Facts- The petitioner entered into an Aircraft Specified Lease Agreement with Air India Limited for lease of one aircraft for a period of 12 years.
The case of the petitioner is that the petitioner made applications under Section 197 of the Act for ‘Nil‟ rate of withholding tax on the premise that under Articles 8 and 12 of the India Ireland Double Taxation Avoidance Agreement (‘Tax Treaty‟), they were liable to pay tax only in Ireland. These applications made by the petitioner for the FY 2016-17, 201718, 2018-19, 2019-20 and 2020-21 were allowed by the AO, thereby allowing the petitioner to receive considerations from AIL without any deduction of tax.
The petitioner moved an application on 02.03.2021 in Form 13 under Section 197 for the FY 202122, requesting for issuance of ‘Nil‟ withholding tax certificate in respect of the estimated consideration of Rs. 45,65,90,956/- receivable from AIL under the Agreement dated 21.10.2016 on the same basis as before. Respondent No. 1 issued the impugned order/ certificate on 07.09.2021 – prescribing 10% as the withholding tax rate which is not in line with the earlier certificate/ order issue in respect of the petitioner – as taken note of hereinabove.
Conclusion- In the interim, the petitioner will be entitled to avail of the “Nil” rate of withholding Tax, as has been the position in the past several years consistently. Since the aircraft in question is leased to AIL for a period of 12 years, in our view, the interest of Revenue is sufficiently protected in any eventuality of the petitioner found liable to payment of taxes, interest, or penalty under the Act.
FULL TEXT OF THE JUDGMENT/ORDER OF DELHI HIGH COURT
1. Exemption allowed, subject to all just exceptions.
2. The application stands disposed of.
P.(C) 12002/2021 and CM No. 37105/2021
3. Issue notice Mr. Agarwal appears and accepts notice. On service of advance notice, Mr. Agarwal has also filed his submissions.
4. With the consent of parties, we have proceeded to hear the present petition and dispose of same at this stage.
5. The petitioner has preferred the present petition to assail the order dated 07.09.2021 passed by respondent No. 1 under Section 197 of the Income Tax Act (‘the Act‟). The petitioner also seeks a direction to respondent to issue an order/ certificate under Section 197 of the Act at ‘Nil‟ rate.
6. The brief background facts are that the petitioner is a foreign company, tax resident of Ireland and is engaged in the business of aircraft leasing. The petitioner states that it has regularly filed returns of income in India since the Assessment Year 2019-20, and thereafter. On 21.10.2016, the petitioner entered into an Aircraft Specified Lease Agreement with Air India Limited (AIL) for lease of one aircraft (Airbus A320-200), referenced as MSN 7662, for a period of 12 years.
7. The case of the petitioner is that the petitioner made applications under Section 197 of the Act for ‘Nil‟ rate of withholding tax on the premise that under Articles 8 and 12 of the India Ireland Double Taxation Avoidance Agreement (‘Tax Treaty‟), they were liable to pay tax only in Ireland. These applications made by the petitioner for the Financial Years 2016-17, 201718, 2018-19, 2019-20 and 2020-21 were allowed by the Assessing Officer, thereby allowing the petitioner to receive considerations from AIL without any deduction of tax at source.
8. The petitioner moved an application on 02.03.2021 before respondent No. 1 in Form 13 under Section 197 of the Act for the Financial Year 202122, requesting for issuance of ‘Nil‟ withholding tax certificate/ order in respect of the estimated consideration of Rs. 45,65,90,956/- receivable from AIL under the Agreement dated 21.10.2016 on the same basis as before. Respondent No. 1 issued the impugned order/ certificate on 07.09.2021 – prescribing 10% as the withholding tax rate which is not in line with the earlier certificate/ order issue in respect of the petitioner – as taken note of hereinabove. Aggrieved by the same, this petition has been preferred.
9. Mr. Jolly – learned counsel for the petitioner, submits that the impugned order passed by the Assessing Officer cannot be sustained for the reason that the same proceeds on extraneous considerations, and the reasons for passing the same – as provided by the respondent, are not relevant and germane. The reasons on which the impugned order is premised and which have been provided to the petitioner, read as follows:-
“Order u/s 197 of the Income Tax Act, 1961
M/s Celestial Aviation Trading 64 Limited (‘CAT 64‟) is a tax resident of Ireland. The assessee is engaged in the business of aircraft leasing. The applicant has entered into Aircraft Specified Lease Agreements dated 21.10.2016 regarding lease of aircraft with Air India Limited (‘AIL‟), a company incorporated under the laws of Indian having its registered office in New Delhi.
