IN HIGH COURT OF DELHI AT NEW DELHI Reserved on: 26th July, 2019 Decided on: 29th July, 2019 W.P.(C) 7744/2019 and CM APPL. 32145/2019 (stay) BENTLY NEVADA LLC Petitioner Through: Mr.Sachit Jolly with Mr.Rohit Garg, Mr.Siddharth Joshi and Mr.Aarush Bhatia, Advocates. versus INCOME TAX OFFICER, WARD-1(1) (2), INTERNATIONAL TAXATION & ANR. ..... Respondents Through: Mr.Ruchir Bhatia, Sr.Standing Counsel with Mr.U.K.Das, ITO. CORAM: JUSTICE S.MURALIDHAR JUSTICE TALWANT SINGH ORDER 29.07.2019 Dr. S. Muralidhar, J.: 1. challenge in this petition is to lower withholding certificate issued by Income Tax Officer-Ward-I (1) (2), International Taxation, New Delhi (Respondent No.1) under Section 197 of Income Tax Act, 1961 ( Act ) directing deduction of tax at source (TDS) @ 5% from payments made to Petitioner by its Indian customers. 2. Petitioner is company incorporated in United States of America W.P.(C) 7744/2019 Page 1 of 18 ( USA ) and is subsidiary of Baker Hughes LLC, General Electric group company. Petitioner is engaged inter alia in business of supply of goods from outside India. 3. It is stated that for Assessment Year ( AY ) 2002-03, Income Tax Department ( Department ) by assessment order dated 5th October, 2011 under Section 143 (3)/147 read with Section 144-C (13) of Act computed profits of Petitioner by adopting deemed profitability @ 10% of revenues/sales. This was done with reference to Section 44BB of Act. 35% of such profits were held to be related to marketing activities. 75% of marketing activities were held attributable to Permanent Establishment ( PE ) of Petitioner in India. Effectively, 2.625% of sales revenue was held to be profit attributable to PE in India and this was held to be taxable @ 40%. As result, 1.054% of gross sales became effective tax payable in India (40% of 26.25% of 10% of sales). 4. Petitioner states that it has been regularly obtaining lower withholding certificates under Section 197 of Act from Department whereby Petitioner was permitted to receive remittances from its customers after deduction of tax @ 1.5% of sum remitted. 5. Income Tax Appellate Tribunal ( ITAT ) rejected Petitioner s appeals and upheld assessment order for above AYs 2002-03 to 2006-07 confirming rate of attribution of income to PE in India @ 2.6%. This was not further questioned by Revenue. Copy of order W.P.(C) 7744/2019 Page 2 of 18 dated 27th January, 2017 passed by ITAT in appeals for aforementioned AYs have been enclosed with petition. 6. However, above decision was further challenged in this Court by Petitioner s group companies on identical facts. By judgment dated 21st December, 2018 in ITA No.621/2017 and batch, said appeals were dismissed by this Court. Following above judgment, Department passed assessment order in Petitioner s case for AY 2015-16 attributing income to PE in India at rate of 2.6% and computing tax @ 40% thereon. According to Petitioner, effective rate of tax was worked out at 1.04% of total revenues. 7. For Financial Year (FY) 2019-20, Petitioner electronically filed application on 30th April 2019 under Section 197 of Act seeking NIL withholding tax. In alternative, Petitioner sought lower withholding of tax @ 1.04% in respect of remittances to be received from customers. Along with said application, letter dated 31st May 2019 was filed before Respondent No.1 submitting, inter alia, that if effect was given to orders of ITAT and this Court in Petitioner s own case for earlier years, then entire outstanding demands for said years would be reduced and Petitioner would be entitled to refund amounting to Rs.2,03,70,412/-. Petitioner thus requested Department to issue NIL withholding certificates under Section 197 of Act. 8. query was placed by Department on TRACES portal of Petitioner on 4th June 2019 asking Petitioner to furnish audited copy W.P.(C) 7744/2019 Page 3 of 18 of its India specific account for previous year and projected accounts of company for current year. Petitioner sent reply dated 6th June 2019 wherein inter alia it was pointed out that since Petitioner did not have any office/PE in India, it was not required to maintain books of accounts in India. Without prejudice to above contention, Petitioner pointed out that as per prevailing laws in USA, financial statements of group entity were required to be consolidated with financial statements of its respective holding company. Petitioner pointed out that question of getting financial statements audited would arise only in respect of consolidated national statements prepared by holding company i.e. Baker Hughes LLC which were required to be filed with United States Securities and Exchange Commission ( USSEC ). 