Facts of the Case

Glaxo Smith Kline Asia Pvt. Ltd. was engaged in the manufacture and sale of fast-moving consumer products. The company did not maintain its own administrative workforce except for a Company Secretary. Administrative functions such as marketing, finance, human resources, and secretarial services were provided by Glaxo Smith Kline Consumer Healthcare Ltd. (GSKCH).

Under an arrangement between the parties, the petitioner reimbursed GSKCH for administrative costs along with a 5% mark-up termed as "cross charges." To determine an appropriate basis for allocation of such costs, Price Waterhouse Coopers (PWC) conducted a study and submitted a report that became effective from 1 January 1997.

For Assessment Years (AYs) 1998-99 and 1999-2000, the Assessing Officer disallowed a substantial portion of these administrative expenses, holding that only expenses equivalent to 7% of net sales were justified. The disallowance was upheld by the Commissioner of Income Tax (Appeals). However, the Income Tax Appellate Tribunal (ITAT) deleted the disallowance and held that there was no legal basis for such disallowance in the absence of applicability of Section 40A(2). The Revenue’s appeal against the Tribunal's decision was dismissed by the Delhi High Court.

Despite these decisions, similar disallowances were made in AYs 2000-01 and 2001-02. The Tribunal again allowed the assessee’s appeals and directed deletion of the disallowances. As a consequence, substantial refunds became due to the petitioner. However, the Revenue failed to grant the refunds and sought to adjust them against tax demands raised for AYs 2002-03 and 2003-04. The petitioner therefore approached the Delhi High Court seeking a direction for grant of refund together with statutory interest.

 

Issues Involved

  1. Whether the Revenue could invoke Section 245 of the Income Tax Act to adjust the refund due to the assessee against outstanding tax demands for subsequent assessment years.
  2. Whether the Revenue could withhold or adjust refunds without issuing prior written intimation as mandated under Section 245.
  3. Whether pendency of Revenue appeals against favourable Tribunal orders justified withholding of refunds.
  4. Whether the assessee was entitled to interest on the delayed refund under the provisions of the Income Tax Act.

 

Petitioner’s Arguments

The petitioner contended that the principal component of the outstanding demands for AYs 2002-03 and 2003-04 related to the same issue of cross charges/administrative expenses that had already been decided in its favour by the Tribunal and affirmed by the High Court for earlier years.

It was argued that CBDT Circular Nos. 530 and 589 required the Department to treat an assessee as not being in default where the disputed issue had already been decided in favour of the assessee in earlier proceedings.

The petitioner further submitted that no valid proceedings under Section 245 had been initiated because no prior written intimation proposing adjustment of refund had ever been issued.

The assessee also pointed out that there was no justification for apprehending non-recovery of future tax demands, particularly when substantial taxes had already been paid and the company had a strong financial standing. Therefore, withholding the refund was arbitrary and contrary to law.

 

Respondent’s Arguments

The Revenue contended that under Section 245, it was entitled to adjust any refund against sums remaining payable by the assessee.

According to the Department, substantial outstanding tax demands existed for AYs 2002-03 and 2003-04. Since those demands remained unpaid, the Revenue was justified in seeking adjustment of the refund rather than releasing it.

The Revenue also argued that the CBDT circulars relied upon by the assessee related to Section 220(6) and not Section 245. Therefore, they did not directly govern refund adjustments.

It was further submitted that the existence of outstanding demands satisfied the statutory condition under Section 245, thereby enabling adjustment of refunds against such demands.

 

Court Order / Findings

The Delhi High Court allowed the writ petition and ruled in favour of the assessee.

The Court held that Section 245 confers a discretionary power and not a mandatory power. Before exercising such power, the Revenue must strictly comply with the statutory requirement of issuing prior written intimation to the assessee regarding the proposed adjustment.

The Court emphasized that the safeguards judicially recognized under erstwhile Section 241 would apply with equal force to Section 245. Refunds cannot be withheld or adjusted mechanically merely because tax demands exist or appeals are pending.

The Court observed that:

  • No notice under Section 245 had been issued.
  • The Department attempted to bypass the statutory procedure by seeking permission from the Court to adjust the refund.
  • Mere pendency of Revenue appeals does not justify denial of refund.
  • Earlier decisions of the Tribunal and the High Court in favour of the assessee on the same issue were binding and relevant considerations.
  • The Revenue had failed to establish any genuine apprehension that future tax demands would become unrecoverable.

The Court further held that the Revenue's conduct in delaying the refund was unjustified and that the assessee was entitled to statutory interest on the delayed refund.

 

Important Clarifications

1. Prior Written Intimation under Section 245 is Mandatory

Before adjusting any refund against outstanding tax demand, the Revenue must issue a written intimation to the assessee regarding the proposed action. Failure to do so vitiates the exercise of power under Section 245.

2. Section 245 Confers Discretionary Power

The word "may" in Section 245 indicates that the power is discretionary and must be exercised judiciously after considering relevant circumstances.

3. Pendency of Appeal is Not Sufficient Ground

The mere pendency of an appeal by the Revenue against a favourable order of the Tribunal does not authorize withholding or adjustment of refund.

4. Consistency Principle Must Be Followed

Where identical issues have already been decided in favour of the assessee in earlier years, the Department should respect such decisions unless a stay has been obtained from the appellate forum.

5. Interest on Delayed Refund is Statutory

The Revenue is liable not only to refund the amount but also to pay statutory interest where refunds are delayed without justification.

Sections Involved

  • Section 245 – Set-off of refund against tax remaining payable.
  • Section 244A – Interest on refunds.
  • Section 243 – Interest on delayed refunds (as applicable at the relevant time).
  • Section 220(6) – Stay of demand where issues are covered in favour of the assessee.
  • Section 241 (pre-amendment provision) – Power to withhold refund in certain cases.
  • Section 40A(2) – Disallowance of excessive or unreasonable expenditure (discussed in earlier proceedings).
  • Article 226 of the Constitution of India – Writ jurisdiction of the High Court.

Link to Download the Order

https://delhihighcourt.nic.in/app/case_number_pdf/2006:DHC:2-DB/SMD12011006CW21112006.pdf

 

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