2020 (1) TMI 1154 - HC - Income Tax

Certificates u/s 197 at the lower rate of 1.5% - Revenue prescribing withholding tax at the rate of 10 % in respect of the Petitioner s contract with THDC India Limited - Petitioner was issued withholding tax certificate at rate of 1.5 % of payments made by THDC India Limited in pursuance of the contract which continues to remain in force and is operational in the current year - HELD THAT - The notification dated 31.12.2018 issued by the Directorate of Income Tax (Systems) of the CBDT by resort to Rule 28 (2) of the Income Tax Rules, 1962 cannot enlarge the scope of the Respondents to consider the assessed, returned or estimated income for a period in excess of the last four previous years. Rule 28 (2) is merely an empowering rule, which empowers the named authorities looking after the systems to lay down procedure, format and standards for insuring secured capture and transmission of data, and uploading of documents and for evolving and implementing appropriate security, archival and retrieval policies in relation to furnishing of form No. 13. Respondents have not taken into consideration the tax already paid by the Petitioner in the previous years and the computation tendered in Court proceeds on the assumption that no payment has been made by the Petitioner. On that premise, tax as well as interest under Section 234B and 234C have been added, which cannot be the case. Following the earlier orders of this court in Bently Nevada LLC v. Income Tax Officer, Ward-1(1)(2), International Taxation Anr. 2019 (7) TMI 1503 - DELHI HIGH COURT and Lufthansa Cargo AG V. Deputy Commissioner Of Income Tax And Anr. 2019 (11) TMI 759 - DELHI HIGH COURT we quash the impugned order dated 05.07.2019 issued by the Respondents prescribing withholding tax at the rate of 10 % in respect of the Petitioner s contract with THDC India Limited. Also direct the Respondents to consider the matter afresh and issue a fresh withholding tax certificates under Section 197 of the Act after taking into account the aspects taken note of hereinabove. Till then, the Petitioner shall continue to remain bound by the withholding tax certificate issued in respect of the immediately preceding year i.e. at the rate of 1.5% qua the payments received by it from THDC India Limited.

Summary

Issues:
Challenge to order for tax withholding at 10% on payments made to Petitioner by THDC India Limited; Request for nil rate or lower rate withholding tax certificates under Section 197 of the Income Tax Act; Justification for withholding tax rate by Revenue; Compliance with rules for determining tax liability; Consideration of tax already paid in previous years.

Analysis:
The Petitioner challenged the order directing tax withholding at 10% on payments from THDC India Limited and sought nil or lower rate withholding tax certificates under Section 197. The Revenue justified the 10% rate based on a survey and potential tax liability due to income derived from a Permanent Establishment in India. However, the counter affidavit lacked these justifications. The Respondents attributed 35% of profit to business through the Petitioner's PE in India, but the Petitioner argued against this attribution.

The Petitioner's counsel argued that even if the Respondents' contentions were accepted, the 10% withholding rate was unjustified. The total revenue for the relevant years did not support this rate, and the Respondents failed to consider the nature of the THDC contract as a supply contract. The Respondents also miscalculated the tax liability by not accounting for payments made in previous years.

The Court noted that the Revenue's justification for 10% withholding tax based on assumed tax and interest liability was impermissible under Rule 28AA. The notification dated 31.12.2018 could not extend the period for considering assessed or estimated income beyond the last four years. The Court also highlighted the failure to consider tax payments made in previous years in the computation.

Citing previous judgments, the Court quashed the order for 10% withholding tax and directed the Respondents to reconsider, taking into account the issues raised. The Petitioner would continue with the 1.5% withholding rate until a fresh certificate was issued. The Respondents were instructed to ensure compliance within a week.

In conclusion, the writ petition was disposed of with the above directions, emphasizing adherence to the Court's order and compliance with the specified withholding tax rates.