9. Petitioner in its letter dated 6th June 2019 then referred to assessment proceedings undertaken by Department from AY 2002-03 till 2015-16 where profit percentage of 10% had been regularly determined by AO as per Rule 10 of Income Tax Rules, 1962 ( Rules ). reference was made to order of ITAT which inter alia had stated that approach of AO in estimating income @ 10% in sales made in India in respect of Assessee is perfectly in order and does not require any interference. extract was also given from judgment of this Court concurring with above view. It was pointed out that since profitability of 10% had been accepted in above assessment proceedings by ITAT, there was no reason for Respondent Nos.1 and 2 to take different stand in absence of any change in facts of applicable law. W.P.(C) 7744/2019 Page 4 of 18 10. With its reply dated 6th June 2019, Petitioner enclosed withholding certificate issued by Respondent No.1 under Section 197 of Act for FY 2018-19 @ 1.5%. Form 10K filed by Baker Hughes before USSEC for year ended 31st December 2017 was also enclosed. This indicated figures pertaining to global revenues. It showed that holding company had earned profit/loss margin of 3.06% and 1.65% of global revenue in 2018 and 2017 respectively. It was pointed out that even if Department decided to continue with determination of profitability of Petitioner, it could not be more than global profit margin of holding company. 11. Respondent No.1 issued impugned certificate on 11 th June 2019 authorising deduction of tax from payments made to Petitioner by different entities which purchased its goods @ 5%. This withholding certificate has been challenged in present petition by Petitioner on following grounds: (i) No reasons have been given for arriving at withholding rate of 5%. order under Section 197 of Act was quasi-judicial in nature. It must be supported by valid and cogent reasoning. Reference is made to decisions in McKinsey and Company Inc. v. Union of India (2010) 324 ITR 367 (Bom) and Tata Teleservices (Maharashtra) Ltd v. Deputy Commissioner of Income-Tax (TDS) (2018) 402 ITR 384 (Bom). (ii) Respondent No.1 did not consider undisputed fact that in terms of order passed by ITAT and this Court, there would be no W.P.(C) 7744/2019 Page 5 of 18 outstanding demand as on date and on contrary, Petitioner would be entitled for refund of Rs.2,03,70,412/-. This justified Petitioner s prayer for NIL withholding certificate under Section 197 of Act. (iii) Without prejudice to above contention, it is submitted that with attribution rate @ 2.6% to PE of Petitioner having been accepted by Department while passing assessment order for AY 2015-16, effective tax rate worked out only to 1.04% and, therefore, Respondent No.1 erred in not issuing lower withholding certificate under Section 197 of Act at 1.04%. Withholding tax rate of 5% meant that attribution of alleged PE was assumed to be higher than 2.6% of total revenue which was totally contrary to order of ITAT and this Court. (iv) In any event, there was no occasion to increase withholding rate beyond 1.5% which was rate which had been consistently adopted by Department while issuing such certificates under Section 197 of Act for earlier years. (v) For rule of consistency, reliance is placed on decision in Radha Saomi Satsang v. CIT (1992) 193 ITR 321 (SC). In view of global profitability of holding company of Petitioner being 3.06%, impugned order directing deduction of tax @ 5% defeated purpose of Section 197 of Act and denied Petitioner much needed working capital thereby crippling its business. (vi) No appeal was preferable under Act in respect of order passed W.P.(C) 7744/2019 Page 6 of 18 under Section 197 of Act. Since impugned certificate, which has been issued with prior approval of Commissioner of Income Tax (International Transaction) (Respondent No.2), even revisionary jurisdiction under Section 264 of Act is unavailable. 12. This petition was listed first on 19th July 2019 when notice was issued. Mr. Sachit Jolly, learned counsel for Petitioner pressed for urgent interim relief since amount involved since beginning of FY 2019-20 was already substantial. However, given nature of matter, it was felt that interim relief would be no different from final relief. At request of Mr. Ruchir Bhatia, learned counsel for Revenue, who was present in Court on that day, case was adjourned to 26th July 2019 to enable him to take instructions. 