1. The petitioner herein seeks a writ of certiorari from this court quashing the order dated August 19, 1982, passed by the respondent on the ground that he has no jurisdiction to pass such an order and that even otherwise it is illegal and unsustainable in law.
2. The circumstances under which the writ petition has been filed are these :
The petitioner-company entered into a collaboration agreement dated February 22, 1965, with Messrs Vulcan Materials Company, a company incorporated in the State of New Jersey, U.S.A. Under the collaboration agreement, the petitioner has to make a down payment of 50,000 U.S. dollars for the processes, engineering drawings, etc. called the know-how package and a recurring payment of a royalty at the rate of 2.5% of the net sales value in India on all the materials produced in the petitioner's plant for a period of six years, subject to certain conditions. Clause 6(vi) of the collaboration agreement provided that all tax or taxes, if any, under the laws and rules in force in the Union of India on all payments of royalty by the petitioner-company to Vulcan Materials Company shall be borne by the latter. The Government of India by their letters dated August 12, 1964, and January 13, 1965, approved the terms of the said collaboration agreement and these letters seem to proceed on the basis that only the royalty payment will be subject to Indian taxes. The petitioner in pursuance of the terms of the collaboration agreement remitted 50,000 U.S. dollars on March 12, 1965, to Vulcan Materials Company through the State Bank of India for the know-how package. Subsequently, the petitioner has been remitting from time to time 2.5% commission on the net sales value of the products manufactured in its plant and while making those remittances, the petitioner has been deducting income-tax at source and paying the sum so deducted to the Department under s. 195 of the I.T. Act. in respect of the previous year relevant to the assessment year 1972-73, the petitioner had deducted tax at source at the time of payment of royalty to Vulcan materials Company and remitted the amounts deducted to the Department. However, there was a change in the rates of tax in the Finance Act, 1972, in payment of taxes on royalty and the difference came to Rs. 3,957. At the request of the respondent, the petitioner paid the said sum together with interest accrued aggregating to Rs. 4,408 to the Department.
3. The petitioner had paid advance tax in respect of the tax payable by it under the I.T. Act. As a result of the final assessment made, it has been found that a sum of Rs. 5,31,559 was due to be refunded to the petitioner by the Department. When the petitioner sought the refund of the said amount of Rs. 5,31,559, he was informed by the respondent herein by a letter dated August 19, 1982, that the refund to Rs. 5,31,559 due to him for the assessment year 1978-79 has been adjusted towards the tax due by the Vulcan Materials Company for the assessment year 1965-66, which has been computed at Rs. 6,57,550. In the impugned letter dated August 19, 1982, the respondent has no only adjusted the refund of Rs. 5,31,559 as against the tax due by the Vulcan Materials Company, but also called upon the petitioner-assessee to pay the balance of tax of Rs. 1,25,991 due by the said foreign company. It is in these circumstances the petitioner has filed the writ petition challenging the validity of the letter dated August 19, 1982, directing the adjustment of the refund due to the petitioner and calling upon the petitioner to pay the tax due by the foreign company.
4. In the impugned letter two reasons had been given for adjusting the refund and making a further demand for payment of Rs. 1,25,991. One reason is that the foreign company has stated that it is the petitioner who is liable to pay all the taxes in India and, therefore, the petitioner is liable to pay the amount assessed on the foreign company. The second reason is that on two earlier occasions, the petitioner made two payments towards the tax due by the foreign company in respect of the assessment year 1972-73.
5. The petitioner's case as set out in the affidavit filed in support of the writ petition is that the refund due to the company cannot be adjusted against the tax due by the foreign company, that the petitioner is not an agent of the foreign company, that in fact the terms of the collaboration agreement make only the foreign company liable for the tax, that no tax is payable under the I.T. Act on the lump sum payment made under the terms of the agreement and that the assessee's payment of two amounts of Rs. 8,265 and Rs. 100 towards tax due by the foreign company for the assessment year 1972-73 cannot be taken advantage of by the Revenue nor could it be taken as the basis for raising the plea of estoppel. Thus, the petitioner has challenged the jurisdiction of the respondent to adjust the refund due to it as against the tax due from the foreign company and to call upon it to pay the balance of tax.
6. In the counter-affidavit filed by the respondent, the adjustment of the refund amount due to the petitioner towards the dues of the foreign company has been justified on a new ground which had not been set out in the impugned letter. The new ground set out is that the petitioner as a persons remitting the income to a foreign company is liable to make deduction towards the tax payable under s. 195 of the I.T. Act and since the petitioner has not deducted the tax payable under the Act at source, the Department can proceed against the petitioner as an 'assessee in default' under s. 201 and straightway adjust the refund amount due to the petitioner towards the tax payable by the foreign company.
