be

charged to tax on the basis of receipt of income ,

actual or constructive, in the taxable territorials.

The non-residents did not carry on any business

operations in the taxable territories: they acted as

selling agents outside India. The receipt in India of

the sale proceeds of tobacco remitted or caused to

be remitted by the purchasers from abroad did not

amount to an operation carried out by the non -

residents in India as contemplated by Clause (a)of

the Explanation to Section 9(1)(i) of the I.T. Act,

1961. The commission amounts which were earned

by the non-residents for services rendered outside

India could not be deemed to be income which had

either accrued or arisen in India.”

38. While so holding, the Court explained the scope of Section

160, 161 and 163 of the Act in the manner already stated

by us hereinbefore.

39. The issue has been considered at length by Kerala High

Court as well in the case of Commissioner of Income

Tax Vs. Fertilizers & Chemicals (Travancore) Ltd.

[166 ITR 823]. In that case, the assessee-company had

entered into a collaboration agreement with a foreign

company for construction of a synthesis gas plant. The

assessee was to pay certain amount to the foreign

company for construction of a synthesis gas plant. The

assessee was to p ay certain amount to the foreign

company. The Income -tax Officer treated the assessee-

W.P. (C) No.9100 of 2007 Page 46 of 52

company as the agent of the non -resident foreign

company under Section 163 of the Act and assessed the

aforesaid amount in the hands of the assessee. The

Appellate Assistant Commissioner cancelled the

assessment as also the orders under section 163 on the

ground that the assessee company could not be treated as

an agent of the foreign company as there was no business

connection between the foreign company and the

assessee. The Appellate Assistant Commissioner also

found that since the non-resident foreign company had

already been assessed directly in India, the said foreign

company should not have again been assessed “through

an agent”. The Appellate Tribunal upheld the order of the

Assistant Commissioner. On a reference, the High Court

held that the Tribunal had not considered the question

whether the assessee had any business connection with

the non-resident so as to treat it as an agent of the non-

resident under Section 163 of the Act. Only on deciding

this issue, the question whether the orders passed by the

Income Tax Officer under Section 163 and the assessment

for the year of assessment 1968-69 could be said to be

W.P. (C) No.9100 of 2007 Page 47 of 52

valid or not. The question required to be consid ered

afresh.

40. While doing so, the Court delineated the scope of these

provisions in the following words:

“Chagla C.J. in CIT v. Balwantrai Jethalal Vaidya

[1958] 34 ITR 187 (Bom), has observed as follows

(at pages 194 and 195):

"If the assessment is upon a trustee, the tax

has to be levied and recovered in the manner

provided in section 4l. The only option that the

Legislature gives is the option embodied in sub-

section (2) of section 41, and that option is that

the Department may assess the beneficiaries

instead of the trustees, or having assessed the

trustees, it may proceed to recover the tax from

the beneficiaries. But, on principle, the

contention of the Department cannot be

accepted that, when a trustee is being assessed

to tax, his burden which will ultimately fall upon

the beneficiaries should be increased and

whether that burden should be increased or not

should be left to the option of the Department.

The basic idea underlying section 41, and which

is in conformity with principle, is that the

liability of the trustees should be co-extensive

with that of the beneficiaries and in no sense a

wider or a larger liability. Therefore, it is clear

that every case of an assessment against a

trustee must fall under section 41, and it is

equally clear that, even though a trustee is

being assessed, the assessment must proceed

in the manner laid down in Chapter III ......

Section 41 only comes into play after the

income has been computed in accordance with

Chapter III. Then the question of payment of

tax arises and it is at that stage that section 41

issues a mandate to the Taxing Department

that, when they are dealing with the income of

a trustee, they must levy the tax and recover it

in the manner laid down in section 41."

W.P. (C) No.9100 of 2007 Page 48 of 52

41. We, thus, agree with the submission of Mr. Salve, learned

Senior counsel appearing for the assessee, that a

harmonious reading of Sections 160, 161, 162 and 163

would show that:

(i) In order to become liable as a representative

assessee, a person must be situated such as to

fall within the definition of a representative

assessee;

(ii) The income must be such as is taxable under

Section 9;

(iii) The income must be such in respect of which

such a person can be treated as a

representative assessee;

(iv) The representative assessee has a statutory

right to withhold sums towards a potential tax

liability;

(v) Since the liability of a representative assessee is

limited to the profit representative assessee,

there can be multiple representative assessees

in respect of a single non-resident entity – each

W.P. (C) No.9100 of 2007 Page 49 of 52

being taxed on the profits or gain relateable to

such representative assessee.

