2023 (3) TMI 869 - HC - Income Tax

TDS u/s 195 - seeking certificate u/s 197 setting out the withholding tax at NIL rate - scope of the proceedings under Section 197 - contention is that payment received by the petitioner against software-based information security solutions to its partners under the Reseller Agreements cannot be treated as Royalty, both as per Indo-US DTAA and the judgement rendered in Engineering Analysis Centre of Excellence (P.) Ltd 2021 (3) TMI 138 - SUPREME COURT - HELD THAT - The concerned officer would have to re-examine the application filed on behalf the petitioner under Section 197 of the Act, both, in the backdrop of Article 12 of the Indo-US DTAA and the judgment of the Supreme Court rendered in Engineering Analysis Centre of Excellence (P.) Ltd. That said, the other decisions which have been cited by the petitioner, will also have to be adverted to by the concerned officer. Accordingly, the impugned certificate dated 03.08.2022 and communication/order dated 17.08.2022 are set aside. The concerned officer will carry out a fresh exercise and pass an order once again, having regard to what has been stated by us hereinabove. This exercise will be carried out by the officer within the next two weeks. The concerned officer will grant hearing to the petitioner and/or its authorized representative. The date and time of hearing will be communicated to the petitioner via email. The concerned officer will be at liberty to accord hearing via video conferencing (VC). Writ petition is disposed of in the aforesaid terms. Pending application shall stand closed.

Summary

Issues:
1. Application for advancing the date of hearing.
2. Challenge to withholding tax certificate and communication/order.
3. Interpretation of Indo-US Double Taxation Avoidance Agreement (DTAA) and Supreme Court judgment on fees for included services.
4. Re-examination of application under Section 197 of the Income Tax Act.

Analysis:
1. The petitioner filed an application seeking an early hearing of the writ petition. The respondents had no objection, leading to the court allowing the application for early hearing and taking up the writ petition for final disposal on the same day.

2. The petitioner challenged a withholding tax certificate and a communication/order issued by the revenue authorities. The petitioner had requested a NIL withholding tax rate under Section 197 of the Income Tax Act, which was rejected, fixing the rate at 10%. The petitioner argued that payments received for software-based solutions should not be treated as royalty, citing the Indo-US DTAA and a Supreme Court judgment. The court set aside the certificate and directed a fresh examination by the concerned officer, considering relevant legal provisions and granting a hearing to the petitioner.

3. The petitioner contended that the withholding tax treatment did not consider the Indo-US DTAA and the Supreme Court judgment on fees for included services. The court agreed, emphasizing the need for the concerned officer to re-examine the application in light of these legal aspects and other cited decisions. The certificate and communication/order were set aside for a fresh decision within two weeks, with a hearing to be granted to the petitioner.

4. The court highlighted the importance of considering the legal provisions and judgments cited by the petitioner in determining the withholding tax rate. The concerned officer was instructed to conduct a fresh assessment, provide a hearing to the petitioner, and communicate the decision digitally. The previously fixed hearing date was canceled, and parties were directed to act based on the digitally signed order.