2021 (12) TMI 1085 - HC - Income Tax

Lower deduction certificate u/s 197 - Applications u/s 197 for Nil‟ rate of withholding tax as per under Articles 8 and 12 of the India Ireland Double Taxation Avoidance Agreement ( Tax Treaty‟), they were liable to pay tax only in Ireland - HELD THAT - We find force in the submission of Mr. Jolly that the aspects which the Assessing Officer is obliged to take into consideration, while considering an application under Section 197 of the Act, have not at all been adverted to. The reasons proceed only on the basis of the liability, if any, which may, or may not, be fastened upon another group company, i.e. CAT-9. That, by itself, cannot be a justification for denying the Nil‟ rate certificates to the petitioner. The reasons now brought out by Mr. Agarwal do not form part of the reasons contained in the impugned order and the respondents are precluded from citing those as reasons to justify the impugned order issued to the petitioner. We, accordingly, quash and set aside the impugned order dated 07.09.2021 and remand the matter back to the Assessing Officer, who may pass a fresh order within four weeks from today. The petitioner is directed to provide whatever relevant information is called for by the Assessing Officer without any delay, so that the order is passed within the time frame fixed by us. In the interim, the petitioner will be entitled to avail of the Nil rate of withholding Tax, as has been the position in the past several years consistently.

Issues involved:
1. Challenge to order passed under Section 197 of the Income Tax Act for withholding tax rate determination.
2. Interpretation of the India Ireland Double Taxation Avoidance Agreement.
3. Consideration of relevant factors under Rule 28AA of the Income Tax Rules for determining withholding tax rate.
4. Assessment of the impact of group liability on withholding tax rate determination.

Detailed Analysis:
Issue 1: The petitioner challenged the order passed by respondent No. 1 under Section 197 of the Income Tax Act, seeking a direction for a "Nil" rate withholding tax certificate. The petitioner, a foreign company engaged in aircraft leasing, argued that the reasons provided for the withholding tax rate determination were not relevant and germane. The petitioner contended that the considerations taken into account by the Assessing Officer did not align with the requirements of Rule 28AA of the Income Tax Rules.

Issue 2: The petitioner relied on the India Ireland Double Taxation Avoidance Agreement to support its claim for a "Nil" withholding tax rate. The petitioner highlighted that previous applications for a "Nil" rate were approved by the Assessing Officer based on the provisions of the Tax Treaty, allowing tax liability only in Ireland. The petitioner sought to challenge the new withholding tax rate of 10% imposed by respondent No. 1, which deviated from previous approvals.

Issue 3: The Court analyzed Rule 28AA of the Income Tax Rules, emphasizing the factors that the Assessing Officer must consider for determining the withholding tax rate. The Court noted that the reasons provided by the Assessing Officer did not address crucial elements such as tax payable on estimated income, assessed income of previous years, existing tax liabilities, and advance tax payments. The Court found that the Assessing Officer's decision lacked a comprehensive evaluation of the petitioner's tax liability.

Issue 4: The Respondent argued that the petitioner withheld relevant information, leading to the issuance of "Nil" rate certificates in previous years. The Respondent highlighted alleged group liability issues involving another company, which, according to the Respondent, influenced the withholding tax rate determination. However, the Court held that group liability should not impact the petitioner's independent transaction with Air India Limited. The Court emphasized that the reasons provided by the Respondent were insufficient to justify denying the "Nil" rate certificates to the petitioner.

The Court quashed the impugned order and remanded the matter back to the Assessing Officer for a fresh decision within a specified timeframe. The petitioner was directed to provide necessary information promptly. In the interim, the petitioner was allowed to avail of the "Nil" rate of withholding tax. The Court ensured that the Revenue's interests were safeguarded, considering the long-term lease agreement between the petitioner and Air India Limited.

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