High Court Sets Aside Order Rejecting Withholding Tax Certificate Application

Case Name:

W.P.(C) 8041/2021 & CM APPLs. 25024/2021, 25025/2021 - Cloudtail India Private Limited vs. The Commissioner of Income Tax (TDS) Delhi & Anr. (High Court of Delhi)

Key Takeaways:

1. The High Court set aside the order rejecting the petitioner’s Form 13 application for Nil/lower withholding tax certificate for the Assessment Year 2021-22.

2. The matter was remanded back to the Assessing Officer for re-examination in accordance with the law.

3. The court directed the Assessing Officer to pass a reasoned order after giving an opportunity of hearing to the authorized representative of the petitioner within four weeks.

A judgment from the High Court of Delhi at New Delhi, with the case number W.P.(C) 8041/2021 & CM APPLs. 25024/2021, 25025/2021. The case involves Cloudtail India Private Limited as the petitioner and The Commissioner of Income Tax (TDS) Delhi & Anr. as the respondents.

The petitioner, Cloudtail India Private Limited, challenged the order dated 28th April, 2021, passed by respondent no. 2, Income Tax Officer (TDS), Circle 73(1), under Section 197(1) of the Income Tax Act, 1961 for the Assessment Year 2021-22. The order rejected the petitioner’s Form 13 application for Nil/lower withholding tax certificate and the petitioner sought direction to the respondents to issue a certificate under Section 197(1) of the Act at Nil rate to the petitioner.

The judgment was delivered by HON’BLE MR. JUSTICE MANMOHAN and HON’BLE MR. JUSTICE NAVIN CHAWLA on 09th August, 2021. The judgment provides a detailed account of the arguments presented by both the petitioner and the respondents, and the court’s decision on the matter.

The petitioner’s counsel argued that the ageing of inventory is common in retail business and based on the period of holding of the inventory, the petitioner creates provision for slow and ageing inventory on scientific and reasonable estimates in the books of accounts and financial statements. The counsel emphasized that the treatment for slow and ageing inventory is revenue neutral and has been done in accordance with the Accounting Standard 2 stipulated by the Institute of Chartered Accountants of India.

The petitioner’s counsel also pointed out that the AO (Assessing Officer) had passed the assessment order accepting the returned income for the AY 2018-19 after the petitioner had provided an explanation with respect to the inventory provision. The counsel argued that deduction of tax under Section 194O of the Act at the rate of 1% would result in a huge refund of taxes causing severe hardship to the petitioner.

The petitioner’s counsel relied on the Standard Operating Procedure laid down by the Central Board of Direct Taxes vide Notification 8/2018 as well as Rule 28AA of the IT Rules, which lay down the procedures and parameters for issuing certificates under Section 197 of the Act. The counsel contended that the scope of scrutiny under Section 197 read with Rule 28AA is limited and as the AO had neither followed the procedure prescribed therein, nor given any reasons in the impugned order, the same is liable to be quashed.

The respondents’ counsel accepted notice on behalf of the respondents and stated that the AO had given reasons for rejecting the petitioner’s Form 13 application for Nil/lower withholding tax certificate. He also stated that as there was limited scrutiny for A/Y 2018-19, the provision for slow and ageing inventory was not examined by the AO. However, he suggested that the matter can be sent back to the AO for re-examination.

The court, after considering the arguments from both sides, set aside the impugned order dated 28th April, 2021, and remanded the matter back to the AO to determine the said application afresh in accordance with the law. The court directed respondent no. 2 to pass a reasoned order in accordance with the law after giving an opportunity of hearing to the authorized representative of the petitioner within four weeks.

This judgment provides a detailed account of the arguments presented by both parties and the court’s decision, which includes setting aside the impugned order and remanding the matter back to the AO for re-examination.

FAQ:

Q1: What was the petitioner challenging in this case?

A1: The petitioner, Cloudtail India Private Limited, challenged the rejection of its Form 13 application for Nil/lower withholding tax certificate for the Assessment Year 2021-22.

Q2: What was the court’s decision in this case?

A2: The court set aside the impugned order and remanded the matter back to the Assessing Officer for re-examination.

Q3: What were the key arguments presented by the petitioner’s counsel?

A3: The petitioner’s counsel argued that the treatment for slow and ageing inventory is revenue neutral and has been done in accordance with the Accounting Standard 2 stipulated by the Institute of Chartered Accountants of India. They also relied on the Standard Operating Procedure laid down by the Central Board of Direct Taxes and Rule 28AA of the IT Rules.

Q4: What was the response from the respondents’ counsel?

