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2022 (8) TMI 41 - SC - Income TaxTDS u/s 195 - withholding of tax - PE in India - obligation to deduct TDS - issuance of Certificate under Section 197(1) - non-resident entity to be taxed in India - Seeking fresh Certificate u/s 197 for deduction of Nil tax on payments received from ONGC for activities carried on outside India - Earlier appellant requested issuance of Certificate for deduction of TDS at 4% of taxable value - Appellant contends that a certificate of Nil TDS, for payments received in respect of activities outside India, should have been issued to the Appellant. INDIRA BANERJEE, J. HELD THAT - It is well settled that the obligation to deduct TDS is limited to appropriate proportion of income chargeable to tax under the IT Act that forms part of the gross sum of money payable to the non-resident. A person paying any sum to a non-resident is not liable to deduct any tax at source if such sum is not chargeable to tax under the IT Act, as held by this Court in G E India Technology Centre Pvt. Ltd. 2010 (9) TMI 7 - SUPREME COURT High Court rightly held that the question of whether the Appellant had PE, could not possibly be undertaken in an enquiry for issuance of Certificate under Section 197 having regard to the time-frame permissible in law for deciding an application, more so, when regular assessment had been completed in respect of the immediate preceding year and the Appellant found to be taxable under the IT Act at 10% of the contractual receipts. The Assessing Authority found that the Appellant had PE in India in the concerned Assessment Years. The appeal of the Appellant is possibly pending disposal. As held by the High Court, it is well settled that the principle that res judicata is not applicable to income tax proceedings because assessment for each year is final only for that year and does not cover later years. Whether the Appellant had PE or not, during the Assessment Year in question, is a disputed factual issue, which has to be determined on the basis of the scope, extent, nature and duration of activities in India. Whether project activity in India continued for a period of more than nine months, for taxability in India in terms of the AADT, is a question of fact, that has to be determined separately for each Assessment Year. The scope of enquiry and investigation in proceedings for grant of Certificate under Section 197 of the IT Act is different from the scope of assessment proceedings. The High Court rightly declined to direct the Revenue to hold that the Appellant did not have PE in India. By its letter dated 22nd June 2019, referred to above, the Appellant made a request to the Revenue for issuance of Certificate under Section 197(1) of the IT Act permitting deduction of TDS at the rate of 4% plus applicable surcharge and cess, for all contractual receipts, in line with assessment proceedings for the Assessment Year 2016-2017 without prejudice to its legal position, since the Appellant had been facing financial hardship and urgently required funds. On 26th June 2019, the Respondent No.1 issued the impugned Certificate directing ONGC to deduct TDS at the rate of 4% for all sums receivable in respect of activities both outside and inside India. The impugned Certificate being as per the request of the Appellant, it is not open to the Appellant to make a volte-face and challenge the impugned Certificate. Letter of request dated 22nd June 2019, of the Appellant, referred to above, for issuance of a Certificate under Section 197 of the IT Act, for TDS at the rate of 4% on all receipts was without prejudice to the rights in law and contentions of the Appellant. Such a request without prejudice to the rights and contentions of the Appellant would not operate as estoppel against the Appellant in any Assessment Proceedings, Appellate proceedings or any other proceedings. However, the impugned Certificate having been issued as per the Appellant s own request, the Appellant is estopped from questioning the impugned Certificate by initiation of proceedings under Article 226 of the Constitution of India. The Appellant itself made a request for Certificate for TDS at the rate of 4% on all receipts. There is no such infirmity in the reasoning of the High Court which calls for interference of this Court under Article 136 of the Constitution of India. As rightly held by the High Court, since the Appellant requested issuance of Certificate for deduction of TDS at 4% of taxable value it is not for the Appellant to challenge the certificate. Moreover, it appears that in the final assessment for one or two preceding Assessment Years it was found that the Appellant did have PE in India. Appeals are pending. In any event, Tax deducted at source is adjustable against the tax, if any, ultimately assessed as payable by the Assessee and any excess tax deducted is refundable with interest. Interference is not warranted at this stage. In course of hearing, Counsel for the Revenue handed us a Draft Assessment Order, issued in respect of the Assessment Year in question, that is 2020-21, holding that the Appellant had PE in India and was liable to tax in India under the IT Act. In the event, it is found that the Appellant is not liable to tax, the Appellant will be entitled to refund of TDS with interest. Appeal dismissed. J.K. MAHESHWARI, J. HELD THAT - As issuance of a certificate under Section 197 of the IT Act, an application shall be made to assessing officer under subrule (1) of Rule 28. The assessing officer after recording satisfaction that existing and estimated tax liability justifies the deduction of tax at lower rate or no deduction of tax as the case may be shall issue certificate. While exercising the power to issue a certificate, the assessing officer is required to follow the procedure as per subrule (2). The assessing officer shall consider the existing and estimated liability that what may be tax payable on estimated income of the previous year; tax payable on the assessed or returned income of the last four years from previous year; existing liability under the