2021 (3) TMI 331 - HC - Income Tax

Rate of tax deduction certificate under Section 197 - Tax deduction certificates qua offshore supply contracts were issued at the rate of 1.72% - For offshore supplies, the rate of withholding tax has been enhanced to 10% - in the earlier years, the assessee was contesting the stand of the revenue that it had the Permanent Establishment (in short PE ) in India - HELD THAT - We direct that, for the moment, the concerned officer will issue a Tax deductor certificate under Section 197 of the Act for the FY 2020-2021 (Assessment Year 2021-2022) in line with the rate applied for FY 2018-2019 and FY 2019-2020. Assessee will file an affidavit within 10 days from today which will inter alia indicate that in case it were to, ultimately, fail in the captioned writ petition, it will deposit the deficit amount within four weeks of such a direction being issued by the Court. List the captioned writ petition on 16.04.2021.

Summary

Issues:
Rate of tax deduction certificate under Section 197 of the Income Tax Act, 1961 for offshore supply contracts.

Analysis:
In the case at hand, the primary issue revolves around determining the appropriate rate at which the tax deduction certificate under Section 197 of the Income Tax Act, 1961 should be issued for offshore supply contracts. The petitioner, represented by Mr. Percy Pardiwalla, Senior Advocate, argued that based on previous Tribunal orders for assessment years 2015-2018, the tax deduction certificates were issued at a rate of 1.72% for offshore supplies. However, the impugned order increased the withholding tax rate to 10%, which the petitioner contested. Mr. Pardiwalla highlighted that the assessee previously disputed having a Permanent Establishment (PE) in India but has now established a branch office in India. He argued that even if the revenue claims a PE in India, the withholding tax rate for offshore supplies should not exceed 1.72%. Consequently, the petitioner sought interim orders for the tax deduction certificate for the Financial Year 2020-2021 to align with previous certificates issued for FY 2018-2019 and FY 2019-2020. Additionally, the petitioner agreed to deposit any deficit amount if the Court ruled against them.

Upon hearing both parties, the Court directed that the concerned officer should issue a tax deduction certificate under Section 197 of the Act for the FY 2020-2021 in line with the rates applied for FY 2018-2019 and FY 2019-2020. The Court also mandated the assessee to file an affidavit within 10 days, confirming their willingness to deposit the deficit amount within four weeks if the writ petition was unsuccessful. The matters were listed for further hearing on 16.04.2021. This decision was extended to other related writ petitions as well, ensuring consistency in the application of rates for tax deduction certificates. The Court's order aimed to maintain fairness and adherence to established rates while addressing the changing circumstances and arguments presented by both parties regarding the withholding tax rate for offshore supplies.