Income Tax | Non-Application of Rule 28AA Vitiates Section 197 Order: Delhi High Court Quashes Rejection of Nil Withholding Certificate for UK-Based Nord Anglia

"Once Tribunal’s Orders Are Binding, Mere Filing of Appeal Cannot Justify Ignoring Them", Delhi High Court setting aside the rejection of a Nil Withholding Certificate under Section 197 of the Income-tax Act, 1961. A Division Bench comprising Justice V. Kameswar Rao and Justice Vinod Kumar held that the Assessing Officer’s refusal to grant the certificate—on grounds of protecting revenue and premature determination of income—was legally unsustainable and violative of Rule 28AA of the Income-tax Rules, 1962.

The High Court emphasized that while safeguarding revenue is important, statutory provisions must be strictly followed and not bypassed by speculative assessments, especially when appellate findings favour the taxpayer. The matter has been remanded to the Assessing Officer (AO) for fresh adjudication within four weeks, directing that past favourable ITAT rulings must be given due weight unless overturned.

"Revenue Authorities Must Follow Tribunal Orders Unless Set Aside": High Court Applies Kamlakshi Finance Principle

The petitioner, Nord Anglia Education Ltd., a UK-based entity providing managerial support services to its Indian subsidiary, had approached the High Court challenging the AO’s order dated June 9, 2025, and consequential certificate dated July 30, 2025, rejecting its request for a Nil rate tax deduction certificate under Section 197.

The AO refused the certificate on the ground that the matter was at a "premature stage" and insisted that 15% TDS be deducted “to protect the interest of revenue,” without engaging with the petitioner’s substantive contentions or complying with Rule 28AA's statutory mandate.

Calling this a “mechanical and arbitrary exercise of power”, the Court observed:

“It is clear that these factors [under Rule 28AA] have not been actually considered, which displays the non-application of mind of the Assessing Officer, making the impugned order and certificate untenable.”

High Court: Rule 28AA Is Mandatory, and Deviation Vitiates Decision-Making Process

The Court held that Rule 28AA(2) lays down four mandatory parameters—including past tax liability, advance tax paid, and assessed or estimated income of the past four years—that the AO must consider when determining whether to issue a Nil or lower withholding certificate.

Rejecting Revenue’s justification of issuing a 15% TDS certificate as protective action, the Court clarified: “The Assessing Officer cannot ignore the mandate of Rule 28AA and proceed on any other basis as the Government is bound to follow the rules and standards they themselves had set on pain of their action being invalidated.”

This position was fortified by reliance on earlier rulings of the Delhi High Court in Manpower Services India Pvt. Ltd., Virgin Atlantic Airways Ltd., and Hero Wind Energy Pvt. Ltd., all of which stressed that adherence to Rule 28AA is not optional.

Tribunal Rulings Binding on Revenue Unless Set Aside: Court Rejects Revenue’s Contention of Pending Appeals

Crucially, the High Court rebuked the Revenue for disregarding two prior decisions of the Income Tax Appellate Tribunal (ITAT) in Nord Anglia’s own case for AY 2020–21 and AY 2021–22, which had categorically held that the services rendered were not taxable as Fees for Technical Services (FTS) under Article 13 of the India–UK DTAA.

The Court invoked the Supreme Court’s decision in Kamlakshi Finance Corporation Ltd. to underline that mere filing of an appeal does not render a binding appellate order inoperative:

“Until the conclusion arrived at by the Tribunal for AYs 2020-21 and 2021-22 are set aside or reversed, they would be binding on the Revenue. The fact that an appeal has been preferred cannot be the stand of the respondent/Revenue to justify the impugned order.”

It reiterated that the Revenue is bound to follow decisions of appellate authorities even if it disagrees with them, until such orders are set aside.

“Managerial Services Not Taxable As FTS Under DTAA”: Court Emphasizes Legal Distinction

The Court accepted the petitioner’s argument that the India–UK DTAA, under Article 13(4), only taxes technical or consultancy services that “make available” technical knowledge or know-how, and does not cover managerial services. Since the petitioner merely provided routine operational support on a cost-to-cost basis, such services could not be brought under the scope of FTS under the DTAA.

This distinction was central to the ITAT’s earlier rulings and had not been controverted by the AO in the impugned order, who failed to deal with the petitioner’s submissions and prior legal precedents. The High Court noted:

“Though the AO has held that determining the income for AY 2026–27 is premature... [he] should have considered the assessed or returned or estimated income for the previous years… It is clear that these factors have not been actually considered.”

Court Rejects Revenue’s Reliance on National Petroleum Case

The Revenue relied on the Delhi High Court’s decision in National Petroleum Construction Co. (2019) to justify the AO's limited role under Section 197. However, the Court dismissed this argument, finding that the case was factually inapplicable, dealing with PE attribution and characterisation of income, which did not arise in Nord Anglia’s case.

“We find the submission of Mr. Bajpai [counsel for petitioner] appealing… the assessing officer not having considered the issue from the perspective of Rule 28AA… the statutory requirement… has not been satisfied.”

Remand for Fresh Decision Within 4 Weeks

While the petitioner argued for direct issuance of a Nil Certificate, the Court chose to remand the matter back to the Assessing Officer, with a strict direction to decide the application afresh in four weeks and in accordance with Rule 28AA, taking into account the binding nature of past ITAT orders, unless they are overturned.

“The AO shall consider the application… afresh, keeping in view the mandate of the law, specifically Rule 28AA… and without being influenced by the filing of the appeal/application against the orders of the Tribunal…”

In quashing the impugned certificate and order under Section 197, the Delhi High Court has sent a clear message: Revenue authorities cannot ignore binding precedent nor bypass statutory rules under the guise of revenue protection. Mechanical decision-making—especially where taxpayer rights under a valid DTAA and tribunal rulings are in play—will not withstand judicial scrutiny.

The decision reinforces the primacy of Rule 28AA, the binding nature of appellate orders, and the judiciary’s intolerance for arbitrary exercise of discretion in tax administration.

Date of Decision: January 14, 2026