IT Act; advance tax payment i.e. tax deducted and collected at source for the assessment year relevant to the previous year till the date of making application under subrule (1) of Rule 28. Thus, for the purpose of issuance of certificate under Chapter XVII of Section 197 of the IT Act, the procedure for determination has been prescribed to the assessing officer on which satisfaction may be recorded by him. Order passed by the High Court is without considering the perspective and scope of issuance of the certificate for deduction of tax at lower rate or no deduction at tax and also without following the prescribed procedure. The High Court has wrongly distinguished the previous judgement 2017 (5) TMI 1054 - DELHI HIGH COURT on the premises which is not tenable, and relied upon undertaking dated 22.06.2019 of appellant submitted perforce. After due consideration view High Court has committed error in dismissing the writ petition; therefore, we am unable to concur the opinion of the esteemed sister Judge. During hearing, it is said that against the previous judgment of Delhi High Court 2016 (2) TMI 47 - DELHI HIGH COURT is pending, which relates to assessment orders pertaining to financial years 2007-2008 to 2009-2010, but it cannot be connected to the issue of certificate under Section 197(1) of the IT Act for the year 2019-2020. The other judgment of Delhi High Court 2017 (5) TMI 1054 - DELHI HIGH COURT directly deals the issuance of the certificate under Section 197(1) of the IT Act. For the reasons mentioned in detail I endorse the view taken by Delhi High Court as correct and plausible view. Thus, it is made clear here that the TDS certificate granted under Section 197 (1) shall be provisional subject to the assessment of the returned income. The appeal filed by the appellant is hereby allowed setting aside the order of the High Court with a direction to the respondent to reconsider the application of the appellant and issue certificate following the prescribed procedure.
Issues Involved:
1. Whether the Appellant had a Permanent Establishment (PE) in India. 2. Whether the income from activities conducted outside India was taxable in India. 3. Whether the issuance of a certificate under Section 197 of the Income Tax Act was justified. 4. The applicability of the principle of consistency in tax proceedings. 5. The scope of judicial review under Article 226 of the Constitution of India. Detailed Analysis: 1. Permanent Establishment (PE) in India: The Appellant, a UAE-based company, contended that it did not have a PE in India. The Assessing Officer (AO) and the Dispute Resolution Panel (DRP) held that the Appellant had a Fixed Place PE and a Dependent Agent PE in India. The Income Tax Appellate Tribunal (ITAT) concurred with the AO and DRP, rejecting the Appellant's contention. The Delhi High Court upheld that the existence of a PE must be determined annually based on the scope, extent, nature, and duration of activities in India. The Supreme Court noted that the determination of PE is a factual issue and must be assessed yearly. The principle of res judicata does not apply to income tax proceedings, and each year's assessment is final only for that year. 2. Taxability of Income from Activities Outside India: The Appellant argued that income from activities conducted outside India should not be taxable in India. The AO held that the contract was a turnkey and composite contract, not divisible, and hence, the entire contractual receipts were taxable in India. The ITAT, however, accepted that the contract could be segregated into offshore and onshore activities, and income from activities outside India could not be attributed to the PE in India. The Delhi High Court concurred with the ITAT, noting that invoices indicated whether work was done outside or inside India, making the value of work done outside India segregable. 3. Issuance of Certificate under Section 197: The Appellant applied for a certificate under Section 197 for Nil TDS on payments for activities outside India. The Respondent issued a certificate directing ONGC to deduct TDS at 4% on all receipts. The High Court held that the question of whether the Appellant had a PE could not be determined in an enquiry for issuance of a certificate under Section 197. The Supreme Court noted that the issuance of the certificate was based on the Appellant's own request for a 4% TDS rate due to financial hardship, and hence, the Appellant could not challenge the certificate. 4. Principle of Consistency: The Appellant argued that the principle of consistency should apply, as previous assessments had held that income from activities outside India was not taxable. The High Court and Supreme Court noted that the principle of res judicata does not apply to tax proceedings, and each year's assessment is independent. The Supreme Court emphasized that the determination of PE and taxability must be assessed annually based on the specific facts and circumstances of each year. 5. Scope of Judicial Review under Article 226: The High Court held that judicial review under Article 226 is limited to examining the decision-making process, not the decision itself. The High Court found no arbitrariness or procedural irregularity in the Respondent's approach. The Supreme Court upheld this view, noting that the Appellant's request for a 4% TDS rate precluded it from challenging the certificate. Conclusion: The Supreme Court dismissed the appeal, upholding the High Court's judgment that the issuance of the certificate under Section 197 was justified based on the Appellant's request. The determination of PE and taxability of income from activities outside India must be assessed annually, and the principle of res judicata does not apply to tax proceedings. The Appellant's request for a 4% TDS rate due to financial hardship estopped it from challenging the certificate. The dissenting opinion by Justice J.K. Maheshwari emphasized the principle of consistency and the need for the AO to follow the prescribed procedure for issuing certificates under Section 197.
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