Facts of the Case

The petitioner, Lufthansa Cargo AG, a company incorporated and tax resident of Germany, filed a writ petition challenging the order dated 03.05.2024 passed under Section 195(3) of the Income-tax Act, 1961, whereby its application for issuance of a nil withholding tax certificate for Financial Year 2024–25 was rejected. The petitioner also challenged the certificate dated 17.05.2024 issued under Section 197 of the Act, which permitted withholding tax at a reduced rate of 0.10 percent instead of nil rate.

The petitioner is engaged in the business of international cargo handling and transportation of cargo through operation of aircrafts in international traffic. Its services are procured through agents registered with the International Air Transport Association (IATA), who generate airway bills and arrange cargo transportation. The petitioner claimed that its income from such operations is exempt from tax in India under Article 8 of the India–Germany Double Taxation Avoidance Agreement.

The petitioner applied electronically on 14.02.2024 in Form 15D seeking a nil withholding tax certificate under Section 195(3). The Assessing Officer rejected the application on the ground that the petitioner had not furnished sufficient material to qualify under Section 195(3) read with Rule 29B. Subsequently, on an application under Section 197, the Assessing Officer issued a certificate allowing withholding tax at a reduced rate of 0.10 percent.

Issues Involved

Whether the petitioner was entitled to a nil withholding tax certificate under Sections 195(3) and 197 in respect of income from international air cargo operations exempt under Article 8 of the India–Germany DTAA, and whether the rejection of the nil certificate and issuance of a reduced-rate certificate was arbitrary and unsustainable.

Petitioner’s Arguments

The petitioner contended that its income was generated solely from operation of aircrafts in international traffic and was squarely exempt from taxation in India under Article 8 of the DTAA. It was argued that there was no ambiguity regarding the nature of services rendered or the character of income.

The petitioner pointed out that it had been regularly filing returns of income in India for more than fourteen years and had consistently been granted nil withholding tax certificates under Sections 195(3) or 197, except for Financial Year 2019–20, where denial of nil certificate was set aside by the Delhi High Court in earlier proceedings and the certificate was eventually granted at nil rate. It was submitted that there was no change in facts, services or legal position in the relevant year.

Respondents’ Arguments

The Revenue contended that the petitioner had failed to furnish adequate financial statements and details to establish eligibility under Section 195(3) and that there was a likelihood of income arising which could be taxable in India. It was further submitted that issuance of a reduced-rate certificate was done as a protective measure to safeguard the interest of the Revenue.

Court Order / Findings

The Delhi High Court held that the impugned order rejecting the application under Section 195(3) could not be sustained. The Court noted that there was no dispute regarding the nature of services rendered by the petitioner and that the Revenue had not controverted the petitioner’s assertion that its income from international cargo operations was exempt under Article 8 of the DTAA.

The Court observed that the petitioner had consistently been granted nil withholding tax certificates for more than a decade and that even for Financial Year 2019–20, the denial of nil certificate had been set aside and the certificate was ultimately issued at nil rate. The Court found that there was no material change in facts or law to justify a different approach for Financial Year 2024–25.

The Court further held that the Assessing Officer had failed to provide any cogent reasons for issuing a certificate at a reduced rate of 0.10 percent instead of nil rate. In the absence of any dispute regarding chargeability of income, such an approach was arbitrary.

Considering that the financial year was nearing completion, the Court declined to remand the matter and instead directed issuance of a nil withholding tax certificate under Section 197.

Important Clarification

The Court clarified that issuance of a nil withholding tax certificate under Section 197 does not preclude the Assessing Officer from examining, during assessment proceedings, whether any part of the petitioner’s income is chargeable to tax in India. However, such examination must be carried out independently and uninfluenced by the grant of the certificate.

Final Outcome

The writ petition was allowed. The Delhi High Court set aside the order rejecting the application under Section 195(3) and the certificate dated 17.05.2024 issued under Section 197 permitting withholding tax at 0.10 percent, and directed the Revenue to issue a certificate for nil withholding tax in favour of Lufthansa Cargo AG for Financial Year 2024–25. Pending applications were disposed of accordingly.

Link to download order - https://www.mytaxexpert.co.in/uploads/1769686366_LUFTHANSACARGOAGVsASSISTANTCOMMISSIONEROFINCOMETAXORS..pdf

Disclaimer

This content is shared strictly for general information and knowledge purposes only. Readers should independently verify the information from reliable sources. It is not intended to provide legal, professional, or advisory guidance. The author and the organisation disclaim all liability arising from the use of this content. The material has been prepared with the assistance of AI tools