High Court Directs Withholding Tax Rate for WTS Energy DMCC at 4%

Case Name:

WTS Energy DMCC vs. Deputy Commissioner of Income Tax, Circle 3(1)(1) & Anr. (High Court of Delhi)

W.P.(C) 14766/2022

Key Takeaways:

1. The petitioner sought quashing of the Impugned Order and Impugned Certificate issued by the respondents, directing the deduction of tax at the rate of 10% on payments to be made to the petitioner.

2. The Court directed the respondents to issue a certificate under Section 197 (of Income Tax Act, 1961), pegging the withholding tax rate at 4% for the financial year 2022-2023.

3. The respondents were instructed to issue the certificate expeditiously, not later than two weeks from the date of the order.

4. The dispute arose regarding the treatment of the subject income earned by the petitioner as Fees for Technical Services (FTS) or business income, as contended by the respondents/revenue.

5. The Double Tax Avoidance Agreement between India and UAE does not contain any article concerning FTS, leading to a dispute over the rate at which withholding tax had to be pegged.

Case Synopsis:

The case of W.P.(C) 14766/2022 and CM APPL. 45399/2022 involved WTS Energy DMCC as the petitioner and the Deputy Commissioner of Income Tax, Circle 3 (1)(1) & Anr. as the respondents. The petitioner sought the quashing of the Impugned Order and Impugned Certificate issued by the respondents under section 197 (of Income Tax Act, 1961), which directed the deduction of tax at the rate of 10% on payments to be made to the petitioner. Additionally, the petitioner sought a direction for the issuance of orders/certificates under Section 197 (of Income Tax Act, 1961) at a ‘Nil’ rate of tax withholding until 31.03.2023. The petitioner also requested an interim direction allowing them to receive consideration from customers at a lower rate of 4% during the pendency of the writ petition.

The Court noted that although the petitioner had sought certificates under Section 197 (of Income Tax Act, 1961) at a “Nil” rate for previous financial years, the certificates were issued pegging the withholding tax at 4%. The Court emphasized that the issue at hand pertained to the financial year 2022-2023. Despite the absence of a counter-affidavit from the respondents/revenue, the Court called upon the respondents to file the counter-affidavit by a specified date, which was not met. After considering the instructions received by the respondents’ counsel, the Court decided that a certificate under Section 197 (of Income Tax Act, 1961) should be issued, pegging the withholding tax rate at 4%, consistent with the position in previous financial years.

The dispute in the case revolved around whether the subject income earned by the petitioner could be treated as Fees for Technical Services (FTS), as contended by the respondents/revenue. The absence of any article concerning FTS in the Double Tax Avoidance Agreement between India and UAE led to a dispute over the rate at which withholding tax had to be pegged. Consequently, the Court directed the respondents/revenue to issue a certificate under Section 197 (of Income Tax Act, 1961) expeditiously, not later than two weeks from the date of the order, without prejudice to the rights and contentions of both parties.

FAQ:

Q1: What were the substantive prayers made in the writ petition?

A1: The substantive prayers included quashing the Impugned Order and Impugned Certificate issued by the respondents, directing the deduction of tax at the rate of 10% on payments to be made to the petitioner, and directing the respondents to issue certificates under Section 197 (of Income Tax Act, 1961) at a ‘Nil’ rate of tax withholding for the period until 31.03.2023.

Q2: What was the decision of the High Court regarding the withholding tax rate?

A2: The High Court directed the respondents to issue a certificate under Section 197 (of Income Tax Act, 1961), pegging the withholding tax rate at 4% for the financial year 2022-2023.

1. The substantive prayers made in the writ petition reads as follows:

“a) A Writ, Order or Direction in the nature of Certiorari quashing the Impugned Order issued on 25.08.2022 against application dated 28.06.2022 and Impugned Certificate dated 25.08.2022 passed by the Respondents under section 197 (of Income Tax Act, 1961) directing the deduction of tax at the rate of 10% on payments to be made to the Petitioner;

b) A Writ, Order or Direction in the nature of mandamus directing the Respondents to issue orders/certificates under Section 197 (of Income Tax Act, 1961) ofthe Act at a 'Nil' rate of tax withholding for the period until 31.03.2023;

c) An ad-interim Writ, Order or Direction in the nature of mandamus directing the Respondents allowing the Petitioner to receive the consideration from the customers at lower rate of 4% during the pendency of present writ petition.”

2. Notice in the writ petition was issued by the coordinate bench of this Court on 19.10.2022, wherein, inter alia, it was recorded that the petitioner seeks a direction for issuance of a certificate under Section 197 (of Income Tax Act, 1961) [in short, “the Act”] as lower withholding tax

certificate(s) under Section 197 (of Income Tax Act, 1961) had been issued in Financial Years (FYs) 2019-2020, 2020-2021 and 2021-2022.

3. Mr Sachit Jolly, who appears on behalf of the petitioner, has informed us that although the petitioner had sought issuance of certificates under Section 197 (of Income Tax Act, 1961) at “Nil” rate for the aforementioned FYs, the certificates were issued pegging the withholding tax at 4%.

4. To be noted, in the instant case, we are concerned with FY 2022-2023.

5. We may note, that since counter-affidavit was not filed by the respondents/ revenue, the petitioner/assessee had moved an application i.e.,

CM APPL. 191/2023 to close the respondents/revenue’s right to file the counter-affidavit.

5.1 This application came up before us on 05.01.2023.

6. In order not to prejudice the stand of the respondents/revenue, we had

called upon Mr Sunil Agarwal, who appears on behalf of the respondents/ revenue, to file the counter-affidavit by 10.01.2023.

6.1 The counter-affidavit, for whatever reason, has not been filed.

6.2 Mr Agarwal has, however, returned with instructions in the matter.

7. Having considered the instructions received by Mr Agarwal, we are of the view, that the best way forward will be that a certificate under Section 197 (of Income Tax Act, 1961) is issued, pegging the withholding tax rate at 4%, which was also the position that obtained in FYs 2019-2020, 2020-2021 and 2021-2022.

8. We may note, that Mr Jolly has informed us, that for FY 2019-2020 (AY 2020-2021) and FY 2020-2021 (AY 2021-2022), return has been filed, wherein subject income was offered for tax at 4%.

9. Mr Jolly says, that intimation under Section 143(1) (of Income Tax Act, 1961) has been issued.

10. We may also observe, that what is, in substance, the issue, is: whether the subject income earned by the petitioner can be treated as Fees for Technical Services (FTS), as is contended by the respondents/revenue.

11. Concededly, the Double Tax Avoidance Agreement obtaining between India and UAE does not contain any article concerning FTS.

12. The petitioner, who is a non-resident and does not have a PE in India, claims that the subject income is “business income.”

13. It is because of these varying stands, that a dispute arose with regard to the rate at which withholding tax had to be pegged.

14. Thus, for the foregoing reasons, the rate of withholding tax, for the

moment, will be pegged at 4%.

15. The respondents/revenue will issue a certificate under Section 197 (of Income Tax Act, 1961) as expeditiously as possible, though not later than two weeks from

today.

16. Needless to state, the aforesaid direction has been issued without prejudice to the rights and contentions of both parties.

17. Consequently, the writ petition and pending application are disposed of in the aforesaid terms.

18. Parties will act based on the digitally signed copy of the order.

RAJIV SHAKDHER, J

TARA VITASTA GANJU, J

JANUARY 12, 2023