2019 (7) TMI 1503 - HC - Income Tax

Lower withholding certificate u/s 197 - existing and estimated liability - certificate for TDS for the immediate earlier AY @ 1.5% where as in current year it was directed TDS @ 5% - HELD THAT - Two factors require to be noted here. One that without any change in the circumstances, between 24th May 2019 when he first saw the file and 28th May 2019 when he next saw it, the CIT reviewed his earlier decision instructing his subordinate to put up the file again proposing a 2% TDS. Secondly, his comments were cryptic. That there was a PE of the Petitioner in India was not a new development. The second, that accounts have not been given, he failed to acknowledge that till that date accounts were not even called for from the Petitioner. Yet the decision was given Issue at 5% . The arbitrary nature of such decision is thus self-evident. In the present case the impugned withholding certificate which directs TDS to be deducted at 5% on the payments made by the Indian entities to the Petitioner is unsustainable in law, inasmuch as it is not based on valid reasons and is contrary to the legal requirement spelt out in Section 197(1) of the Act read with Rule 28AA of the Rules. The impugned certificate is hereby quashed. The Court directs Respondent No.1 to once again consider the application made by the Petitioner on 30th April 2019 for issuance of a lower withholding certificate under Section 197(1) afresh in accordance with law. - Till such time the fresh decision is communicated to the Petitioner, the decision in respect of TDS for the immediate earlier AY @ 1.5% will continue to apply. Requirement of reasoned order u/s 197 - application made for @ nil rate of TDS or alternative @ 1.04% - AO posted certificate @5% - no reasons communicated to assessee - Whether posting rate of TDS on Traces website is sufficient - HELD THAT - Even if one were to accept the explanation offered by Mr. Bhatia that on the online portal only a certificate is posted and not the reasons for the decision, then surely there should be a separate written order communicated to the Petitioner giving the reasons for fixing the TDS rate under Section 197(1) since this is mandated by law. To reiterate, that decision which is quasi-judicial in nature, has to be taken by the AO u/s 197(1) on objective criteria and be based on relevant material provided by the applicant and available with the Department. It must be supported by reasons available on the file which conform to the requirement of Section 197 of the Act read with Rule 28 AA of the Rules. Those reasons must be communicated to the applicant.

Issues Involved:
1. Validity of the lower withholding certificate issued under Section 197 of the Income Tax Act, 1961.
2. Justification for the withholding tax rate of 5%.
3. Consideration of past assessments and judicial decisions.
4. Adherence to procedural requirements under Rule 28AA of the Income Tax Rules, 1962.
5. Alleged arbitrariness and non-application of mind by the Income Tax authorities.

Detailed Analysis:

1. Validity of the Lower Withholding Certificate:
The petitioner challenged the lower withholding certificate issued by the Income Tax Officer under Section 197 of the Income Tax Act, 1961, which directed a tax deduction at source (TDS) rate of 5% from payments made to the petitioner by Indian customers. The petitioner is a US-based company engaged in the supply of goods from outside India and had previously obtained lower withholding certificates at a rate of 1.5%.

2. Justification for the Withholding Tax Rate of 5%:
The petitioner argued that no reasons were provided for arriving at the 5% withholding rate, asserting that an order under Section 197 is quasi-judicial and must be supported by valid and cogent reasoning. The court noted that the file contained only 8 pages of notings, with the initial recommendation being for a 1.5% TDS rate, which was later increased to 2% and then to 5% by the CIT without any valid reasons. The court found this arbitrary and indicative of non-application of mind, as the reasons given were inadequate and the decision appeared to be taken under dictation from a superior officer.

3. Consideration of Past Assessments and Judicial Decisions:
The petitioner highlighted that past assessments had consistently attributed a profit percentage of 10% to the petitioner's PE in India, resulting in an effective tax rate of 1.04%. The ITAT and the High Court had upheld this attribution rate. The petitioner argued that the Department's decision to increase the withholding rate to 5% was contrary to these judicial decisions and past practices. The court noted that the Department failed to consider these past assessments and judicial decisions, which should have been taken into account.

4. Adherence to Procedural Requirements under Rule 28AA:
The court emphasized that Rule 28AA of the Income Tax Rules prescribes the procedure for issuing a certificate under Section 197, which includes considering the existing and estimated tax liability. The court found that the Department did not follow this procedure, as there was no reference to Rule 28AA in the file, and the decision to issue the 5% TDS certificate was not based on the required criteria.

5. Alleged Arbitrariness and Non-Application of Mind:
The court found that the decision to issue the TDS certificate at 5% was arbitrary and lacked proper reasoning. The initial recommendation of 1.5% was changed to 2% and then to 5% without any valid reasons, and the decision was taken under dictation from a superior officer, which is against the principles of administrative law. The court cited the Supreme Court's decision in Anirudhsinhji Karsansinhji Jadeja v. State of Gujarat, which held that decisions taken under external dictation are bad in law.

Conclusion:
The court quashed the impugned withholding certificate and directed the Income Tax Officer to reconsider the petitioner's application for a lower withholding certificate afresh, in accordance with the law and the procedural requirements of Rule 28AA. The court also directed that the decision should be communicated to the petitioner with proper reasoning. Until a fresh decision is made, the TDS rate of 1.5% from the immediate previous assessment year will continue to apply.

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