The Delhi High Court has held that while deciding an application under Section 197 of the Income Tax Act, the assessing officer needs to satisfy the requirements imposed by Rule 28AA of the Income Tax Rules, 1962. Since the AO has not satisfied the above-mentioned requirements, there is complete non-application of mind of AO, making the impugned order and the tax withholding certificate untenable.
The Court explained that the tax payable on the assessed or returned or estimated income for the previous years; existing tax liability under the Act and the Wealth Tax Act, 1957; and any advance tax payment, i.e., tax deducted at source and tax collected at source for the AY relevant to the previous year, needs to be considered for determining the application under Section 197 of the Income Tax Act.
The Division Bench comprising Justice V. Kameswar Rao and Justice Vinod Kumar therefore, quashed the order and the certificate due to the failure to comply with the statutory requirements of Rule 28AA, and remanded the matter back to the AO for a fresh consideration of the petitioner’s application. The AO was also directed to decide the application afresh, keeping in view the mandate of Rule 28AA.
The Bench observed that an AO, while deciding an application for a lower or nil withholding certificate under Section 197, is statutorily obligated to follow the decision-making process prescribed under Rule 28AA. Hence, a failure to consider the mandatory parameters laid down in Rule 28AA, such as the tax history of the taxpayer, amounts to non-application of mind and renders the resulting order invalid.
Briefly, the petitioner, a company incorporated in the United Kingdom engaged in providing international education, offers routine management and administrative support services to its Indian subsidiary, Nord Anglia Education India Pvt Ltd. (Nord India), on a cost-to-cost basis without any markup.
The petitioner filed an application under Section 197 read with Section 195(3) of the Income-tax Act, seeking a ‘Nil Withholding Certificate’ for payments received from Nord India, and contended that the services rendered are purely managerial and do not qualify as Fees for Technical Services (FTS) under Article 13 of the India-UK Double Taxation Avoidance Agreement (DTAA), as they do not “make available” any technical knowledge, skill, or know-how.
The Income Tax Appellate Tribunal (ITAT) had previously held in the petitioner’s own case for Assessment Years (AY) 2020-21 and 2021-22 that the consideration received for these services was not taxable as FTS under the DTAA. Despite these favourable orders, the respondent/Revenue rejected the petitioner’s application, issuing an order and a certificate, directing tax to be withheld at 15% to “protect the interest of revenue”.
Appearances:
Advocate Dr. Shashwat Bajpai, for the Petitioner/ Taxpayer
Advocates Shlok Chandra, Naincy Jain, Madhavi Shukla, and Udit Dad, for the Respondent/ Revenue
