The Hindu Business Line : Judicious use of power to withhold refund

Before adjustment of refund is made against the tax payable by an assessee, prior intimation is mandatory. If this is not done, the assessee has the right to seek relief.

The power under Section 245 of the Income-Tax Act, 1961, is discretionary, given to tax officers in the higher echelons to "set off the amount to be refunded or any part of that amount against the tax, if any, remaining payable under this Act by the person to whom the refund is due." That this power is discretionary, and not mandatory, is indicated by the word "may". Secondly, the set off is in lieu of payment of refund. Thirdly, before invoking the power, the officer is expected to give an intimation in writing to the assessee to whom the refund is due informing him of the action proposed to be taken under this Section.

A mechanical invocation of the power under Section 245 can lead to its misuse by the Revenue in order to delay the refund till such time a fresh demand for the subsequent assessment years is finalised. If reasonable time limits are not set for the processing of and disposal of an application for refund by the Revenue, it may result in the assessee not being able to get the refund at all. Also, by stipulating the payment of interest on refunds (Section 244-A) and interest on delayed refunds (Section 243), the statute underscores the importance of timely processing of refund claims.

The GSK case

In GlaxoSmithKline Asia P. Ltd. v. CIT (WP No. 2111 of 2006), the petitioner company was engaged in the business of manufacture and sale of fast moving consumer products. The administrative services relating to marketing, finance, human resource, secretarial services, etc., were provided by GSKCH, a widely held public limited company. The agreement between GSKCH and the petitioner was that the petitioner would reimburse the costs incurred by GSKCH for providing the various services to the petitioner plus 5 per cent.

Since in the agreement, there was no basis laid down for allocation of costs incurred towards the various services provided to the petitioner, it was decided to engage the services of PwC, a leading firm of chartered accountants, to carry out a study to determine the basis for allocation of costs reimbursable by the petitioner to GSK CH.

A report submitted by PwC was made effective from January 1, 1997. In the previous year relevant to the assessment year 1998-99, the administrative expenses ("cross charges") were worked out on the basis of the report of PwC. However, the Assessing Officer held that the increase in payment of cross charges by the petitioner to GSKCH was not fully and exclusively for the purpose of business of the petitioner.

The Assessing Officer held that the payment of cross charges/administrative expenses to the extent of 7 per cent. of net sales alone was justified and disallowed the balance cross-charges/administrative expenses. This order of the Assessing Officer was confirmed by the Commissioner (Appeals). The same approach was adopted by the Assessing Officer as well as the Commissioner (Appeals) for the assessment year 1999-2000 as well.

The Tribunal deleted the disallowances made in the assessment years 1998-99 and 1999-2000. The consequential appeal filed by the Revenue to the court was dismissed on July 20, 2005.

For the subsequent assessment year 2001-02, the Assessing Officer continued to disallow the cross charges/administrative expenses claimed by the petitioner on the basis of the formula worked by PwC. By an order dated February 16, 2005, the Assessing Officer raised a demand of Rs 7,05,04,101. This amount was recovered by attaching the bank accounts of the petitioner on the very next day, that is, February 17, 2005.

Against this order dated February 17, 2005, the petitioner filed an Application before the Tribunal seeking refund of the amount recovered and for a stay of the demand of Rs 7.05 crores, pending disposal of the appeal by the Tribunal.

By an order dated March 3, 2005, the Tribunal directed the Revenue to refund the amount of Rs. 7,05,04,101 to the petitioner within two weeks from the date of the receipt of the order. The order, dated March 3, 2005, of the Tribunal was challenged by the Revenue in a writ petition.

The Delhi High Court held that no notice under Section 245 was issued to the assessee proposing to set off the demand against the outstanding tax amount due from it. There was no explanation why such notice was not issued except saying that after the order of the Tribunal dated August 17, 2005, the Revenue was processing the refund application made by the petitioner. It could dispose of this application only on December 27, 2005. Even at this stage, there was no proposal to invoke Section 245 although on this date there was an outstanding demand for the assessment year 2000-01.

The fact that the orders of the Tribunal for the assessment years 2000-01 and 2001-02 had not been stayed by the Court while admitting the appeal was a relevant factor to be taken note of by the Revenue while deciding whether to invoke the power under Section 245. Another important factor was that the major component of the outstanding dues for the assessment year 2001-02 pertained to administrative expenses/cross charges on which issue the assessee had succeeded up to the court for the earlier assessment years 1998-99 and 1999-2000. For the assessment year 2001-02, the assessee had succeeded before the Tribunal.

No Justification

Therefore, to the extent of the demand on account of administrative expenses/cross charges, there was no justification for withholding the refund. There was no justification for apprehending that the assessee would not pay the demand pertaining to the administrative expenses/cross charges if and when it was ultimately held to be payable. There was no warrant for the Revenue to seek to set off the refund due to the petitioner on account of cross charges against the outstanding demand of tax on such account for the subsequent years.

To sum up, refund is to be set off only after the assessee is given an opportunity of being heard. Before adjustment of refund is to be made against the tax payable by the assessee, a prior intimation is mandatory.

On the other hand, if an intimation is sent after the adjustment is made, the assessee has the right to seek relief by filing a writ petition even if the adjustment was not objected to by him. This view has been taken by the Calcutta High Court in J.K. Industries Ltd. v. C.I.T. (238 I.T.R. 820).

Further, refund can be set-off only against any amount of tax payable by the same person under the Income-Tax Act. The refund cannot be adjusted against a demand under any other Act, for example, the Interest-Tax Act, 1974 (State Bank of Patiala v. C.I.T. — 239 I.T.R. 421).

(The author, a Mumbai-based advocate specialising in tax laws, can be contacted at ranina@bom2.vsnl.net.in)

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