Rejection of Nil-TDS certificate is justified if previous adverse assessments on identical issues are pending appellate adjudication.

The Petitioner, a Chinese tax resident and regional headquarters for the Benteler Group, entered into a Service Agreement with its Indian subsidiary, Benteler India Private Limited

Under this agreement, the Petitioner provided managerial and technical services (HR, IT, Finance) from China via email and video conferencing

For Assessment Years (AY) 2015-16 through 2023-24, the Indian tax authorities treated these payments as "Fees for Technical Services" (FTS) taxable in India; the Petitioner challenged these assessments, and the appeals are currently pending before the ITAT and CIT(Appeals)

On July 1, 2025, the Petitioner applied for a "NIL withholding tax" certificate under Section 197 of the Income Tax Act, 1961 (the "IT Act") for AY 2026-27, arguing that under Article 12(4) of the India-China Double Taxation Avoidance Agreement (DTAA), services must be physically rendered "in" India to be taxable

Respondent No. 1 rejected the application on August 1, 2025, citing the adverse findings in previous years' assessments

The Petitioner approached the High Court seeking to quash this rejection and a declaration that the income is not taxable in India

1. Whether the rendition of services via virtual modes (video conferencing/email) from a foreign country constitutes the physical provision of services "in" India under Article 12(4) of the India-China DTAA

2. Whether the Assessing Officer (AO) was justified in rejecting the application for a NIL withholding certificate under Section 197 of the IT Act based on the Petitioner's previous assessment history

3. Whether the High Court should exercise its jurisdiction under Article 226 to interpret the DTAA while the same issue is pending before the Income Tax Appellate Tribunal (ITAT)

Section 197 of the IT Act regarding the grant of lower/nil withholding certificates

Rule 28AA of the Income Tax Rules, 1962, which mandates the AO to determine tax liability by considering the assessed income of the last three previous years

Article 12 of the India-China DTAA, where Article 12(4) defines FTS as services provided "in" the other Contracting State

Section 90 of the IT Act, which allows DTAA provisions to prevail over domestic law if they are more beneficial to the assessee

The Court first addressed the Revenue’s argument that virtual services equate to physical presence. It rejected this "broad proposition," holding that the mere use of technology like video conferencing does not automatically mean services are physically rendered in India; it could equally be argued the recipient "received" them in China

On the validity of the Section 197 rejection, the Court found the AO’s decision "unexceptionable". Under Rule 28AA, an AO must consider the assessment history of the preceding years. Since authorities higher than the AO (CIT(A) and DRP) had already ruled in previous years that the Petitioner's income was taxable in India, and those orders remain in force pending appeal, the AO could not have issued a NIL certificate without contradicting superior authorities

Regarding the Petitioner’s request for a declaration on the interpretation of Article 12(4), the Court exercised judicial restraint. It held that because the exact interpretation of the India-China DTAA is the core subject of pending appeals before the ITAT for earlier years, any declaration by the High Court at this stage would bypass the statutory appellate machinery and unfairly impact the pending litigation

The Court held that the AO was legally justified under Rule 28AA in refusing the NIL withholding certificate given the Petitioner’s adverse assessment history for the previous four years

The Court declined to grant the declaration regarding non-taxability, leaving the interpretation of Article 12(4) of the India-China DTAA to be decided by the ITAT in the pending appeals

No order as to costs was made