2019 (12) TMI 1212 - HC - Income Tax

Certificate u/s 197 (1) - application of the petitioner to grant a certificate for NIL deduction of tax at source, on the payments made to it, by Oil and Natural Gas Corporation Ltd. (ONGC-Deductor) - writ of mandamus directing the Assessing Officer to grant a certificate authorizing the aforesaid deductor to make payments to the petitioner without deducting tax at source - HELD THAT - In absence of a certificate of deduction of tax at source at a lower rate or nil rate, a payer-whose liability it is to deduct tax at source under Section 195 of the Act, is likely to incur a risk of being declared a defaulter. However, if a certificate under Section 197 of the Act is in operation, such a consequence would not arise. At the same time, the certificate under Section 197 of the Act for deduction of tax at lower rate or nil rate, also benefits the Assessee, who would be entitled to receive full payment from the payer without deduction. It is well settled that in matters of taxation there is no question of res judicata because each year s assessment is final only for that year and does not govern later years, because it determines only the tax for a particular period. Ref Instalment Supply (P) Ltd. v. Union of India 1961 (5) TMI 53 - SUPREME COURT . We cannot direct the Revenue to hold that the petitioner does not have a PE and give the consequent effect of such finding while deciding an application under Section 197 of the Act. Determination of all these questions would have to be undertaken during the course of regular assessment. The manner of determination of issues relating to the tax deduction and regular assessment are inherently and fundamentally different. While there may be certain circumstances where the finding with respect to the previous year can be taken into consideration, however, in the instant case, we cannot find any reason to hold the approach of Respondents to be patently illegal or erroneous on the face of it. The question of existence of permanent establishment, which requires a detailed enquiry, is not envisaged at the stage of deciding the application for issuance of certificate under Section 197 of the Act. The full fledged investigation can be done by the Assessing Officer during the course of assessment. Petitioner contends that the aforesaid concession was made without prejudice to its legal position , and cannot deprive the petitioner to contest the legal position. However, we cannot ignore the fact that Petitioner took categorical stand and prevailed upon the revenue to accept the declaration made in the said communication. Although the declaration was qualified, yet, since the petitioner requested the respondent to deduct the tax @ 4% applicable surcharge cess for the entire contractual revenues, revenue was justified in accepting the same and the petitioner cannot be permitted to resile there from, once the department has accepted petitioner s proposal. Writ petition is dismissed

Issues Involved:

1. Validity of the impugned certificate under Section 197(1) of the Income Tax Act issued by the Deputy Commissioner of Income Tax.
2. Determination of Permanent Establishment (PE) under the India-UAE Double Taxation Avoidance Agreement (DTAA).
3. Application of Section 44BB of the Income Tax Act.
4. Consistency in judicial decisions and applicability of res judicata in tax proceedings.
5. Scope of judicial review under Article 226 of the Constitution of India.

Issue-wise Detailed Analysis:

1. Validity of the impugned certificate under Section 197(1) of the Income Tax Act:

The petitioner sought a writ of certiorari to quash the certificate issued under Section 197(1) of the Income Tax Act, which mandated a 4% tax deduction at source on payments made by ONGC. The petitioner argued that similar contracts in previous years had been assessed with no tax liability in India, as the petitioner had no Permanent Establishment (PE) in India. The court examined the reasons provided by the tax authorities and found that the decision-making process was not arbitrary or unreasonable. The court noted that the certificate was issued based on the assessment history and pending appeals, and thus, upheld the validity of the impugned certificate.

2. Determination of Permanent Establishment (PE) under the India-UAE Double Taxation Avoidance Agreement (DTAA):

The petitioner argued that it did not have a PE in India, citing previous judgments where similar contracts were assessed with no PE in India. The court noted that the determination of PE is a factual question that must be assessed each year based on the specific contracts and activities. The court found that the tax authorities had considered the relevant contracts and the petitioner’s submissions, and determined that there was a potential PE based on the nature and duration of the activities. The court concluded that the determination of PE could not be conclusively decided at the stage of issuing a certificate under Section 197 and required a detailed examination during regular assessment proceedings.

3. Application of Section 44BB of the Income Tax Act:

The petitioner contended that its activities should be assessed under Section 44BB, which deals with the taxation of non-residents involved in the business of providing services or facilities in connection with the extraction or production of mineral oils. The court noted that for the assessment years 2016-17 and 2017-18, the petitioner’s activities were assessed under Section 44BB, and 10% of the contractual receipts were considered as business profits. The court found that the tax authorities had followed a consistent approach in applying Section 44BB and issuing the certificate at a 4% tax rate, which was in line with previous assessments.

4. Consistency in judicial decisions and applicability of res judicata in tax proceedings:

The petitioner argued for consistency in judicial decisions, citing the principle of res judicata. The court noted that in tax jurisprudence, the principle of res judicata does not apply to income tax proceedings, as each year’s assessment is independent. The court referred to previous judgments, emphasizing that the determination of tax liability must be made separately for each assessment year based on the specific facts and contracts. The court found no compelling reason to depart from this principle and upheld the tax authorities’ approach in the present case.

5. Scope of judicial review under Article 226 of the Constitution of India:

The court reiterated that judicial review under Article 226 is directed against the decision-making process rather than the decision itself. The court found that the tax authorities had exercised their jurisdiction under Section 197 with due application of mind and provided cogent reasons for their decision. The court emphasized that it does not sit in appeal over the tax authorities’ decision and does not adjudicate disputed questions of fact. The court concluded that there was no patent illegality or procedural irregularity in the decision-making process, and thus, dismissed the writ petition.

Conclusion:

The court dismissed the writ petition, upholding the validity of the certificate issued under Section 197(1) of the Income Tax Act. The court found that the tax authorities had followed a reasonable and consistent approach in determining the tax liability and the existence of a Permanent Establishment (PE) in India. The court emphasized the limited scope of judicial review under Article 226 and the need for a detailed examination of facts during regular assessment proceedings. The court also highlighted that the principle of res judicata does not apply to income tax proceedings, and each year’s assessment must be determined independently.

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