1. Tax Deduction at Source (TDS) — Section 197, IT Act — Dispute over Nil TDS for offshore activities of a non-resident entity. (Para 2 , 3 , 4 , 5 , 6 , 7 , 8 , 20 , 21 , 22 , 28 )
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2022 Supreme(SC) 632
SUPREME COURT OF INDIA
INDIRA BANERJEE, J.K. MAHESHWARI, JJ.
National Petroleum Construction Company - Appellant
Versus
Deputy Commissioner Of Income Tax, Circle 2(2), International Taxation, New Delhi & Anr – Respondents
Civil Appeal No. 4964 of 2022 (Arising Out Of SLP (C) No. 9233 of 2020)
Decided on : 29-07-2022
Important Points
IMPORTANT POINTS
(1) A person paying any sum to a non-resident is not liable to deduct any tax at source if such sum is not chargeable to tax under IT Act.
(2) For the purpose of issuance of certificate under Chapter XVII of Section 197 of IT Act, procedure for determination has been prescribed to assessing officer on which satisfaction may be recorded by him.
(1) A person paying any sum to a non-resident is not liable to deduct any tax at source if such sum is not chargeable to tax under IT Act.
(2) For the purpose of issuance of certificate under Chapter XVII of Section 197 of IT Act, procedure for determination has been prescribed to assessing officer on which satisfaction may be recorded by him.
Subject
Tax Law - INCOME TAX
Act Referred
Headnote
Per Indira Banerjee, J.
(A) Income Tax Act, 1961 – Section 197 – Tax Deduction at Source (TDS) – Obligation to deduct TDS is limited to appropriate proportion of income chargeable to tax under IT Act that forms part of gross sum of money payable to non-resident – A person paying any sum to a non-resident is not liable to deduct any tax at source if such sum is not chargeable to tax under IT Act – Question of whether Appellant had Permanent Establishment, could not possibly be undertaken in an enquiry for issuance of Certificate under Section 197 of IT Act, having regard to time-frame permissible in law for deciding an application, more so, when regular assessment had been completed in respect of immediate preceding year and Appellant found to be taxable under IT Act at 10% of contractual receipts – Res judicata is not applicable to income tax proceedings because assessment for each year is final only for that year and does not cover later years – Whether Appellant had Permanent Establishment or not, during Assessment Year in question, is a disputed factual issue, which has to be determined on the basis of scope, extent, nature and duration of activities in India – Whether project activity in India continued for a period of more than nine months, for taxability in India in terms of Agreement for Avoidance of Double Taxation, is a question of fact, that has to be determined separately for each Assessment Year. (Paras 36, 37, 38 and 39)
(B) Income Tax Act, 1961 – Section 197 – Tax Deduction at Source (TDS) – Rate – For a non-resident entity to be taxed in India, it should carry on business through a Permanent Establishment in India – Nature, extent and duration of work done in India, could vary from year to year – Scope of enquiry and investigation in proceedings for grant of Certificate under
Section 197 of IT Act is different from scope of assessment proceedings – High Court rightly declined to direct Revenue to hold that Appellant did not have Permanent Establishment in India – Impugned Certificate being as per request of Appellant, it is not open to Appellant to make a volte-face and challenge impugned Certificate – Since Appellant requested issuance of Certificate for deduction of TDS at 4% of taxable value it is not for Appellant to challenge certificate – Appeals are pending – Tax deducted at source is adjustable against tax, ultimately assessed as payable by Assessee and any excess tax deducted is refundable with interest – Interference is not warranted at this stage – Appeals dismissed. (Paras 40, 41, 43, 44, 45 and 48)
Per J.K. Maheshwari, J.(Dissenting View_)
Income Tax Act, 1961 – Section 197 – Income Tax Rules, 1962 – Rule 28 AA – Tax Deduction at Source (TDS) – For the purpose of issuance of certificate under Chapter XVII of Section 197 of IT Act, procedure for determination has been prescribed to assessing officer on which satisfaction may be recorded by him – Since there was no change in circumstances and situation of appellant in financial years 2017-2018 and 2018-2019 (assessment years 2018-19 and 2019-20) respectively and at financial year 2019-20 in question (assessment year 2020-21), are same, however, principle of consistency ought to be followed while considering application under Section 197 of IT Act – Order passed by High Court is without
considering perspective and scope of issuance of certificate for deduction of tax at lower rate or no deduction at tax and also without following prescribed procedure – Order of High Court set aside with a direction to respondent to reconsider application of appellant and issue certificate following prescribed procedure. (Paras 11, 16, 18 and 20)
Facts of the case:
Present appeal is against the judgment and final order dated 20th December 2019 passed by High Court of Delhi dismissing the Writ Petition being Writ Petition (C) No.8527 of 2019 filed by the Appellant against the refusal of the Respondent No.1 to modify the Certificate dated 26th June 2019 issued to the Appellant for the Financial/Previous Year 2019-20, corresponding to the Assessment Year 2020-21, under Section 197 of the Income Tax Act, 1961, for Tax Deduction at Source (TDS) at the rate of 4% in respect of payments received by the Appellant from Oil and Natural Gas Company Ltd. (“ONGC”) towards work done out of India as well as within India.