A4: The respondents’ counsel accepted notice on behalf of the respondents and stated that the Assessing Officer had given reasons for rejecting the petitioner’s Form 13 application for Nil/lower withholding tax certificate. He suggested that the matter can be sent back to the Assessing Officer for re-examination.

1. The petition has been heard by way of video conferencing.

2. Present writ petition has been filed challenging the order dated 28th

April, 2021 [received vide email on 18th June, 2021] passed by respondent

no. 2, Income Tax Officer (TDS), Circle 73(1), under Section 197(1) of the

Income Tax Act, 1961 [the Act] for the Assessment Year 2021-22 whereby the petitioner’s Form 13 application for Nil/lower withholding tax certificate was rejected. Petitioner also seeks direction to the respondents to issue certificate under Section 197(1) of the Act at Nil rate to the petitioner.

3. Learned Senior Counsel for the petitioner states that ageing of inventory is very common in retail business and based on the period of holding of the inventory, the Petitioner creates provision for slow and ageing inventory on scientific and reasonable estimate on the entire inventory in the books of accounts and financial statements.

4. He states that the petitioner suo motu disallows/adds back the provisions which are not allowable under Section 37 of the Act and does not claim deduction in the computation of taxable income, forming part of the return of income. He emphasises that the treatment for slow and ageing inventory is revenue neutral and the same has been done in accordance with the Accounting Standard 2 stipulated by the Institute of Chartered Accountants of India.

5. According to him, this provision for slow and ageing inventory gets reversed in the beginning of the following year in the books of account for

the succeeding financial year; consequently, the reversal of provision (which goes to enhance the book profit for the succeeding year) is claimed as a deduction in the computation of taxable income for that year, to avoid

double taxation.

6. Learned Senior Counsel for the petitioner points out that the AO passed the assessment order accepting the returned income for the AY 2018-19 after the petitioner had provided an explanation with respect to the inventory provision.

7. He states that deduction of tax under Section 194O of the Act at the rate of 1% would result in huge refund of taxes causing severe hardship to the petitioner.

8. Learned Senior Counsel for the petitioner relies on the Standard Operating Procedure laid down by the Central Board of Direct Taxes vide

Notification 8/2018 as well as the Rule 28AA of the IT Rules which lay

down the procedures and parameters for issuing certificates under Section

197 of the Act. He submits that the scope of scrutiny under Section 197 read

with Rule 28AA is limited and as the AO had neither followed the procedure

prescribed therein, nor given any reasons in the impugned order, the same is

liable to be quashed.

9. He relies on the judgments of this court in Bently Nevada LLC vs ITO WP 7744 / 2019 and Manpowergroup Services India vs CIT W.P. (C) 58651/2020 where under similar circumstances TDS certificates under Section 197(1) were set aside.

10. He lastly contends that even if the AO were to deny the inventory related deduction and deduction of education cess, there would still be no

tax payable by the Petitioner. He emphasises that even in that eventuality

refund of Rs. 197 crores would be due and payable to the petitioner for the

AY 2021-22.

11. Issue notice.

12. Mr. Ruchir Bhatia, Advocate accepts notice on behalf of respondents.

He states that AO has given reasons for rejecting petitioner’s Form 13

application for Nil/lower withholding tax certificate. He also states that as there was limited scrutiny for A/Y 2018-19, the provision for slow and

ageing inventory was not examined by the AO.

13. Mr. Bhatia, however, states that as now in the writ petition the petitioner has clarified that the provision creating slow and ageing inventory in relation to the relevant AY has not been claimed as a deduction in the said year, the matter can be sent back to the AO for re-examination.

14. Though in rejoinder, learned senior counsel for the petitioner disputes

the contention advanced by learned counsel for the respondent, yet he has no

objection to the matter being remanded back to the AO.

15. Accordingly, in view of the statement made by learned counsel for the

respondent, the impugned order dated 28th April, 2021 [received vide email

on 18th June, 2021] passed by respondent no. 2, Income Tax Officer (TDS),

Circle 73(1), under Section 197(1) of the Act for the Assessment Year 2021-

22 is set aside and the matter is remanded back to the AO to determine the

said application afresh in accordance with law. Respondent no. 2 shall pass

a reasoned order in accordance with law after giving an opportunity of

hearing to the authorised representative of the petitioner within four weeks.

16. With the aforesaid directions, present writ petition and applications are disposed of.

17. The order be uploaded on the website forthwith. Copy of the order be

also forwarded to the learned counsel through e-mail

MANMOHAN, J

NAVIN CHAWLA, J

AUGUST 09, 2021