42. The scheme underlying the aforesaid provisions is

explained with clarity and precision in the commentary on

Section 163 of the Act in “The Law and Practice of Income

Tax (Kanga and Palkhivala a t page No.1280, English

Edition), the relevant extract is reproduced:

“…Thus Section 163 really provides only the

machinery for giving effect to Sections 160 and 161,

and the mere appointment of an agent under Section

163 would be of no consequence unless there is

income in respect of which the agent can be held to

be a representative-assessee under Section 160 and

can be assessed as such under Section 161 of the

Act. In other words, any person appointed an

agent under Section 163 is not necessarily

assessable as a representative assessee in

respect of the non-resident’s income; it is only

in relation to the income covered by Section

160 that the status of representative assessee

emerges and the liability to be assessed under

Section 161 arises. For instance, though there

may be a business connection between a resident

and non-resident company, where there is no

evidence to show that any profits accrued to

the non -resident company through the

business connection, no assessment can be

made on the resident c ompany as the agent of

the non-resident company and the mere

appointment of the resident company as such agent

under this section would be of no avail.”

43. In view of our discussion, it would be difficult to accept

the contention of Mr. Parasaran. From his arguments

W.P. (C) No.9100 of 2007 Page 50 of 52

taken note of above, it is clear that the entire thrust is

that there is a business connection between the petitioner

and the respondent No.4. We have ourselves proceeded

with the matter on that basis. But that by itself would not

be sufficient for the Revenue to sail through. Even if

business connection is proved, it would at the most make

the respondent No.4 an agent of the petitioners and in

that eventuality, the Income Tax Department can treat

the respondent No.4 as representative assessee of the

first petitioner. However, in order to assess a particular

income, it has to be further established by the Department

that the respondent No.4 had some connection with the

income earned by the first petitioner which is sought to be

taxed at the hands of the respondent No.4. Even when

we examine the case treating the allegations made by the

Department as correct, we find no such live link of income

earned by the first petitioner and the respondent No.4 in

respect of the transaction which is sought to be taxed. As

already held by us that Section 163 has to be read in

conjunction with Section 161 which provides that the

specified person can be treated as assessed “……..as

W.P. (C) No.9100 of 2007 Page 51 of 52

regards the income in respect of which he is a

representative – assessee……….” Therefore, an agent can

only be a representative – assessee as regards the income

in respect of which the alleged agent has business

connection and/or from or through directly and/or

indirectly the income was received.

44. At this stage, it would be necessary to deal with another

contention of Mr. Parasaran, questioning the

maintainability of this writ petition at this stage on the

ground that it is pre-mature proceeding only a show cause

notice has been issued and the facts are yet to be

ascertained/investigated. We are not impressed with this

argument either. We may point out that the petitioners

have gone to the extent of arguing that it has no business

connection with respondent No.4. However, we have

proceeded on the basis that allegations in the show cause

notices to this effect are correct. Even then, the

ingredients of Section 161 are not satisfied as the

petitioner as assessee could be taxed only as regards the

income and in respect of which he is a representative

assessee. No case is made out by the Department that in

W.P. (C) No.9100 of 2007 Page 52 of 52

respect of transaction in question, viz., transfer of share

to third party, that too, outside India. Respondent No.4 is

sought to be taxed as representative assessee when he

had no role in the said transfer. Merely because those

shares relate to the respondent No.4 company, that would

not make respondent No.4 as agent qua deemed capital

gain purportedly earned by the petitioner. Therefore, writ

petition is maintainable.

45. As a result, rule is made absolute. Impugned show cause

notices are hereby quashed and t his writ petition is

allowed. We make it clear that it would be open to the

Department to issue notice to the respondents which is

though a non-resident is an assessee in India, subject to

the condition that such an action is still permissible under

the Act. However, on the facts of this case, we order

parties to bear their respective costs.

(A.K. SIKRI)

JUDGE

(M.L. MEHTA)

JUDGE

AUGUST 12, 2011

pmc