Summary
A UAE company working on ONGC offshore contracts challenged a Section 197 certificate for FY 2019-20. The certificate required tax to be deducted at 4% on all receipts, including those for work done outside India. The Delhi High Court dismissed the writ petition, and the two Judges of the Supreme Court differed. Indira Banerjee, J. would have dismissed the appeal. Whether a permanent establishment exists is a factual question for each year that cannot be settled in a Section 197 enquiry. Having itself asked for a 4% certificate, the company was estopped from challenging it under Article 226. Maheshwari, J. would have allowed the appeal. Rule 28AA(2) factors had not been considered, the principle of consistency applied. The matter was referred to the Chief Justice for a larger Bench.
Issues
- Whether a certificate under Section 197 of the Income Tax Act requiring 4% deduction on all receipts, including offshore receipts, was liable to be quashed when nil-rate certificates had issued in earlier years for similar contracts.
- Whether the existence of a permanent establishment can be determined in an enquiry under Section 197, and what weight the assessee's own request for a 4% certificate carries.
- Whether Rule 28AA and the principle of consistency required a different certificate.
Provisions considered
- Section 197, Income Tax Act, 1961Banerjee, J.: the enquiry is limited, and whether a PE exists cannot be decided within its time-frame. Maheshwari, J.: the Assessing Officer must record satisfaction on existing and estimated liability under the prescribed procedure, distinct from assessment. (¶¶ 37, 41, 9, 11, 12)
- Rule 28AA(2), Income Tax Rules, 1962Maheshwari, J. found that the note-sheets did not show any consideration of estimated and assessed liability, existing liability or tax already deducted, so the satisfaction required by the Rule was absent. (¶¶ 10, 11, 13, 15)
- Section 195, Income Tax Act, 1961Following GE India Technology, both opinions accepted that tax is deductible only on the part of the payment chargeable to tax in India. (¶¶ 36, 7)
- Article 226, Constitution of IndiaBanerjee, J.: a certificate issued on the assessee's own request cannot be challenged in writ proceedings. Maheshwari, J.: the request letter cannot override the prescribed procedure. (¶¶ 43, 44, 15, 18)
Held
- Per Indira Banerjee, J.: whether the assessee had a PE in the year concerned, including whether project activity in India exceeded nine months, is a disputed factual question for each year. It cannot be decided in a Section 197 enquiry. Res judicata does not apply to income-tax proceedings, and Ishikawajima-Harima and Hyundai concerned assessments, not certificates. (¶¶ 37, 38, 39, 40, 41)
- Per Indira Banerjee, J.: the certificate matched the assessee's own request of 22.06.2019. That request, being without prejudice, creates no estoppel in assessment or appellate proceedings, but it bars a writ challenge to the certificate. TDS is adjustable and any excess is refundable with interest, so the appeal should be dismissed. (¶¶ 42, 43, 44, 45, 47, 48)
- Per J.K. Maheshwari, J.: a certificate under Section 197 rests on the existing and estimated liability under Rule 28AA(2), not on assessment-stage questions about a PE. The High Court wrongly distinguished the LEWPP and R-Series contracts when nil-rate certificates had issued for both in earlier years. (¶¶ 11, 12, 13, 14, 15)
- Per J.K. Maheshwari, J.: in the absence of any material change, the principle of consistency (Radhasoami Satsang, BSNL) required the same approach as in earlier years. The letter written under financial hardship could not cure non-compliance with the procedure, so the matter should be remitted for a fresh certificate, which would be provisional pending assessment. (¶¶ 16, 17, 18, 19, 20)
Result
Split verdict. Indira Banerjee, J. would have dismissed the appeal and J.K. Maheshwari, J. would have allowed it with a direction to reconsider the certificate application. The matter was directed to be placed before the Chief Justice of India for constitution of an appropriate Bench.