2010 (4) TMI 223 - HC - Income Tax

Deduction of tax at source- Non-resident- The petitioner is a non-resident company incorporated under the laws of the United States of America. The petitioner operates in India with branches at New Delhi and Mumbai. The petitioner has filed returns in India from the assessment year 1993-94. On January 8 2010 the petitioner made an application under section 195(3) of the Income-tax Act 1961 for the assessment year 2011-12 to the Deputy Director of Income-tax International Taxation 4(1) seeking a nil withholding certificate for payments received for services rendered to clients/ customers group entities and for interest received on deposits made with banks. Show cause notice issued by rejecting its application for a nil withholding certificate. Held that- the Assessing officer had acknowledged the pendency of the mutual agreement procedure proceedings. The basis on which a certificate u/s 195(3) was declined was exfaice contrary to law and amounted to a patent disregard of the binding provisions of the memorandum of understanding between the Governments of India and the US. The order was not valid and liable to quash.

Summary

Issues Involved:
1. Compliance with section 195(3) of the Income-tax Act, 1961.
2. Consistency in issuing certificates under section 195(3) for previous assessment years.
3. Impact of the Mutual Agreement Procedure (MAP) and the Memorandum of Understanding (MOU) between India and the U.S.
4. Validity of the reasons for rejecting the nil withholding certificate.
5. Legal implications of pending draft assessment orders and MAP proceedings.
6. Judicial discretion in the exhaustion of alternative remedies.

Issue-wise Detailed Analysis:

1. Compliance with Section 195(3) of the Income-tax Act, 1961:
The petitioner, a non-resident company, sought a nil withholding certificate under section 195(3) for the assessment year 2011-12. The court noted that the petitioner has been regularly assessed to income-tax in India and has furnished returns for all relevant assessment years. The petitioner met all conditions under rule 29B, including not being in default of any tax, interest, penalty, or fine, and not being subjected to a penalty under section 271(1)(iii). The court found that the petitioner fulfilled all statutory conditions for the grant of a certificate under section 195(3).

2. Consistency in Issuing Certificates Under Section 195(3) for Previous Assessment Years:
The petitioner had consistently received certificates under section 195(3) for the last twelve assessment years. The court emphasized that there was no justification in law for the denial of a certificate for the assessment year 2011-12, especially when the petitioner had been compliant in previous years.

3. Impact of the Mutual Agreement Procedure (MAP) and the Memorandum of Understanding (MOU) Between India and the U.S.:
The court referred to the MOU dated September 25, 2002, between the Government of India and the U.S., which facilitates the suspension of tax collection during MAP proceedings. The petitioner had invoked MAP for the assessment year 2005-06 and furnished a bank guarantee of Rs. 15.67 crores. The court found that the Assessing Officer's order disregarded the binding provisions of the MOU and the legal implications of MAP proceedings.

4. Validity of the Reasons for Rejecting the Nil Withholding Certificate:
The impugned order cited two main reasons for rejecting the certificate: a draft assessment order for the assessment year 2006-07 with a demand of Rs. 44.98 crores, and an outstanding demand of Rs. 9.33 crores for the assessment year 2005-06 under MAP proceedings. The court found these reasons to be baseless, noting that a draft assessment order cannot form the basis of a demand, and the outstanding demand for 2005-06 was already under MAP with a bank guarantee in place.

5. Legal Implications of Pending Draft Assessment Orders and MAP Proceedings:
The court highlighted that reliance on a draft assessment order for the assessment year 2006-07 was inappropriate as it was still pending before the Dispute Resolution Panel. Similarly, the outstanding demand for the assessment year 2005-06 was under MAP, and the petitioner had complied with the requirements by providing a bank guarantee. The court found that the Assessing Officer failed to consider these legal implications.

6. Judicial Discretion in the Exhaustion of Alternative Remedies:
The court acknowledged that no statutory appeal was available against the impugned order. It exercised its judicial discretion, noting that the denial of the certificate was based on extraneous considerations and a complete non-application of mind to relevant legal provisions. The court decided to quash the impugned order and directed the Assessing Officer to pass a fresh order within one week, considering the serious ramifications for the petitioner's business operations.

Conclusion:
The court quashed and set aside the impugned order dated March 29, 2010, rejecting the petitioner's application for a nil withholding certificate under section 195(3). It directed the Assessing Officer to pass a fresh order in accordance with the law after providing an opportunity of being heard to the petitioner. The court emphasized that the denial of the certificate was contrary to law, disregarded the MOU between India and the U.S., and ignored settled issues from past MAP proceedings.