2010 (4) TMI 235 - HC - Income Tax

Deduction of tax- The application filed by the petitioner for a nil tax withholding certificate for assessment year 2010-11 was rejected on the ground that for assessment year 2006-07 the scheduled to the preparation of the consolidated accounts, indicating the financials of the petitioner were not made available and hence the claim of the petitioner that these receipts were not made available and hence the claim of the petitioner that these receipts were held to be taxable in India as fees for technical services under section 9(1)(vi) of the Act and taxable as fees for included services under article 12 of the Indo US Treaty, liable to be taxed at the rate of 15 percent. consequently it was directed that the taxes would be withheld at the rate of 15 percent. consequently it was directed that the taxes would be withheld at the rate of 15 percent. on the gross amount to be paid or payable to the petitioner for financial year 2009-10. Held that-Assessing Officer had furnished no basis whatsoever, for making a departure from the position adopted in the order passed by Director of Income Tax (International taxation) u/s 264, for assessment year 2008-09. therefore no valid basis for the assessing officer to determine that tax be withheld at the rate of 15 percent.

Issues Involved:
1. Classification of payments for borrowed services and firm function services.
2. Imposition of withholding tax on payments for firm function services.
3. Validity of the Assessing Officer's decision to withhold tax at 15%.
4. Applicability of previous rulings and consistency in tax treatment.
5. Jurisdiction and exercise of writ jurisdiction under Article 226.

Detailed Analysis:

Classification of Payments for Borrowed Services and Firm Function Services:
The petitioner, a non-resident company, provides two types of services to its Indian branch: borrowed services and firm function services. The Income-tax Appellate Tribunal determined that payments for borrowed services should be considered normal business income, not fees for included services, based on the memorandum of understanding under the Indo-US Tax Treaty. The firm function services, which involve administrative support, are charged globally through an allocation mechanism.

Imposition of Withholding Tax on Payments for Firm Function Services:
The petitioner applied for a nil tax withholding certificate under section 197 for the financial year 2009-10. However, the application was rejected, and the Assessing Officer directed a 15% withholding tax on the grounds that the receipts were taxable as fees for technical services under section 9(1)(vii) of the Act and as fees for included services under Article 12 of the Indo-US Treaty.

Validity of the Assessing Officer's Decision to Withhold Tax at 15%:
The Assessing Officer's decision to impose a 15% withholding tax was based on a draft assessment order for the assessment year 2006-07. The court found this decision to lack a logical or cogent basis, especially since previous orders for assessment years 2008-09 and 2009-10 had directed tax withholding at 1.5% and 1.3%, respectively. The court noted that the Assessing Officer failed to provide a valid reason for departing from the earlier rulings.

Applicability of Previous Rulings and Consistency in Tax Treatment:
The court emphasized the need for consistency in tax treatment. Previous orders by the Director of Income-tax (International Taxation) and the Assessing Officer had determined lower withholding rates based on the agreement between the petitioner and its Indian branches. The court found no valid basis for the Assessing Officer to deviate from these earlier rulings.

Jurisdiction and Exercise of Writ Jurisdiction under Article 226:
The court exercised its writ jurisdiction under Article 226 to correct the Assessing Officer's arbitrary decision. The court highlighted the importance of hierarchical discipline in fiscal legislation and the need for valid and cogent reasons for any departure from established rulings. The court set aside the impugned order and directed the issuance of a certificate under section 197(1) in accordance with the order for the assessment year 2008-09.

Conclusion:
The court set aside the impugned order of the Deputy Director of Income-tax (International Taxation)-4(1), Mumbai, and directed the issuance of a certificate under section 197(1) consistent with the previous ruling for the assessment year 2008-09. The rule was made absolute, with no order as to costs.

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