13. On adjourned date, Mr. Bhatia informed Court that he had with him, relevant files of Department. When asked about reasons for impugned certificate under Section 197 of Act specifying rate of TDS at 5%, Mr. Bhatia volunteered that it was only certificate which was posted online on portal of Petitioner and no separate order as such giving reasons for same was posted. He, however, stated that original file brought to Court would contain reasons. 14. Court has perused Department s file. It contains just 8 pages of notings. first noting is of 21st May 2019 by Respondent No.1. said note acknowledges that Petitioner had filed online application on 30th April 2019 for issuance of certificate at nil/lower of TDS with list of W.P.(C) 7744/2019 Page 7 of 18 parties from whose payments tax had to be deducted. list is of 29 such Indian entities. It is noted that nature of business of Petitioner i.e. supplying of goods from outside India ; that Petitioner was expected to receive orders during FY 2019-20 from various customers in India worth USD 3,109,169/- equivalent to Indian Rs.21,76,41,830/-. note then states that in latest assessment order for AY 2014-15, Assessing Officer (AO) had established PE in India and attributed income to marketing activities carried out in India in respect of offshore supplies. tax payable in India was shown as 1.05%. In para 4 of note dated 21st May 2019, Respondent No.1 stated as under: 4. assessee has sought Certificate of TDS deduction at NIL . However, considering latest assessment order on offshore supply of goods and keeping in line with order u/s 197 for last financial year, where application was allowed @ 1.5%, we may, if approved, issue Certificate at same rate as applicable for last financial year i.e. @ 1.5%. (emphasis in original) 15. When this note was placed before CIT (IT) (Respondent No.2), he made endorsement dated 24th May 2019: please discuss . On same date, another noting was made by Addl. CIT, Range-1 (1), Delhi which reads: Discussed with CIT. He desires that file may be put up again with 2% TDS rate. file was then sent back to Respondent No.1 who stated as directed, fresh note sheet has been put-up on next page for kind perusal and further direction please. This was dated 27th May 2019. fresh note virtually repeated entire earlier note dated 21st May 2019 except that para 4 of this fresh note reads as under: 4. assessee has sought Certificate of TDS deduction at W.P.(C) 7744/2019 Page 8 of 18 NIL. However, considering facts and circumstances of case, we may, if approved, issue Certificates @ 2.0%. (emphasis in original) 16. Thus, it would be seen that Respondent No.1 who is supposed to exercise quasi-judicial function acted under dictation of his superior i.e. Respondent No.2, who simply asked him to increase TDS percentage from 1.5% to 2% without any reason whatsoever. Consequently, in fresh note dated 27th May 2019 of Respondent No.1, no reasons were given as to why TDS rate should not be NIL as requested for by Assessee and instead why it should be increased from 1.5% to 2%. Interestingly, in this entire note and in further notes of superior officers, no reference is made to what is stated by Petitioner in its application dated 30th April 2019. 17. fresh note dated 27th May 2019 was placed again before Addl. CIT and then before CIT (IT) i.e. Respondent No.2. On 28th May 2019 noting made by Respondent No.2 reads as under: PE has been held to be there in India. Accounts have not been given. Issue @ 5%. 18. This is crucial noting. Two factors require to be noted here. One that without any change in circumstances, between 24th May 2019 when he first saw file and 28th May 2019 when he next saw it, CIT reviewed his earlier decision instructing his subordinate to put up file again proposing 2% TDS. Secondly, his comments were cryptic. That there was PE of Petitioner in India was not new development. second, that W.P.(C) 7744/2019 Page 9 of 18 accounts have not been given, he failed to acknowledge that till that date accounts were not even called for from Petitioner. Yet decision was given: Issue at 5% . arbitrary nature of such decision is thus self- evident. 19. matter was then placed again before Addl. CIT who made following note: See pre-page. Approved @ 5% TDS by CIT. Please issue certificate accordingly. 