The assessee has filed an application requesting for issue of NIL withholding tax certificate u/s 197 of the I.T. Act, 1961 in respect of payment receivable from Air India Limited on account of payments amounting to Rs. 45,65,90,956/- for Aircraft Specified Lease Agreements.
It is to be mentioned that cases u/s 147 of the I.T. Act, 1961 opened in the case of group companies of Celestial Aviation Trading 64 Limited for the A.Y. – 2012-13 and 2013-14 and notice u/s 148 of the I.T. Act, 1961 were issued in both the years for the reason to believe that assessee had made payments and not deducted the TDS on it. Therefore, it is avoidance of tax on the part of assessee. The reasons recorded in these cases are as follows;
“……An information from ITO, TDS, Ward 2(1)(1), International Taxation-2, New Delhi has been received vide letter F. No. ITO/Intl. Tax (2)(I)(I)2019-20/216 dated 12.03.2020. As per the information, a survey u/s 133A (2A) of the Income Tax Act, 1961 was carried out in the business premises of M/s Interglobe Aviation Ltd. on 20.03.2018. During the survey, it was found that M/s Interglobe Aviation Ltd. has made certain payments to Irish companies in the form of lease rent and has claimed lease rent as exempt as per Ind-Ireland DTAA and also section 10(15A) of the Income tax Act. M/s Celestial Aviation Trading 9 Limited, has received payment in the form of Operating Lease rent of Rs. 52,67,46,907/- and Supplementary Lease rent of Rs. 1,28,26,220/- i.e. total lease rent of Rs. 53,95, 73, 1271- on which no TDS has been deducted. It is also observed that the assessee has not filed its return of income for the F. Y. – 2012-13 relevant to A. Y. – 2013-14″
2. The following cases are reopened u/s 147 of I. T. Act, 1961 in Celestial Aviation Trading 9 Limited:
|S. No.||A.Y.||Return Income||Quantum of Amount (In Rs.)||Issue Involved||Outcome|
|1||2012-13||Not filed||129,69,27,387/-||TDS not deducted while making lease rent payment||Notice u/s 148
has been issued.
|2||2013-14||Not filed||53,95,73,127/-||TDS not deducted while making
|Notice u/s 148
has been issued.
Similar cases are also reopened in different years of other companies of the group on similar issue. Similar transaction arises in the case of the applicant for the issue of lower deduction certificate under section 197 of the I.T. Act 1961 @ NIL on account of payment receivable from Air India Limited on account of payments amounting to Rs. 45,65,90,956/- USD 6,170,148 @ INR 74/ USD during the F.Y. – 2021-22 on account of lease rental as per the Aircraft Specified Lease Agreements. As the reassessment proceedings are pending in group companies involved in the similar kind transactions with similar agreements, the applicant may be authorized to receive the lower deduction certificate u/s 197 of the I.T. Act 1961 @ 10% (excluding education cess, surcharge etc) for the F.Y. 2021-22.
The above proceedings and order are only for purpose of issuance of TDS certificate u/s. 197 of the IT Act, 1961. Actual taxability and rate thereof shall be determined during the regular assessment proceedings under the IT Act, 1961.
Accordingly, the assessee is hereby granted TDS @ 10% upto an amount of Rs. 45,65,90,956/- (excluding Education Cess/Surcharge as applicable). This order has been passed after seeking prior approval of the Ld. Additional Commissioner of Income Tax, Range 1(2), New Delhi and Commissioner of Income Tax, International Taxation-1, New Delhi vide order sheet dated 13.07.2021 and 02.09.2021.
WARD INT TAX 1(2)(1)”
10. Mr. Jolly submits that Section 197 itself is made subject to Rule 28AA of the Income Tax Rules. He has referred to the said Rule, and the relevant part thereof reads as follows:
“28AA . (1) Where the Assessing Officer, on an application made by a person under sub-rule (1) of rule 28 is satisfied that existing and estimated tax liability of a person justifies the deduction of tax at lower rate or no deduction of tax, as the case may be, the Assessing Officer shall issue a certificate in accordance with the provisions of sub-section (1) of section 197 for deduction of tax at such lower rate or no deduction of tax.
