Facts of the Case

The Petitioner, Bently Nevada LLC, a US-based company engaged in offshore supply of goods to Indian customers, challenged a lower withholding certificate issued under Section 197 of the Income Tax Act, 1961. The certificate directed deduction of TDS at 5% on payments made by Indian entities.

Historically, the Petitioner had been granted lower withholding certificates at around 1.5%, and judicial precedents (ITAT and Delhi High Court) had established that only 2.6% of revenue was attributable to Permanent Establishment (PE) in India, resulting in an effective tax rate of approximately 1.04%.

For Financial Year 2019–20, the Petitioner applied for NIL or alternatively 1.04% withholding. However, the Assessing Officer (AO), under directions from superior अधिकारियों, issued a certificate imposing 5% TDS without providing reasons.

Issues Involved

  1. Whether an order under Section 197 of the Income Tax Act must be reasoned and based on objective criteria.
  2. Whether the Assessing Officer can act under the dictation of superior authorities while exercising quasi-judicial powers.
  3. Whether arbitrary increase in TDS rate without considering past assessments and judicial precedents is valid.
  4. Applicability of Rule 28AA in determining withholding tax liability.

Petitioner’s Arguments

  • The impugned TDS certificate @5% was arbitrary and lacked reasoning, violating principles of quasi-judicial decision-making.
  • Previous consistent rate (1.5%) and judicial findings fixing effective tax liability (~1.04%) were ignored.
  • No change in facts or law justified deviation from earlier determinations.
  • The order was passed mechanically under dictation of higher अधिकारियों, rendering it invalid in law.
  • Rule 28AA factors (existing and estimated liability) were not considered.
  • The higher withholding severely impacted working capital and business operations.

Respondent’s Arguments

  • The Department contended that existence of a Permanent Establishment (PE) in India justified withholding.
  • Non-submission of accounts by the Petitioner was cited as a reason for higher TDS.
  • Internal noting suggested administrative decision-making, though no formal reasoned order was communicated.

Court’s Findings / Order

The Delhi High Court held:

  • Order under Section 197 is quasi-judicial and must be supported by cogent reasons.
  • The AO acted under dictation of superior authority, which is impermissible in law.
  • The decision-making process showed clear arbitrariness and non-application of mind.
  • Rule 28AA was not followed, and relevant factors were ignored.
  • No valid justification existed for increasing TDS from 1.5% to 5%.

Important Clarification

  • Orders under Section 197 must be reasoned, transparent, and based on objective material.
  • Administrative hierarchy cannot override statutory discretion of the Assessing Officer.
  • Any decision taken under external dictation is void.
  • Communication of reasons to the taxpayer is mandatory, not optional.

Sections & Rules Involved

  • Section 197, Income Tax Act, 1961 (Lower/Nil TDS Certificate)
  • Section 143(3), 147, 144C (Assessment provisions)
  • Section 44BB (Deemed profit for non-residents)
  • Rule 28AA, Income Tax Rules, 1962 (Procedure for lower TDS certificate)

Link to download the order -

https://delhihighcourt.nic.in/app/case_number_pdf/2019:DHC:3668-DB/SMD29072019CW77442019.pdf

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