20. When file was again sent to Respondent No.1, he made endorsement on 3rd June 2010: Please check demand position and sent file to Addl. CIT who stated As per dossier, demand of Rs.42,81,61,593/- is pending which has been stayed. This note is also dated 3rd June 2019. file was then marked to CIT (IT) who simply put his initials thereon on 10th June 2019. There is no further note on file. 21. Thus it will be seen that direction given by CIT (IT) for issuing TDS at 5% was only for two ostensible reasons, first being that PE had been held to be there in India. This cannot be per se reason for increasing TDS from 1.5% to 5%. second reason is that accounts have not been given. If indeed accounts had not been given, it should have not been difficult for Respondents to ask Petitioner to furnish relevant accounts. 22. From file it appears that on 3rd June 2019, reminder had been sent W.P.(C) 7744/2019 Page 10 of 18 by Petitioner for issuance of TDS certificate. Although on file it appears that decision to charge TDS at 5% had already been taken by that date (it was taken by CIT on 28th May 2019), it is only on 4th June 2019 that query was addressed to Petitioner on TRACES asking it for accounts. reply thereto by Petitioner on 6 th June 2019 has already been referred to earlier in this order. However, without referring to said reply dated 6th June 2019 of Petitioner (copy of which along with its enclosures is available on Department s file) CIT (IT) initialled note on file on 10th June 2019 and on that basis impugned certificate dated 11th June 2019, under challenge in present petition, was issued. 23. Court finds that there is both arbitrariness and non-application of mind at various levels which vitiates impugned certificate. Some of them, at cost of repetition, may be recapitulated. first is Respondent No.1 changing his initial decision as contained in note dated 21st May 2019 directing TDS at 1.5% to 5% by his subsequent note dated 27th May 2019 without any reasons and only because his superior, CIT (IT) asked him to do so. At that stage, no reasons whatsoever appeared to have been indicated as to why CIT felt that TDS rate should be 2% instead of 1%. Respondent No.1 mechanically followed advice and prepared fresh note on 27th May 2019 simply stating that considering facts and circumstances of case TDS certificate should be at 2%. 24. Secondly, when this note went back to CIT, he simply said issue @ 5% after noting that there was PE in India and accounts have not been W.P.(C) 7744/2019 Page 11 of 18 given. This was, therefore, done even without asking Petitioner for accounts at that stage. It may be noted that this noting was made on 28 th May 2019 and on 29th May 2019 it was already decided to issue certificate accordingly. For second time, therefore, Respondent No.1 acted on dictation. This was not case of superior officer concurring with decision of subordinate. This was textbook example of superior officer dictating to his subordinate what decision should be. 25. settled legal position in administrative law is that orders passed by statutory authority under dictation of superior officer or anyone else is bad in law. Illustratively, reference may be made to decision in Anirudhsinhji Karsansinhji Jadeja v. State of Gujarat AIR 1995 SC 2390 where Supreme Court held that decision to book Appellants before them for offences punishable under Sections 3 and 5 of Terrorist and Disruptive Activities (Prevention) Act, 1985 was bad in law. following discussion in said decision is relevant for case on hand, because principle enunciated will apply here on all fours: 11. case against appellants originally was registered on 19th March, 1995 under Arms Act. DSP did not give any prior approval on his own to record any information about commission of offence under TADA. On contrary, he made report to Additional Chief Secretary and asked for permission to proceed under TADA. Why? Was it because he was reluctant to exercise jurisdiction vested in him by provision of Section 20A (1)? This is case of power conferred upon one authority being really exercised by another. If statutory authority has been vested with jurisdiction, he has to exercise it according to its own discretion. If discretion is exercised under direction or in compliance with some higher authority s instruction, then W.P.