2023 (1) TMI 782 - HC - Income Tax

Orders/certificates u/s 197 - rate of withholding tax - although the petitioner had sought issuance of certificates u/s 197 of the Act at Nil rate for the aforementioned FYs, the certificates were issued pegging the withholding tax at 4% - HELD THAT - We are of the view, that the best way forward will be that a certificate under Section 197 is issued, pegging the withholding tax rate at 4%, which was also the position that obtained in FYs 2019-2020, 2020-2021 and 2021-2022. Mr Jolly has informed us, that for FY 2019-2020 (AY 2020-2021) and FY 2020-2021 (AY 2021-2022), return has been filed, wherein subject income was offered for tax at 4%. Mr Jolly says, that intimation under Section 143(1) of the Act has been issued. What is, in substance, the issue, is whether the subject income earned by the petitioner can be treated as Fees for Technical Services (FTS), as is contended by the respondents/revenue. Concededly, the Double Tax Avoidance Agreement obtaining between India and UAE does not contain any article concerning FTS. The petitioner, who is a non-resident and does not have a PE in India, claims that the subject income is business income. It is because of these varying stands, that a dispute arose with regard to the rate at which withholding tax had to be pegged. Thus, for the foregoing reasons, the rate of withholding tax, for the moment, will be pegged at 4%. The respondents/revenue will issue a certificate under Section 197 of the Act as expeditiously as possible, though not later than two weeks from today. The aforesaid direction has been issued without prejudice to the rights and contentions of both parties.

Issues:
1. Challenge to Impugned Order and Certificate under Section 197 of the Income Tax Act, 1961
2. Direction for issuance of certificates at a 'Nil' rate of tax withholding
3. Petitioner's request for lower withholding tax rate during the pendency of the writ petition
4. Dispute over the classification of subject income as Fees for Technical Services (FTS) or business income
5. Determination of withholding tax rate for the petitioner

Analysis:

1. The petitioner sought a writ to quash the Impugned Order and Certificate issued by the respondents under Section 197 of the Income Tax Act, 1961, directing a 10% tax deduction on payments. Additionally, the petitioner requested a direction for issuing certificates at a 'Nil' rate of tax withholding until a specified period. The petitioner also sought an interim direction for receiving consideration at a lower rate during the petition's pendency.

2. The court noted that the petitioner had previously received certificates with a 4% withholding tax rate for previous financial years. The current issue pertained to the financial year 2022-2023. Despite the absence of a counter-affidavit from the respondents, the court allowed an opportunity for filing and considered the petitioner's claim for a 'Nil' withholding tax rate.

3. After considering the instructions received from the respondents' counsel, the court decided to issue a certificate under Section 197 with a 4% withholding tax rate, aligning with previous years' practice. The petitioner had filed returns for previous years at a 4% tax rate, indicating a consistent position.

4. The core issue revolved around the classification of the petitioner's income as either Fees for Technical Services (FTS) or business income. The absence of an FTS provision in the Double Tax Avoidance Agreement between India and UAE led to differing interpretations between the parties.

5. Ultimately, the court determined that the withholding tax rate would be set at 4% for the current financial year. The respondents were directed to issue the certificate promptly, within two weeks, without prejudice to the rights of either party. The writ petition and related application were disposed of based on these terms, with parties instructed to act based on the digitally signed order.

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