Findings of Court:
Registry is directed to place the matter before Hon’ble the Chief Justice of India so that an appropriate Bench could be constituted to hear the matter.
Result – Matter referred to Larger Bench.
Legal Category Hierarchy
Advocates appeared:
For the Petitioner(s): Mr. Bhargava V. Desai, AOR Mr. Shivam Jasra, Adv. Mr. Utkarsh Vats, Adv.
For the Respondent(s): Mr. N. Venkataraman, ASG Mr. Akshay Amritanshu, Adv. Mr. Shyam Gopal, Adv. Mr. Chandra Kant Sharma, Adv. Mr. Rashmi Malhotra, Adv. Ms. Preeti Rani, Adv. Mr. Raj Bahadur Yadav, AOR
For the Petitioner(s): Mr. Bhargava V. Desai, AOR Mr. Shivam Jasra, Adv. Mr. Utkarsh Vats, Adv.
For the Respondent(s): Mr. N. Venkataraman, ASG Mr. Akshay Amritanshu, Adv. Mr. Shyam Gopal, Adv. Mr. Chandra Kant Sharma, Adv. Mr. Rashmi Malhotra, Adv. Ms. Preeti Rani, Adv. Mr. Raj Bahadur Yadav, AOR
Table of Contents
2. Appellant — Nil TDS based on precedent — Revenue — Indivisible contracts and existence of Permanent Establishment. (Para 26 , 30 , 31 , 32 )
3. Rule 28AA compliance for TDS certificates — Principle of consistency for unchanged fundamental facts — Irrelevance of without-prejudice requests when procedure is ignored. (Para 4 , 9 , 10 , 11 , 12 , 13 , 14 , 15 , 18 )
4. Section 197 certificates — Mandatory adherence to Rule 28AA procedure — Principle of consistency in subsequent assessment years with identical facts. (Para 16 , 17 )
5. Appeal allowed — High Court order set aside — Direction to reconsider application and issue certificate following prescribed procedure. (Para 20 , 21 )
6. What is the distinction between proceedings for a certificate under Section 197 and regular assessment proceedings?
Section 197 proceedings concern the determination of the rate of tax deduction based on existing and estimated tax liability under Rule 28AA, whereas regular assessments under Chapter XIV determine the total income or loss for a specific year. (Para 4 , 12 )
7. Does the principle of res judicata apply to income tax proceedings?
Res judicata does not strictly apply to income tax because each assessment year is a distinct unit. However, the principle of consistency applies where a fundamental fact has been decided and remains unchanged in subsequent years. (Para 16 , 17 )
8. What factors must an Assessing Officer consider when issuing a certificate under Section 197?
Under Rule 28AA(2), the Assessing Officer must consider tax payable on estimated income for the current year, tax payable on assessed or returned income of the last four years, existing liabilities, and advance tax payments. (Para 10 , 11 )
9. Under what condition are the profits of a non-resident enterprise taxable in India according to the India-UAE AADT?
Under the India-UAE AADT, profits of a contracting state enterprise are taxable only in that state unless the enterprise carries on business in the other state through a permanent establishment, in which case only profits attributable to that establishment are taxable. (Para 8 )
JUDGMENT :
Indira Banerjee, J.
