2024 (9) TMI 1128 - HC - Income Tax

TDS u/s 195 - PE in India - holding tax rate of 4% in respect of the receipts received from various customers and asserted to be taxable as business income u/s 9(1)(i) - HELD THAT - Petitioner has received remittances with a withholding tax at the rate of 1.5%. By the time these writ petitions were taken up for hearing, it was evident that they had essentially been rendered infructous consequent to the FYs themselves having come to an end. As in case the petition were to fail, the balance amount calculated at a differential rate of 2.5% would be deposited. It was on the aforesaid basis that the writ petitioners prayed for the matters being heard and disposed of finally on merits and notwithstanding the FY having come to an end. In our considered opinion, para 18 of our interim order clearly requires a finding on merits being rendered irrespective of the FY having come to an end since the liability of the petitioner for the period in question would have to be adjudged lest it be put to prejudice and be compelled to pay the differential tax @ 2.5%. One of the primary grounds of challenge which was noticed by the Court while entertaining the writ petition was of the respondents having accepted the profit attribution rate to be 26%. It was in the aforesaid backdrop that the petitioners appear to have contended that the withholding rate of tax would not exceed 1.04%. However, and since they had been adhering to a withholding tax rate of 1.5%, and which was the rate that was admittedly followed for the period spanning FYs‟ 2018-19 to 2020-21, the Court had in the interim stipulated that the withholding tax rate would be 1.5%. We note that the profit attribution rate of 26% does not appear to be disputed. Notwithstanding the authority having noticed the profit attribution rate, it proceeded to frame a with holding tax rate of 4%. Since the factum of the with holding tax rate not exceeding 1.04%, when computed alongside the profit attribution rate of 26%, was not seriously questioned, we find ourselves unable to sustain the order impugned. The withholding tax rate question for any other year which may be pending would have to be decided independently. Since the orders impugned before us stood restricted to an adjudication under Section 197 of the Act alone, all rights and contentions of respective parties on merits are kept open to be addressed in regular assessment proceedings.

Issues Involved:
1. Entitlement to a withholding tax rate.
2. Existence of a Permanent Establishment (PE) in India.
3. Attribution of profits to the PE.
4. Validity of the Assessing Officer's (AO) order pegging the withholding tax rate at 4%.
5. Compliance with previous judicial directions and orders.
6. Impact of the interim order on the final judgment.

Issue-wise Detailed Analysis:

1. Entitlement to a Withholding Tax Rate:
The petitioner challenged the order dated 13 May 2022, which set the withholding tax rate at 4% for receipts from various customers, asserting these receipts were taxable as business income under Section 9(1)(i) of the Income Tax Act, 1961. The petitioner argued that the withholding tax rate should not exceed 1.04%, based on a profit attribution rate of 26%.

2. Existence of a Permanent Establishment (PE) in India:
For Assessment Years (AYs) 2001-02 to 2008-09, various assessment orders held that the petitioner had a PE in India. This finding was upheld by the Income Tax Appellate Tribunal (ITAT) and affirmed by the High Court. The petitioner continued to contest the existence of a PE but had to comply with the existing judicial decisions.

3. Attribution of Profits to the PE:
The ITAT had reduced the profit attribution rate to 26%, a decision that was later affirmed by the High Court. Despite this, the respondents framed the withholding tax rate at 4%, which the petitioner argued was inconsistent with the established profit attribution rate.

4. Validity of the AO's Order Pegging the Withholding Tax Rate at 4%:
The petitioner contended that the AO's order was erroneous as it did not adhere to the profit attribution rate of 26% established by the ITAT and affirmed by the High Court. The AO's order was deemed unsustainable because it did not consider the established rate of profit attribution, leading to an inflated withholding tax rate.

5. Compliance with Previous Judicial Directions and Orders:
The Court noted that the AO had not followed the directions issued in the previous order dated 25 March 2022, which required the AO to consider the established profit attribution rate while determining the withholding tax rate. The Court found that the AO had failed to address this aspect adequately.

6. Impact of the Interim Order on the Final Judgment:
The interim order dated 28 July 2022 allowed the petitioner to receive remittances with a withholding tax rate of 1.5%. The Court held that the interim order necessitated a final finding on merits to avoid prejudice to the petitioner, who might otherwise be compelled to pay the differential tax rate of 2.5%.

Conclusion:
The Court allowed the writ petitions and quashed the impugned order dated 13 May 2022. It held that the withholding tax rate should not exceed 1.04%, based on the profit attribution rate of 26%. The decision for FYs 2022-23 and 2023-24 would not serve as a precedent for subsequent years. All rights and contentions of the parties were kept open for regular assessment proceedings.

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