The Delhi High Court has clarified that where an assessee maintains a continuous, uncontested history of financial losses, and the tax department has historically granted lower withholding tax certificates based on those very facts, the competent authority cannot suddenly impose a higher rate. The Court held that the competent authority was not justified in departing from its own consistent practice of issuing TDS certificates at the rate of 1% to the petitioner, particularly when there was no significant difference in the facts of the year under consideration as compared to the earlier years.
The Court reasoned that where an assessee has been consistently loss-making, its returns have been accepted as such, and the department itself had been issuing certificates at a lower rate in prior years, there is no valid basis for the authority to suddenly take a detour and issue a certificate at a higher rate without any change in material circumstances.
The Division Bench comprising Justice Dinesh Mehta and Justice Rajneesh Kumar Gupta took note of the consistent loss-making track record of the petitioner and the fact that its returns had been accepted by the department without any adverse findings. The Court also acknowledged the capital and labour-intensive nature of the mineral oil extraction business, and observed that deduction of a substantial amount at source could lead to withholding of significant working capital, thereby prejudicing the petitioner’s financial operations.
Briefly, Schlumberger Asia Services Limited, a company engaged in providing services and facilities in connection with the extraction and production of mineral oils, entered into contracts with major players such as Reliance Industries Limited, Oil and Natural Gas Corporation Limited, and Vedanta Limited. The petitioner had been suffering consistent losses over the preceding 7–8 years, and its income tax returns reflecting those losses had been accepted as such by the Income Tax Department without dispute.
Given its loss-making position, the petitioner filed an application before the competent authority, the DDIT (International-2), Dehradun, seeking issuance of a ‘Nil’ rate Tax Deduction at Source (TDS) certificate under Section 395(1) of the Income Tax Act, 2025. The petitioner’s case was that since it had been running losses for several years and its returns had been accepted accordingly, no tax ought to be deducted at source from payments made to it by the awarders of contracts. However, the competent authority rejected the prayer for a Nil certificate and instead issued TDS certificates at the rate of 2.5% on the petitioner’s turnover of Rs. 36 crores.