7. Learned counsel for the petitioner contends that it is not open to the Department to put forward a new ground in the counter-affidavit, which has not been mentioned in the impugned letter to sustain the validity of the same and that the validity of the impugned letter should be tested with reference to the grounds set out therein and not with reference to the grounds set out for the first time in the counter-affidavit. Though we feel that there is some force in the contention advanced by the learned counsel for the petitioner, it is not necessary for us to go into that question, as we are of the view that even if such a new contention should be urged in the counter-affidavit and the Department could seek to sustain the validity of the impugned letter on the basis of the new contention, the impugned letter cannot be legally sustained.
8. Assuming that the Department is entitled to invoke s. 195 of the I.T. Act, that will not enable the Department to treat the petitioner as an 'assessee in default' as provided in s. 201 of the Act. Without treating the petitioner as an 'assessee in default', the amounts due to the petitioner by way of refund cannot straightaway be adjusted as has been done in this case in the impugned letter. Though s. 201 does not refer to a written order treating the petitioner as an assessee in default, a reading of s. 246 will indicate that the statue normally contemplates a written order under s. 201 so that the person aggrieved can file an appeal under s. 246 Unless there is a written order, it is not possible for the petitioner to challenge the same by filing an appeal under s. 246. As a matter of fact in CIT v. Express Newspapers (P.) Ltd. : 111ITR347(Mad) , it has specifically been held that since an order under s. 201 is appealable, a written order is essential. Even if the impugned letter dated August 19, 1982, is treated as a written order, we find that the letter does not proceed on the basis that the petitioner is an assessee in default for non-compliance with the provisions of s. 195. Therefore, the impugned letter cannot at all be taken as an order passed under s. 201.
9. We have already stated that the impugned letter dated August 19, 1982, is mainly sought to be sustained by the Department on the basis of s. 195 read with s. 201 of the Act. Since we are of the view that the non-compliance of s. 195 will not enable the Department to impose a liability on the petitioner for the tax due by the foreign company without passing an order under s. 201, it is not possible to sustain the impugned letter as having been passed in accordance with law.
10. On the two reasons given in the impugned letter, its legality cannot also be sustained. The first reason is, the foreign company has stated that all dues are to be settled by the petitioner-company and, therefore, the petitioner-company is liable to pay the tax due by the foreign company. This reasoning, to say the least, is quite absurd. The tax liability of the foreign company has to be determined with reference to the provisions of the I.T. Act and the terms and conditions contained in the collaboration agreement. In this case, the collaboration agreement prima-facie indicates that the tax due under the I.T. Act has to be paid by the foreign company and the petitioner company has not agreed to meet such a liability. Merely because the foreign company understood the terms of the collaboration agreement in a particular manner, the liability cannot be shifted from the foreign company to the petitioner company. Therefore, the respondent is in error in proceeding on the basis of the assertion made by the foreign company that all the taxes are payable only by the petitioner company without an independent investigation as to who is liable. Therefore, the said reasoning cannot at all be sustained.
11. The next reason given is that the petitioner company has paid two amounts, viz.,Rs. 8,265 and Rs. 100, on earlier occasions on behalf of the foreign company and that, therefore, the petitioner company should also be held liable for the amount of Rs. 6,57,550 which has been assessed on the foreign company. Merely because there are two earliest payments by the petitioner company, that cannot be taken as final or conclusive on the question of its liability to pay the tax due by the foreign company. It may be that the petitioner felt that the amounts claimed are too small and with a view to purchase peace with the department, it thought of paying the same. In this case, the petitioner's affidavit has stated that the amounts which claimed to be paid represents the difference in the rates of tax towards the deductions made by the petitioner under s. 195. We think it is unnecessary to go into the details as to why the petitioner has made the payments on two earlier occasions, for, in our view, merely from those payments, the liability of the petitioner company to pay the sum of Rs. 6,57,550 assessed on the foreign company for the assessment year 1965-66 cannot be assumed and the refund due to the petitioner company cannot be adjusted. In this view of the matter, we hold that the impugned letter, as it is, cannot legally be sustained. We, therefore, quash the said letter. This order will not, however, prevent the Department from making a proper investigation on the question of liability and then pass an order under s. 201 if it wants to fasten the income-tax liability on the petitioner under s. 195 read with s. 201. It is, however, made clear that we are not expressing any opinion as to whether the liability can be imposed on the petitioner on the basis of s. 195 read with s. 201.
12. Accordingly, this writ petition is allowed. No costs.