(C) 7744/2019 Page 12 of 18 it will be case of failure to exercise discretion altogether. In other words, discretion vested in DSP in this case by Section 20A (1) was not exercised by DSP at all. 12. Reference may be made in this connection to Commissioner of Police vs. Gordhandas Bhanji 1952 SCR 135, in which action of Commissioner of Police in cancelling permission granted to respondent for construction of cinema in Greater Bombay at behest of State Government was not upheld, as concerned rules had conferred this power on Commissioner, because of which it was stated that Commissioner was bound to bear his own independent and unfettered judgment and decide matter for himself, instead of forwarding order which another authority had purported to pass. 13. It has been stated by Wade and Forsyth in Administrative Law , 7th Edition at pages 358 and 359 under heading Surrender, Abdication, Dictation and sub-heading "Power in wrong hands" as below: "Closely akin to delegation, and scarcely distinguishable from it in some cases, is any arrangement by which power conferred upon one authority is in substance exercised by another. proper authority may share its power with someone else, or may allow someone else to dictate to it by declining to act without their consent or by submitting to their wishes or instructions. effect then is that discretion conferred by parliament is exercised, at least in part, by wrong authority, and resulting decision is ultra vires and void. So strict are courts in applying this principle that they condemn some administrative arrangements which must seem quite natural and proper to those who make them.....". "Ministers and their departments have several times fallen foul of same rule, no doubt equally to their surprise...." W.P.(C) 7744/2019 Page 13 of 18 14. present was thus clear case of exercise of power on basis of external dictation. That dictation came on prayer of DSP will not make any difference to principle. DSP did not exercise jurisdiction vested in him by statute and did not grant approval to recording of information under TADA in exercise of his discretion. (emphasis supplied) 26. Thirdly, decision was taken without valid basis and ignoring relevant material that was called for and available on record. On 3rd June 2019, demand position was asked to be checked and it was stated that demand had been stayed. It is only thereafter on 4th June 2019 that Petitioner was asked for accounts. It sent its reply on 6th June 2019 but on 11th June 2019 impugned certificate was issued without adverting to any of contentions raised by Petitioner or documents enclosed with said reply. 27. Rule 28AA of Rules prescribes procedure to be followed by AO who is approached with application under Section 197 (1) of Act. How AO is to estimate existing and estimated liability is indicated in Rule 28 AA (2). relevant portion of Rule 28 AA reads thus: Certificate for deduction at lower rates or no deduction of tax from income other than dividends. 28AA (1) Where Assessing Officer, on application made by person under sub-rule (1) of rule 28 is satisfied that existing and estimated tax liability of person justifies deduction of tax at lower rate or no deduction of tax, as case may be, Assessing Officer shall issue certificate in accordance with provisions of W.P.(C) 7744/2019 Page 14 of 18 sub-section (1) of section 197 for deduction of tax at such lower rate or no deduction of tax. (2) existing and estimated liability referred to in sub-rule (1) shall be determined by Assessing Officer after taking into consideration following: (i) tax payable on estimated income of previous year relevant to assessment year; (ii) tax payable on assessed or returned 2or estimated income, as case may be, of last four previous years; (iii) existing liability under Income-tax Act, 1961 and Wealth- tax Act, 1957; (iv) advance tax payment tax deducted at source and tax collected at source for assessment year relevant to previous year till date of making application under sub-rule (1) of rule 28. 28. file produced before this Court by Department shows that above factors were not kept in view and no reference in fact was made to Rule 28AA of Rules. impugned certificate simply states that rate of TDS should be 5%, which obviously does not satisfy requirements of law. 29. Even if one were to accept explanation offered by Mr. Bhatia that on online portal only certificate is posted and not reasons for decision, then surely there should be separate written order communicated to Petitioner giving reasons for fixing TDS rate under Section 197(1) since this is mandated by law. To reiterate, that decision which is quasi-judicial in nature, has to be taken by AO under Section 197(1) of Act on objective criteria and be based on relevant material provided by applicant and available with Department. It must be supported by W.P.