Facts of the Case

  • The petitioner, a UK-based airline company, is a tax resident of the United Kingdom and operates international air traffic.
  • It claimed that its income is not taxable in India under Article 8 of the India–UK DTAA.
  • Historically, NIL TDS certificates under Section 197 were granted for several assessment years.
  • For later years, nominal TDS rates (0.01%) were applied due to technical/system limitations.
  • In the relevant year (AY 2022–23), the department issued a certificate mandating 1% TDS along with a speaking order.
  • The petitioner challenged the increase and sought issuance of a NIL withholding certificate.

Issues Involved

  1. Whether the Assessing Officer complied with Rule 28AA while determining TDS under Section 197.
  2. Whether the speaking order justifying 1% TDS was legally valid.
  3. Whether income of the petitioner was taxable in India despite DTAA protection.
  4. Whether writ petition is maintainable despite alternate remedy under Section 264.

Petitioner’s Arguments

  • Income from international air operations is not taxable in India under Article 8 of DTAA.
  • The Assessing Officer ignored mandatory factors under Rule 28AA.
  • Past assessments consistently accepted NIL taxable income.
  • The speaking order was arbitrary and lacked proper reasoning.
  • RBI restrictions prevented the petitioner from carrying on other business activities in India.

Respondent’s Arguments

  • The petitioner had an alternative remedy under Section 264 of the Act.
  • The Assessing Officer considered that the petitioner may have other sources of income.
  • TDS at 1% was necessary to safeguard revenue interests.
  • Interest on income tax refunds could be taxable as “income from other sources.”

Court’s Findings / Judgment

  • The Court held that Rule 28AA lays down mandatory considerations for determining TDS rates.
  • The impugned speaking order failed to demonstrate compliance with Rule 28AA.
  • Mere assumption of possible additional income is not sufficient justification.
  • The Court relied on earlier judgments including:
    • Manpowergroup Services India Pvt. Ltd. vs. CIT
    • Lufthansa Cargo AG vs. DCIT
  • The objection regarding alternate remedy was rejected.

Final Order

  • The impugned speaking order and TDS certificate dated 02.06.2021 were quashed.
  • The department was directed to issue a fresh order in accordance with law.
  • Interim relief: TDS to continue at earlier rate of 0.01% until fresh certificate is issued.

Important Clarifications

  • Compliance with Rule 28AA is mandatory, not discretionary.
  • Decision-making process must reflect application of mind to prescribed factors.
  • Section 197 certificates cannot be issued arbitrarily to “protect revenue.”
  • Writ jurisdiction is maintainable where statutory procedure is violated.

Sections Involved

  • Section 197, Income Tax Act, 1961
  • Section 143(3), Income Tax Act, 1961
  • Section 264, Income Tax Act, 1961
  • Rule 28AA, Income Tax Rules, 1962
  • Article 8, India–UK Double Taxation Avoidance Agreement (DTAA)

Link to download the order -https://delhihighcourt.nic.in/app/case_number_pdf/2021:DHC:2241-DB/NAC29072021CW59782021_230407.pdf

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