Case Note & Summary
The petitioner, Mckinsey & Company Inc., a non-resident company incorporated in the USA with branches in India, filed an application under Section 195(3) of the Income Tax Act, 1961 on 8 January 2010 for a nil withholding certificate for Assessment Year 2011-12. The application sought a certificate for payments received for services rendered to clients/ customers, group entities, and for interest on deposits with banks. The petitioner had previously received such certificates from Assessment Year 1998-99 to 2010-11. During the proceedings, the Deputy Director of Income Tax (International Taxation) issued a show cause notice on 24 March 2010 proposing to reject the application, to which the petitioner responded on 25 March 2010. By an order dated 29 March 2010, the authority rejected the application, citing that for Assessment Year 2006-07 a draft assessment order had been completed and a demand of Rs. 44,98,82,376/- was raised (though pending before the DRP), and for Assessment Year 2005-06 a gross demand of Rs. 26,23,47,269/- was raised. The High Court held that the reasons given in the impugned order were extraneous and not germane to the consideration of an application under Section 195(3). The court observed that the provision is intended to determine the appropriate proportion of tax to be deducted at source on payments to be made in the current year, and past tax demands for earlier years cannot be a valid basis for refusal. The court quashed the order and directed the authority to reconsider the application afresh after giving the petitioner an opportunity of being heard. The writ petition was allowed, and rule was made absolute in those terms.
Headnote
A) Income Tax - Withholding Tax - Section 195(3) of the Income Tax Act, 1961 - Nil Withholding Certificate - The petitioner, a non-resident company, applied for a nil withholding certificate for payments received from clients and interest on deposits. The Assessing Officer rejected the application citing past tax demands for A.Y. 2005-06 and A.Y. 2006-07. The High Court held that past tax demands for earlier years cannot be a valid ground to reject an application under Section 195(3) for a subsequent year, as the provision is meant to determine the appropriate proportion of tax to be deducted at source on current payments. The court quashed the order and directed the authority to reconsider the application afresh after giving the petitioner an opportunity of being heard. (Paras 1-6)
Issue of Consideration
Whether the Deputy Director of Income Tax (International Taxation) was justified in rejecting the petitioner's application for a nil withholding certificate under Section 195(3) of the Income Tax Act, 1961 for Assessment Year 2011-12 solely on the ground that there were past tax demands raised against the petitioner for earlier assessment years.
Final Decision
The High Court allowed the writ petition, quashed the order dated 29 March 2010, and directed the Deputy Director of Income Tax (International Taxation) to reconsider the application of the petitioner for a nil withholding certificate under Section 195(3) for Assessment Year 2011-12 afresh after giving the petitioner an opportunity of being heard. Rule was made absolute in those terms.
Law Points
- Section 195(3) of the Income Tax Act
- 1961
- nil withholding certificate
- non-resident company
- past tax demands
- pending assessments
- show cause notice
- natural justice