(C) 7744/2019 Page 15 of 18 reasons available on file which conform to requirement of Section 197 of Act read with Rule 28 AA of Rules. Those reasons must be communicated to applicant. It cannot be taken, as in instant case, on dictation of officer superior to AO. 30. In Tata Teleservices (Maharashtra) Ltd v. Deputy Commissioner of Income-Tax (TDS) (supra) Bombay High Court held as under: Section 197 of Act permits/allows assessee to make application to Assessing Officer, that in its case, deduction of tax under sections specified therein should be at lower rates or at nil rates instead of normal rate prescribed under Act. Assessing Officer, if satisfied, with application made, bearing in mind provisions of Act and Rules, is obliged to grant certificate. Therefore, there is right given to assessee to apply for nil/lower rate of withholding tax under section 197 of Act and obligation upon Assessing Officer to grant same, if conditions specified therein are satisfied. Thus, it is clear that order passed under section 197 of Act is order which is quasi-judicial order and must be supported by reasons. 31. That there have to be proper reasons for order under Section 197 of Act has also been emphasized in McKinsey and Company Inc. v. Union of India (supra). In that case AO determined withholding % of TDS @ 15% for FY 2009-10 which was much higher than rate determined by CIT for earlier AYs 2007-08 to 2009-10 at 1.5% and 1.3%. While setting aside order of AO it was observed by Bombay High Court as under: In disposing of application filed by assessee under Section 197(1) for grant of certificate, Assessing Officer has to make determination which would constitute W.P.(C) 7744/2019 Page 16 of 18 order for purposes of Section 264. That petitioner should exhaust alternate remedies available is self-imposed restraint which does not bar exercise of writ jurisdiction under Article 226. In case such as present where Assessing officer has chosen to act in complete departure from duly considered determination made by superior officer, it is necessary for this court to step in to ensure that discipline of hierarchy imposed by fiscal legislation is duly observed. Unless sense of hierarchical discipline is observed, while implementing fiscal legislation, exercise of powers would be rendered arbitrary and subject to whim and caprice of Assessing officers. This would be impermissible and contrary to norm of fairness which article 14 of Constitution embodies. prescriptions of Article 14 must at all times infuse statutory interpretation and must rigorously apply to exercise of statutory discretion. It is in these circumstances, that this court has been constrained to exercise its writ jurisdiction under article 226 to correct manifest failure of justice. Assessing Officer is correct in adopting position that section 197(2) will not preclude departure or contrary view being taken in assessment proceedings, in view of judgments of this court in CIT v. Tata Engineering and Locomotive Company Limited (2000) 245 ITR 823 and CIT v. Elbee Services (P) Limited (2001) 247 ITR 109. But Assessing officer must also bear in mind that departure has to be made on basis of valid and cogent reasons where there is material on record which would justify such departure. There is absence of material on record which would have justified departure in facts of present case. 32. Court accordingly finds that in present case impugned withholding certificate which directs TDS to be deducted at 5% on payments made by Indian entities to Petitioner is unsustainable in law, inasmuch as it is not based on valid reasons and is contrary to legal requirement spelt out in Section 197(1) of Act read with Rule 28AA of W.P.(C) 7744/2019 Page 17 of 18 Rules. impugned certificate is hereby quashed. 33. Court directs Respondent No.1 to once again consider application made by Petitioner on 30th April 2019 for issuance of lower withholding certificate under Section 197(1) of Act afresh in accordance with law. Needless to state that Respondent No.1 should deal with issues raised by Petitioner in application and in subsequent correspondence which already forms part of record of Department and take fresh decision not later than 4 weeks from today. Apart from certificate being posted online, decision itself, containing reasons, must be separately communicated to Petitioner not later than 1 week thereafter. Till such time fresh decision is communicated to Petitioner, decision in respect of TDS for immediate earlier AY @ 1.5% will continue to apply. 34. Needless to state, if Petitioner is aggrieved by fresh decision it will be open to Petitioner to seek appropriate remedies in accordance with law. 35. writ petition is allowed in above terms. pending application is disposed of. S. MURALIDHAR, J. TALWANT SINGH, J. JULY 29, 2019 tr W.P.(C) 7744/2019 Page 18 of 18 Bently Nevada LLC v. Income-tax Officer, Ward-1(1)(2), International Taxation & Anr