Section 197 Income Tax Act | Arbitrary Rejection of NIL Withholding Certificate Violates Rule 28AA & Legitimate Expectation Doctrine : Delhi HC

The Delhi High Court has reaffirmed that tax authorities cannot arbitrarily reject applications for NIL or lower rate withholding certificates under Section 197 of the Income Tax Act without applying the mandatory formula under Rule 28AA or providing reasoned justification. The judgment underscores the constitutional imperative of non-arbitrariness in tax administration and the binding nature of prior consistent conduct by revenue authorities.

Background & Facts

The Dispute

The petitioner, Make My Trip (India) Private Limited, a leading online travel services provider incorporated in 2000, applied on 19.05.2025 for a NIL Withholding Tax Certificate under Section 197 of the Income Tax Act, 1961 for Financial Year 2025-26, relevant to Assessment Year 2026-27. Alternatively, it sought a certificate at the rate of 0.30%, consistent with the rate granted for the immediately preceding three financial years. The application was rejected on 17.07.2025 by the Deputy Commissioner of Income Tax (TDS), Gurugram, solely on the ground that aggregate outstanding tax demands of ₹23,80,63,189/- were pending against the petitioner’s TAN.

Key Facts

• The petitioner has been assessed by the Assistant Commissioner of Income Tax, Circle 75(1), Delhi, for over a decade under PAN AADCM5146R and TAN DELM09144C.
• The petitioner has consistently filed applications for lower withholding certificates since 2017-18, with the following rates granted:
  • 0.30% for A.Y. 2025-26 (issued 01.06.2024)
  • 0.30% for A.Y. 2024-25 (issued 09.06.2023)
  • 0.30% for A.Y. 2023-24 (issued 05.08.2022)
  • 0.10% for A.Y. 2022-23 (issued 05.05.2021)
  • 1.50% for A.Y. 2021-22 (issued 29.06.2020)
• The petitioner’s taxable income for FY 2025-26 was estimated to be NIL due to substantial brought-forward losses and unabsorbed depreciation.
• The petitioner has pending tax refunds aggregating ₹84,10,73,810/- across A.Ys 2016-17 to 2023-24.
• The outstanding demand of ₹23,80,63,189/- cited in the impugned order primarily arose from alleged TDS defaults on payments to Google India, Khajrana, and HP India for FYs 2017-18 to 2019-20.
• The petitioner had challenged these demands through rectification applications under Section 154 and appeals before the National Faceless Appeal Centre.
• On 22.08.2025, after the impugned order, rectification orders under Section 154 read with Section 201(1)/(1A) reduced the disputed demand to ₹14,08,03,300/-.
• The petitioner voluntarily offered to deposit 20% of the reduced disputed demand (₹2,81,60,660/-) within seven days as a gesture of bonafides.

Procedural History

• 19.05.2025: Petitioner filed Form 13 application for NIL or 0.30% withholding certificate.
• 28.05.2025: Respondent issued query regarding outstanding demand of ₹1,50,65,760/- (PAN) and ₹11,660/- (TAN).
• 03.06.2025: Petitioner replied, clarifying that PAN demand was under rectification and TAN demand was technical.
• 17.07.2025: Impugned order passed rejecting application citing ₹23,80,63,189/- outstanding demand.
• 22.08.2025: Rectification orders issued reducing demand to ₹14,08,03,300/-. This was not considered by the AO.
• 16.03.2026: Writ petition filed before Delhi High Court (W.P.(C) 11956/2025) was heard and decided.

The Parties' Positions

For the Petitioner

• The Revenue had consistently granted lower withholding certificates for the past eight years under identical factual circumstances.
• The rejection was arbitrary, non-reasoned, and violated the principles of consistency and non-arbitrariness under Maruti Suzuki India Ltd. and South Indian Bank Ltd.
• The outstanding demand was not final, was under appeal, rectification, or stay, and was substantially reduced post-order.
• Rule 28AA mandates consideration of estimated tax liability, brought-forward losses, and pending refunds - all of which were ignored.
• The impugned order was a one-line rejection without application of mind, violating natural justice.

For the Respondents

• The petitioner had outstanding tax demands of ₹23,80,63,189/- against its TAN, which were recoverable and not stayed.
• Rule 28AA requires consideration of existing liabilities, and the petitioner failed to prove that the demands were non-recoverable.
• The petitioner had filed Form 13 with its corporate address in Gurugram, Haryana, making the Punjab and Haryana High Court the proper forum.
• Section 197 certificates are provisional and do not create vested rights; past grants do not bind future decisions.
• The remedy under Section 264 of the Act was available and should have been exhausted.

Relief Sought

The petitioner sought:

• Quashing of the impugned order dated 17.07.2025
• Direction to the AO to grant a NIL or 0.30% withholding certificate for FY 2025-26
• Declaration that the rejection was arbitrary and violative of Rule 28AA and constitutional principles

The Legal Issue

The central question was whether the tax authority can reject an application for a NIL or lower rate withholding certificate under Section 197 of the Income Tax Act solely on the basis of pending, disputed, and un-stayed tax demands without applying the mandatory formula under Rule 28AA, considering the petitioner’s estimated NIL tax liability, substantial pending refunds, and long-standing consistent practice.

