Assessing Officer Cannot Grant 'NIL' Withholding Tax Certificate If Taxability Issue Is Pending Before ITAT: Bombay High Court

"Without there being any specific provision, either in law or in the DTAA, we are unable to accept this broad proposition that because the services were rendered by the Petitioner to Benteler India virtually, the same amounted to the said services being rendered physically in India." Bombay High Court, in a significant ruling, held that an Assessing Officer cannot issue a "NIL withholding tax" certificate to a foreign entity if the identical issue of its tax liability is already pending before higher appellate forums for previous assessment years.

A bench of Justice B. P. Colabawalla and Justice Amit S. Jamsandekar observed that granting such a certificate would directly contradict the rulings of higher authorities in the petitioner's own case, while dealing with a Chinese company's plea claiming tax exemption under the India-China Double Taxation Avoidance Agreement (DTAA).

The petitioner, Benteler Automotive (China) Investment Limited, provided management, IT, and technical support services to its Indian subsidiary from China. The petitioner applied for a NIL withholding tax certificate under Section 197 of the Income Tax Act, 1961, arguing its income was not taxable as "fees for technical services" under Article 12(4) of the India-China DTAA since the services were not physically rendered in India. The Assessing Officer rejected the application, noting that the petitioner had been consistently held liable to tax in India for the previous four assessment years, decisions which the petitioner has challenged before appellate authorities.

The primary question before the court was whether the Assessing Officer was justified in rejecting the NIL withholding tax certificate application under Section 197 of the Income Tax Act. The court was also called upon to determine whether the virtual rendition of technical services from China to an Indian entity legally equated to the physical rendition of services in India under the India-China DTAA.

Justification Of Rejecting Section 197 Application

The court extensively analysed Section 197 of the Income Tax Act read with Rule 28AA of the Income Tax Rules, 1962, which governs the issuance of certificates for lower or nil deduction of tax. The bench noted that the Assessing Officer is statutorily required to determine the estimated tax liability by considering the tax payable on the assessed income of the last three previous years. Since the higher authorities, including the Dispute Resolution Panel and CIT (Appeals), had already ruled that the payments made to the Chinese parent were taxable in India for previous years, the court found the Assessing Officer's rejection wholly justified.

The bench stressed that issuing a nil tax certificate at this stage would run contrary to the ongoing assessments and undermine the appellate process. The court observed, "Once this issue is already pending before the Tribunal and authorities higher than the Assessing Officer have already taken the view that the Petitioner is liable to tax in India... the Assessing Officer could not have issued any Certificate under Section 197."

Virtual Services Do Not Automatically Equate To Physical Rendition

A major contention raised by the Revenue was that since the technical services were rendered through video conferencing, conference calls, and emails, the virtual interaction legally equated to a physical rendition of services in India. The High Court firmly rejected this broad proposition. The bench reasoned that merely because services were rendered virtually to an Indian entity, it could equally be argued that the Indian entity received those services in China.

The court held that without specific legal or treaty provisions, technological interactivity cannot be blindly equated to physical presence in a taxing jurisdiction. Rejecting the Revenue's stance, the bench remarked, "The services may have been rendered in the presence of each other, but by merely saying that because the services were rendered to the Indian entity virtually, would mean that the services were physically rendered in India by the Chinese entity would be too broad a proposition for us to accept."

Reliance On Criminal And Procedural Precedents Misplaced

The Revenue had heavily relied on landmark Supreme Court rulings like State of Maharashtra v. Praful B. Desai and Kishan Chand Jain v. Union of India, which pertained to video-conferencing in criminal trials and virtual courts, to argue that virtual presence is physical presence. The High Court distinguished these judgments, noting they pertained to criminal procedure and access to justice, and could not be imported to determine the place of rendition of technical services under a bilateral tax treaty.

The court observed that while video conferencing fulfills the requirement of evidence being recorded in the "presence" of an accused under criminal law, applying that logic to cross-border tax disputes is entirely out of context. The court stated, "In the facts of the present case, the services in question can be said to have been rendered in the presence of each other because they were rendered through video conferencing. But it is a giant leap from there to say that the said services are physically rendered in India."

"Any declaration given by us on this issue would directly impact the appeals filed by the Petitioner for the previous assessment years, which are pending before the ITAT."

Refusal To Adjudicate On DTAA Interpretation

While the petitioner sought a definitive declaration that its services did not constitute 'fees for technical services' under Article 12(4) of the India-China DTAA due to the lack of physical rendition in India, the High Court declined to adjudicate on the merits of this treaty interpretation. The bench emphasised that this exact issue is currently live and pending before the Income Tax Appellate Tribunal (ITAT) for the petitioner's previous assessment years.

The court held that exercising its extraordinary writ jurisdiction under Article 226 of the Constitution of India to give a declaration on taxability would directly interfere with the pending appellate proceedings. Consequently, the court left it open for the parties to canvass all arguments regarding the interpretation of the India-China DTAA before the ITAT.

The High Court dismissed the writ petition and upheld the Assessing Officer's order rejecting the NIL withholding tax certificate application. The court declined to issue any declaration regarding the taxability of the services under the India-China DTAA, directing the parties to pursue their remedies before the ITAT where the appeals are currently pending.

Date of Decision: 27 March 2026