Leave granted.
2. This appeal is against the judgment and final order dated 20th December 2019 passed by High Court of Delhi dismissing the Writ Petition being Writ Petition (C) No.8527 of 2019 filed by the Appellant against the refusal of the Respondent No.1 to modify the Certificate dated 26th June 2019 issued to the Appellant for the Financial/Previous Year 2019-20, corresponding to the Assessment Year 2020-21, under Section 197 of the Income Tax Act 1961, hereinafter referred to as the “IT Act”, for Tax Deduction at Source (TDS) at the rate of 4% in respect of payments received by the Appellant from Oil and Natural Gas Company Ltd. hereinafter referred to as the “ONGC” towards work done out of India as well as within India.
3. The Appellant, National Petroleum Construction Company, is a company incorporated under the laws of the United Arab Emirates (UAE) and is a tax resident of that country. The provisions of the Agreement for Avoidance of Double Taxation hereinafter referred to as the “AADT” between India and the UAE apply in determining the taxable income of the Appellant under the IT Act.
4. The Appellant is, inter alia, engaged in the fabrication of Petroleum Platforms, Pipelines and other equipment, installation of Petroleum Platforms, Submarine Pipelines, onshore and offshore oil facilities and coating of Pipelines.
5. Pursuant to different tender notices issued by ONGC from time to time, the Appellant submitted tenders, inter alia, for installation of Petroleum Platforms and submarine Pipelines. The tenders submitted by the Appellant were accepted and contracts were executed by and between the Appellant and ONGC. The first contract was executed by and between the Appellant and ONGC in the Financial Year 1996-97, corresponding to the Assessment Year 1997-98.
6. On 28th August 2005, the Appellant was awarded a contract termed as Contract No. MR/OW/MM/NHBS4WPP for Well Platform Project-II hereinafter referred to as ‘LEWPP Contract’ pursuant to a global tender floated by ONGC in July 2005. This was the third contract between the Appellant and ONGC. Later on 23rd November 2006, the Appellant entered into another contract termed as Contract No. MR/OW/MM/C-Series/03/2006, hereinafter referred to as ‘C-Series Contract’, for C-Series Project.
7. The scope of work as described in the “General Conditions of Contract” for LEWPP Contract and C-Series Contract included “Surveys (pre-engineering, pre-construction/pre-installation and post-installation), Design, Engineering, Procurement, Fabrication, Anticorrosion & Weight coating (in case of rigid pipeline), Load-out, Tie-down/Sea fastening, Tow-out/Sail-out, Transportation, Installation, Hook-up, Installation of submarine pipelines, Installation and hook-up of submarine cables, Modifications on existing facilities, Testing, Pre-commissioning, Commissioning of entire facilities as described in the bidding document”.
8. The contracts referred to above included various activities. Whilst the activities relating to survey, installation and commissioning were done entirely in India, the platforms were designed, engineered and fabricated overseas - at Abu Dhabi.
9. The Appellant has been filing its Income Tax Returns from the Assessment Year 1997-98. The Appellant’s income has been computed on a presumptive basis by taxing the gross receipts pertaining to the activities in India, less verifiable expenses at the rate of 10% and the receipts pertaining to activities out of India at the rate of 1%.
10. The Appellant adopted the said basis for computing its assessable income and filed its returns for the Assessment Year 1999-2000 onwards. Accordingly the returns filed by the Appellant for the Assessment Years 2004-05, 2005-06 and 2006-07 were processed under Section 143(1) of the IT Act. However, the returns filed by the Appellant for Assessment Years 2007-08 and 2008-09, were not accepted by the Assessing Officer, hereinafter referred to as the ‘AO’.
11. The AO passed
