2020 (12) TMI 934 - HC - Income Tax

Revision u/s 264 - Order u/s 197 refusing to grant a certificate of tax deduction at source at Nil rate to the petitioner company - Petitioner is a wholly owned subsidiary of Manpower Holdings Inc USA and is engaged in the business of providing manpower related services - case of petitioner, the ratio of tax deduction at source to profits has been as high as 1758% in the recent past and the petitioner company has refunds due and payable which have arisen essentially on account of high rate of TDS - petitioner contended that the impugned order was contrary to the rule of consistency as the 1.50% rate with respect to payment under Sections 194J and 194I of the Act specified in the impugned order was three times higher than the 0.50% rate of tax deduction at source determined in the immediately preceding year by the respondent - HELD THAT - This Court finds merit in the submission of the petitioner that since the impugned order was passed after an approval from the CIT, it cannot be challenged by way of a revision petition before the CIT under Section 264 of the Act. To hold otherwise, would amount to directing the petitioner to file an appeal from Caesar to Caesar . In the present writ petition, the petitioner has not claimed that the payments received by it are in the nature of technical services subject to 2% rate. The respondent has itself admitted in the impugned reasons that the nature of services of petitioner is Consultancy which falls under definition of fees for technical services subject to TDS rate of 1.50% for the current financial year 2020-21. Consequently, there is no need for any direction to be given to the petitioner to file a fresh application under Section 197. This Court is also of the view that the reliance placed by the respondent upon para no.4 of the impugned reasons is misplaced inasmuch as the rates mentioned therein have been superseded by the subsequent order dated 7th November, 2019 passed by the CIT under Section 264 of the Act. Accordingly, the respondent could not have relied upon the initial rates of 2019-20, which have been set-aside/superseded, to determine the average rate of TDS. This Court is in agreement with the submission of learned standing counsel for the respondent that it is the decision making process and not the decision that can be impugned in a writ petition. To appreciate the decision making process, it is necessary to outline the provision under which the TDS rates have to be determined under Section 197 of the Act. Rule 28AA of the Income Tax Rules prescribes the procedure to be followed by the assessing officer in determining the 'existing and estimated liability'. Perusal of Rule 28AA of the Income Tax Rules shows that the considerations prescribed under clause (2) are mandatory and the department is bound to determine the yearly TDS rates on the four parameters prescribed therein. It is settled law that the Government is bound to follow the rules and standards they themselves had set on pain of their action being invalidated. In the present case, the assessing officer has not followed the aforesaid rule as there is no reference in the impugned reason to any computation carried out under Rule 28AA. This Court vide order dated 8th December, 2020 had granted time to the respondent to place on record the computation of TDS rates under Rule 28AA, if any. Despite the said opportunity, neither any computation was filed nor was any reasonable explanation given as to why the computation under Rule 28AA was not carried out. Consequently, this Court is of the opinion that the impugned order is liable to be quashed on the ground that the decision making process in the present case is contrary to law. This Court finds that there is nonapplication of mind which vitiates the impugned order and reasons. Accordingly, we set aside the impugned order and reasons and remand the matter to respondent no.2 for fresh determination in accordance with law as expeditiously as possible preferably within a period of two weeks. In the interim, we direct that the benefit of revised TDS rates prescribed for financial year 2019-2020 (by respondent no.1 vide order dated 7th November, 2019) read with rebate of 25% given by Ministry of Finance on account of Covid-19 crisis from the rates applicable in the preceding year 2019-20 vide Press Release dated 13th May, 2020 be given to the petitioner.

Issues Involved:
1. Challenge to the order under Section 197 of the Income Tax Act, 1961 refusing to grant a certificate of tax deduction at source (TDS) at Nil rate.
2. Rule of consistency in determining TDS rates.
3. Maintainability of the writ petition in light of an alternative remedy under Section 264 of the Act.
4. Judicial review of the decision-making process under Section 197.
5. Application of Rule 28AA of the Income Tax Rules in determining TDS rates.

Issue-Wise Detailed Analysis:

1. Challenge to the Order under Section 197 of the Income Tax Act, 1961:
The petitioner challenged the order dated 29th June 2020, which refused to grant a certificate of tax deduction at source at Nil rate. The petitioner argued that the TDS rates specified in the order were arbitrary and not based on any working, despite the respondent admitting that the estimated tax liability was Nil and the average tax rate to turnover was 0.12% for the last three years.

2. Rule of Consistency in Determining TDS Rates:
The petitioner contended that the impugned order was contrary to the rule of consistency. The TDS rate of 1.50% under Sections 194J and 194I was three times higher than the 0.50% rate determined in the immediately preceding year. The petitioner emphasized that the conditions of mandatory Rule 28AA were satisfied, yet the respondent had arbitrarily prescribed higher TDS rates.

3. Maintainability of the Writ Petition in Light of an Alternative Remedy under Section 264 of the Act:
The respondent argued that the writ petition was not maintainable as the petitioner had not exhausted the alternate remedy of revision under Section 264 of the Act. The respondent relied on the judgment in Sis Live vs. Income Tax Officer, where the court directed the petitioner to file a revision petition. However, the court held that since the impugned order was passed after approval from the Commissioner of Income Tax (CIT), it could not be challenged by way of a revision petition before the CIT under Section 264. The court reasoned that directing the petitioner to file a revision petition would amount to filing an appeal from Caesar to Caesar.

4. Judicial Review of the Decision-Making Process under Section 197:
The court agreed with the respondent that the scope of judicial review of an order under Section 197 is limited to the decision-making process and not the decision itself. The court emphasized that the assessing officer must follow the mandate of Rule 28AA in determining the TDS rates. The court found that the assessing officer had not followed Rule 28AA as there was no reference to any computation carried out under the rule. Consequently, the court quashed the impugned order on the ground that the decision-making process was contrary to law.

5. Application of Rule 28AA of the Income Tax Rules in Determining TDS Rates:
Rule 28AA prescribes the procedure for determining the 'existing and estimated liability' for issuing a certificate under Section 197. The court highlighted that the considerations under Rule 28AA are mandatory and the department must determine the yearly TDS rates based on the four parameters prescribed. The court found that the assessing officer had not carried out any computation under Rule 28AA, which vitiated the impugned order and reasons.

Relief:
The court set aside the impugned order and reasons and remanded the matter to respondent no.2 for fresh determination in accordance with law, preferably within two weeks. In the interim, the court directed that the benefit of revised TDS rates prescribed for financial year 2019-2020, along with the rebate of 25% given by the Ministry of Finance on account of the Covid-19 crisis, be given to the petitioner. The writ petition was allowed and pending applications were disposed of.

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