(2) The existing and estimated liability referred to in sub-rule (1) shall be determined by the Assessing Officer after taking into consideration the following:-
(i) tax payable on estimated income of the previous year relevant to the assessment year;
(ii) tax payable on the assessed or returned2 [ or estimated income, as the case may be, of last four] previous years;
(iii) existing liability under the Income-tax Act, 1961 and Wealth-tax Act, 1957;
(iv) advance tax payment3 [tax deducted at source and tax collected at source for the assessment year relevant to the previous year till the date of making application under sub-rule (1) of rule 28];
(vi) 5[***] ”
11. Mr. Jolly submits that a reading of the reasons disclosed by the respondents shows that the considerations which should have been taken into account have not even crossed the mind of the Assessing Officer. She does not say as to what is the tax payable on estimated income of the previous year relevant to the Assessment Year. The Assessing Officer has also not disclosed as to what – according to her, is the tax payable on the assessed, or returned, or estimated income, as the case may be, of last four previous years. There is no reference to any existing liability under the Income Tax Act, or the Wealth Tax Act and there is no reference to any advance tax payment.
12. Jolly submits that a perusal of the reasons shows that only because another so-called Group Company, namely, Celestial Aviation Trading 9 Ltd. (‘CAT-9’) was found to have leased out an aircraft to another assessee, namely, Interglobe Aviation Limitation (‘Interglobe’) and upon a search conducted on Interglobe, it was allegedly found that there was evasion of tax, the ‘Nil’ rate of tax deduction certificate was denied to the petitioner.
13. Jolly submits that there is no concept of group liability under the Income Tax Act. The lease entered into between the petitioner and Air India Limited is a separate and independent transaction with which CAT-9 has no concern, and similarly, the petitioner has no concern with the transaction between CAT-9 and Interglobe.
14. Jolly submits that the petitioner undertakes to file his return for the Assessment Year in question and also to pay the taxes, and other liabilities towards interest, or penalty, if any, under the Act in accordance with law, as and when determined.
15. On the other hand, Mr. Agarwal has sought to urge that reliance placed by Mr. Jolly on the aforesaid clauses of the Ireland Double Taxation Avoidance Agreement is misplaced. He submits that there are two kinds of transactions. The first is a finance transaction, which is in the nature of hire purchase. In respect of such transactions, the interest element – which the foreign company derives, is taxable in India. The other kind of transactions is operating lease which are pure and simple hire agreements. Whereas in the first category, the asset – on the completion of the hire purchase tenure, vests with the hiree/ lessee; in the second kind of transaction, the interest in the asset remains with the hirer/ lessor.
16. Agarwal further submits that the petitioner has withheld the relevant information from the Assessing Officer, and it is on that account, that the ‘Nil’ rate certificates were issued in the earlier years.
17. Having heard learned counsels and perused the impugned order, we are of the view that the impugned order cannot be sustained. We find force in the submission of Mr. Jolly that the aspects – which the Assessing Officer is obliged to take into consideration, while considering an application under Section 197 of the Act, have not at all been adverted to. The reasons proceed only on the basis of the liability, if any, which may, or may not, be fastened upon another group company, i.e. CAT-9. That, by itself, cannot be a justification for denying the ‘Nil’ rate certificates to the petitioner. The reasons now brought out by Mr. Agarwal do not form part of the reasons contained in the impugned order and the respondents are precluded from citing those as reasons to justify the impugned order issued to the petitioner.
18. We, accordingly, quash and set aside the impugned order dated 07.09.2021 and remand the matter back to the Assessing Officer, who may pass a fresh order within four weeks from today. The petitioner is directed to provide whatever relevant information is called for by the Assessing Officer without any delay, so that the order is passed within the time frame fixed by us.
19. In the interim, the petitioner will be entitled to avail of the “Nil” rate of withholding Tax, as has been the position in the past several years consistently. Since the aircraft in question is leased to AIL for a period of 12 years, in our view, the interest of Revenue is sufficiently protected in any eventuality of the petitioner found liable to payment of taxes, interest, or penalty under the Act.
20. The petition stands disposed of in the aforesaid terms.