Tax Insights
from India Tax & Regulatory Services
www.pwc.in
Delhi HC quashes withholding tax certificate, issued without
assigning cogent reasons at a rate higher than earlier years
August 5, 2019
In brief
Recently, the Delhi High Court (HC)1 held that there should be a separate written communication to the taxpayer giving reasons for fixing the withholding tax rate under section 197(1) of the Income-tax Act, 1961 (the Act) even when the online portal does not allow it. Further, the withholding tax order, being quasi-judicial in nature, cannot be passed arbitrarily, and merely on basis of the instructions from superior authorities. Since the tax authorities have not recorded cogent reasons for arriving at the issued withholding tax rate, the HC quashed the lower withholding certificate and asked the authorities to reconsider the application.
In detail
Facts
The taxpayer, a non- resident company is engaged inter alia in the business of supply of goods from outside India.
The taxpayer had electronically filed an application under section 197 of the Act for the financial year (FY) 2019- 20, seeking NIL
withholding tax on income earned from offshore supply of goods to various customers. Alternatively, the taxpayer sought a
1 W.P.(C) 7744/2019 and CM APPL. 32145/2019
2 The Delhi HC, in the case of the taxpayer’s group companies, held that 2.6% of the revenue was attributable to the PE in India being taxable at 40%.
3 Reliance in this regard has been placed on McKinsey and Company Inc. v. Union of India (2010) 324 ITR 367 (Bombay HC) and Tata Teleservices (Maharashtra) Ltd v. Deputy Commissioner of Income-tax (TDS) (2018) 402 ITR 384 (Bombay HC).
lower withholding tax rate of 1.04%.2
The taxpayer had been regularly obtaining lower withholding certificates under section 197 of the Act, at the rate of 1.5%
from the tax authorities.
Without valid and cogent reasoning, the tax
authorities issued a lower withholding tax certificate at the rate of 5% to the taxpayer.
Issue before the High Court Whether the certificate issued by the tax authorities was rightly done without any valid and cogent reasons, and
deviating from the settled position in earlier years?
Taxpayer’s contentions
An order under section 197 of the Act is quasi-judicial in nature and must be supported by valid and cogent reasoning.3
A withholding tax rate of 5% meant that the attribution of the alleged permanent establishment (PE) was assumed to be higher than 2.6% of the total revenue, which was contrary to the order of the Income-tax Appellate Tribunal and the HC.
Tax Insights
2 pwc
There was no occasion to increase the withholding rate beyond 1.5% — the rate consistently4 adopted by the tax authorities while issuing the lower withholding certificate for earlier years.
The global profit margin of the holding company was 3.6%. Accordingly, a lower withholding certificate at the rate of 5% defeated the purpose of section 197 of the Act, thereby, adversely affecting the working capital.
High Court’s decision
On perusal of the
department’s file, the HC observed that the impugned certificate did not satisfy the requirements of law and was passed without proper application of mind at various levels.
The TO, who is supposed to exercise a quasi-judicial
4 Reliance was placed upon the decision in Radha Saomi Satsang v. CIT [1992]
193 ITR 321 (SC).
function, acted under the dictation of his superior (i.e.
the Commissioner).
There is both arbitrariness and non-application of mind at various levels, which vitiates the certificate.
Further, the decision was taken without valid basis and ignoring relevant material that was called for and available on record. The TO acted on dictation. This was not a case of a superior officer
“concurring” with the decision of the subordinate;
rather, it was a textbook example of a superior officer dictating to his subordinate what the decision should be.
It is a legally settled position5 that the orders passed by a statutory authority under the
“dictation” of a superior officer, or anyone else, are bad in law.
5 Anirudhsinhji Karsansinhji Jadeja v.
State of Gujarat [1995] AIR 2390 (SC)
The decision for issuing lower withholding certificate being quasi-judicial in nature must be supported by reasons and communicated to the taxpayer.
The HC quashed the certificate and directed the TO to consider the
application afresh, in accordance with the law.
Further, the decision must be separately communicated to the taxpayer.
The takeaways
This decision, although arising from a writ petition, may be seen as a timely relief for taxpayers, as it directs the TO to issue a lower withholding certificate, supported by cogent/ valid reasons.
Let’s talk
For a deeper discussion of how this issue might affect your business, please contact your local PwC advisor
Tax Insights
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