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2025 (4) TMI 89 - HC - Income TaxWithholding tax u/s 195 - petitioner s income from operating aircrafts in international traffic - petitioner claims that it is a tax resident of Germany and its income is not chargeable to tax in India in terms of Article 8 of the India-Germany DTAA - rejection of the petitioner s application for a nil withholding tax certificate u/s 195 (3) HED THAT - Undisputedly the petitioner has been granted certificate u/s 195 (3)/197 of the Act for receiving the payment for services at nil withholding tax for more than a decade. It is also the petitioner s case that the nature of its services or the income received has undergone no change and it continues to render the same services which were rendered in the prior years. Thus the impugned order passed by the AO rejecting the petitioner s application for certificate under Section 195 (3) of the Act cannot be sustained. There is no ambiguity in the petitioner s explanation as to the nature of the services rendered by it and the AO has also not controverted the petitioner s assertion that its income for the services as described by the petitioner is not be chargeable to tax in India by virtue of Article 8 of the DTAA. AO had also granted the petitioner an opportunity to file an application u/s 197 for seeking a certificate for nil/reduced withholding tax. In view of the liberty granted the petitioner had filed an application dated 20.04.2024 for issuance of the certificate at nil rate of withholding tax u/s 197 (1) of the Act. This application was also rejected on 17.05.2024. The AO has not indicated any reasons which persuaded the AO to permit the payments from the specified agents at a lower rate of 0.10 percent withholding tax as against nil rate claimed by the petitioner. It is contended that the receipts at the reduced rate was allowed to the petitioner as against a certificate for nil withholding tax for the protection of the Revenue. Where the petitioner has been granted certificate at nil withholding tax for prior assessment years and there is no issue to the chargeability of the petitioner s income to tax under the Act the impugned certificate requiring withholding tax at reduced rate instead of nil rate cannot be sustained. Although this court was inclined to remand the matter to the AO to consider afresh however the said exercise may not be feasible considering that FY 2024-25 would expire in the next five days.
ISSUES PRESENTED and CONSIDERED
The core legal questions considered in this judgment include: 1. Whether the petitioner's income from operating aircrafts in international traffic is chargeable to tax in India under the India-Germany Double Taxation Avoidance Agreement (DTAA), specifically Article 8. 2. Whether the rejection of the petitioner's application for a nil withholding tax certificate under Section 195 (3) of the Income Tax Act, 1961, was justified. 3. Whether the issuance of a certificate for withholding tax at a reduced rate of 0.10 percent under Section 197 of the Act was appropriate. ISSUE-WISE DETAILED ANALYSIS 1. Chargeability of Income under the DTAA Relevant legal framework and precedents: The petitioner claimed that its income from international cargo handling and transportation of cargo through aircrafts is not chargeable to tax in India under Article 8 of the India-Germany DTAA. Article 8 generally exempts income derived from the operation of aircraft in international traffic from being taxed in the other contracting state. Court's interpretation and reasoning: The Court noted that the petitioner had consistently been issued certificates of nil withholding tax for over a decade, except for FY 2019-20, which was later rectified. The nature of the petitioner's services had not changed, and there was no dispute regarding the applicability of Article 8 of the DTAA to the petitioner's income. Application of law to facts: The Court found no ambiguity in the petitioner's explanation regarding the nature of its services and agreed that the income described by the petitioner was not chargeable to tax in India under the DTAA. Conclusions: The Court concluded that the petitioner's income from operating aircrafts in international traffic is not taxable in India under Article 8 of the DTAA. 2. Rejection of Application under Section 195 (3) Relevant legal framework and precedents: Section 195 (3) of the Income Tax Act allows for the issuance of a nil withholding tax certificate if the income is not chargeable to tax in India. Rule 29B of the Income Tax Rules outlines the conditions and documentation required for such applications. Court's interpretation and reasoning: The Court noted that the rejection was based on the petitioner not providing sufficient material to qualify for a deduction under Section 195 (3) and Rule 29B. However, the Court found that the petitioner had provided necessary information and had been compliant in previous years. Key evidence and findings: The petitioner had submitted an indemnity bond and responded to all queries raised by the Assessing Officer (AO). The petitioner had also been regularly filing returns and had been issued nil withholding tax certificates in previous years. Application of law to facts: The Court found that the AO's rejection was not justified, as the petitioner had consistently been granted nil withholding tax certificates in the past, and there was no change in the nature of its income or services. Conclusions: The Court concluded that the rejection of the application under Section 195 (3) was not sustainable. 3. Issuance of Certificate under Section 197 Relevant legal framework and precedents: Section 197 of the Income Tax Act provides for the issuance of certificates for nil or reduced rate of withholding tax. Court's interpretation and reasoning: The Court observed that the AO did not provide reasons for issuing a certificate at a reduced rate of 0.10 percent. The Court noted that the petitioner had previously been issued certificates for nil withholding tax and that there was no change in circumstances. Application of law to facts: Given the lack of justification for the reduced rate and the impending end of the financial year, the Court found it appropriate to direct the issuance of a certificate for nil withholding tax. Conclusions: The Court concluded that the issuance of the certificate at a reduced rate was not justified and directed the issuance of a certificate for nil withholding tax. SIGNIFICANT HOLDINGS The Court held that the petitioner's income from operating aircrafts in international traffic is not chargeable to tax in India under Article 8 of the India-Germany DTAA. The Court found that the rejection of the application under Section 195 (3) was not sustainable due to the lack of justification and the consistent issuance of nil withholding tax certificates in previous years. The Court also determined that the issuance of a certificate at a reduced rate under Section 197 was inappropriate and directed the issuance of a certificate for nil withholding tax. Preserve verbatim quotes of crucial legal reasoning: "In view of the above, we consider it apposite to allow the present petition and direct the issuance of the certificate for nil withholding tax under Section 197 of the Act." Core principles established: The consistent application of the DTAA and the Income Tax Act provisions, alongside the historical issuance of nil withholding tax certificates, supports the non-taxability of the petitioner's income in India. Final determinations on each issue: The petition was allowed, directing the issuance of a certificate for nil withholding tax, while leaving open the possibility for the AO to examine the chargeability of the petitioner's income in future assessment proceedings.
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