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Revenue Cannot Arbitrarily Deviate from Established TDS Certification Patterns: Delhi High Court

In a pivotal ruling for corporate taxpayers, the High Court of Delhi has criticized the Income Tax Department’s summary rejection of a tax-deduction petition, underscoring that administrative authorities cannot depart from years of consistent practice without providing a reasoned, transparent justification. The bench, comprising Justice V. Kameswar Rao and Justice Vinod Kumar, remanded the matter back to the tax authorities, stressing that compliance with the rule of consistency is essential to the stability of business operations.

Case Background

Make My Trip (India) Private Limited, a prominent player in the online travel portal space, had a decade-long history of successfully obtaining 'NIL' or lower withholding tax certificates under Section 197 of the Income Tax Act, 1961. For the four preceding financial years, the company had been consistently granted certificates at a 0.30% rate due to substantial accumulated tax losses.

However, in May 2025, the company’s application for the 2026-27 assessment year was rejected by the Assistant Commissioner of Income Tax. The rejection was primarily based on a large outstanding tax demand reflected against the company’s Tax Deduction and Collection Account Number (TAN), which the Revenue classified as "collectible" and without stay.

Arguments Presented

The Petitioner’s Stance: Mr. Salil Kapoor, appearing for Make My Trip, argued that the business’s financial profile—characterized by ongoing losses and a lack of taxable income—remained identical to previous years. He contended that the blanket rejection relied on disputed demands that were either subject to pending rectification or sub judice before the National Faceless Appeal Centre. Mr. Kapoor argued that the Revenue’s departure from a settled seven-year standard violated the foundational principles of certainty, consistency, and non-arbitrariness in tax administration.

The Revenue’s Position: The Revenue maintained that they were acting strictly within their administrative powers. Counsel for the Respondent argued that under Rule 28AA of the Income Tax Rules, the presence of substantial outstanding tax liability explicitly precludes the issuance of a lower withholding certificate. They contended that the certificate process is summary in nature, and the existence of unrecovered and unstayed demands necessitated the decline of the company’s application.

Legal Analysis

The Court’s analysis centered on the procedural infirmity of the Revenue’s order. The bench found that the impugned order was a "one-line denial" that failed to engage with the statutory formula mandated by Rule 28AA, which requires evaluating estimated tax liability, existing demands, and potential refunds.

The Court distinguished this from previous precedents cited by the Revenue, noting that earlier rulings focused on PE (Permanent Establishment) determinations, which are fact-intensive. By contrast, the current dispute involved a purely administrative, summary procedure that, while tentative in nature, cannot be exempt from the principles of natural justice.

Key Observations

Highlighting the standard of administrative fairness, the Court noted:

> "The action of the respondents strikes at the core constitutional principles of certainty, consistency and non-arbitrariness in tax administration."

Regarding the necessity of a reasoned decision, the Court remarked:

> "The impugned order rejecting the application is without considering the fact that the petitioner is entitled to tax refunds... and it is a reasoned process and not an arbitrary figure."

On the validity of the Revenue’s logic, the Court reinforced:

> "Neither Section 197 of the Act nor Rule 28AA provides that no certificate of nil/lower rate of withholding tax can be granted if any demand, howsoever minuscule, is outstanding."

Court’s Decision

The Delhi High Court set aside the order dated July 17, 2025, describing it as an arbitrary exercise of power. Remanding the case back to the Assessing Officer, the bench directed the Revenue to issue a fresh, reasoned, and speaking order within two weeks. This directive mandates that the tax authority must account for the petitioner’s actual tax posture, including the substantial refunds due and the pending status of existing demands, before deciding the application.

This ruling serves as a vital reminder to tax authorities that the rule of consistency is not merely an advisory principle but a check on the exercise of administrative discretion, ensuring that taxpayers are not blindsided by sudden shifts in tax assessment without proper justification.