Arguments Presented

For the Petitioner

The petitioner relied on Manpower Group Services India Pvt. Ltd. v. CIT (TDS), Tata Teleservices (Maharashtra) Ltd. v. DCIT (TDS), and Virgin Atlantic Airways Ltd. v. PCIT to argue that Rule 28AA is mandatory and must be applied with reasoned analysis of four parameters: estimated tax liability, existing demand, brought-forward losses, and pending refunds. The Revenue’s prior issuance of certificates at 0.30% for three consecutive years created a legitimate expectation. The outstanding demand of ₹23.80 crore was not final, was under rectification, and had been reduced to ₹14.08 crore post-order. The one-line rejection without reference to Rule 28AA was arbitrary and violated principles of natural justice and non-arbitrariness under Maruti Suzuki and South Indian Bank. The petitioner also offered to deposit 20% of the reduced demand as a bonafide gesture.

For the Respondent

The Revenue contended that Section 197 certificates are provisional and do not create vested rights. The existence of recoverable demands, even if disputed, disqualifies an assessee from receiving a NIL certificate under Rule 28AA. The petitioner’s failure to obtain a stay on the demand and lack of documentary proof of rectification rendered the demand enforceable. The jurisdictional challenge was valid as Form 13 was filed with a Gurugram address, and the order was issued by the TDS Circle, Gurgaon. The remedy under Section 264 was available and should have been exhausted. The Revenue also relied on Chhabil Dass Agarwal and Coforge Solutions to argue that writ jurisdiction should not interfere with administrative decisions where statutory remedies exist.

The Court's Analysis

The Court began by rejecting the jurisdictional objection, noting that the petitioner’s assessment and TDS jurisdiction had always been with Circle 75(1), Delhi, and that all prior certificates - including for A.Y. 2025-26 - were issued from Delhi. The rectification orders dated 22.08.2025, which reduced the disputed demand, were also issued by the same Delhi office, confirming jurisdiction.

The Court then turned to the core issue: the absence of reasoning in the impugned order. It emphasized that Rule 28AA of the Income Tax Rules, 1962, prescribes a mandatory formula for determining the appropriate rate of TDS, requiring the Assessing Officer to consider:

"(i) the estimated total income of the assessee for the previous year; (ii) the tax payable on the basis of completed assessments; (iii) the existing outstanding tax liability; and (iv) the tax liability on the basis of the income on which tax is to be deducted."

The Court held that the impugned order failed to mention any of these parameters. It did not analyze the petitioner’s estimated NIL income, its ₹84 crore pending refunds, or the fact that the disputed demand was under appeal and rectification. The order merely cited a figure - ₹23.80 crore - without explaining its composition, relevance, or recoverability.

The Court cited Manpower Group Services India Pvt. Ltd. and Virgin Atlantic Airways Ltd. to affirm that an order under Section 197 must be a "speaking order" and cannot be arbitrary. It observed:

"The Government is bound to follow the rules and standards they themselves have set on the pain of their action being invalidated."

The Court further noted that the Revenue’s own conduct - granting certificates at 0.30% for three consecutive years under identical circumstances - created a legitimate expectation. The sudden reversal without justification violated the principle of consistency in tax administration, as upheld in Radhasoami Satsang and Maruti Suzuki.

The Court also rejected the Revenue’s reliance on Chhabil Dass Agarwal and Coforge Solutions, distinguishing them on facts. In those cases, the petitioners had not alleged violation of natural justice or non-application of statutory rules. Here, the petitioner explicitly challenged the non-application of Rule 28AA and the absence of reasoning.

The Court acknowledged that while Section 197 certificates are provisional, they are not a blank cheque for arbitrary denial. The existence of disputed demands does not automatically disqualify an applicant - the AO must evaluate whether the demand is likely to be upheld, whether it is stayed, and whether the assessee’s overall tax posture justifies relief.

The Court concluded that the rejection was legally unsustainable and violated statutory mandate, constitutional principles, and settled jurisprudence.

The Verdict

The writ petition was allowed. The impugned order dated 17.07.2025 rejecting the application for a NIL or 0.30% withholding certificate under Section 197 of the Income Tax Act is set aside. The matter is remanded to the Assessing Officer, Circle 75(1), Delhi, to reconsider the application in accordance with Rule 28AA, taking into account the petitioner’s estimated NIL income, pending refunds of ₹84,10,73,810/-, and the reduced disputed demand of ₹14,08,03,300/-. The AO shall pass a reasoned, speaking order within two weeks from the date of this judgment. The pending application is disposed of as infructuous.

What This Means For Similar Cases

Rule 28AA Is Mandatory - Not Discretionary

• Practitioners must insist that AO’s cite Rule 28AA explicitly in every order rejecting or granting a lower TDS certificate.
• Any order failing to analyze the four parameters under Rule 28AA(2) is liable to be quashed.
• The burden is on the Revenue to demonstrate how each parameter was weighed - not on the assessee to prove why the demand is invalid.

Past Consistency Creates Legitimate Expectation

• If an assessee has received lower withholding certificates for three or more consecutive years under identical financial conditions, a sudden reversal without rational justification is arbitrary.
• Revenue cannot change its stance merely because a demand is pending - it must evaluate the likelihood of recovery and the assessee’s overall tax position.
• This principle applies equally to corporate taxpayers with recurring losses and substantial refunds.

Pending Demands Are Not Automatic Disqualifiers

• A pending demand, even if substantial, does not automatically disqualify an applicant under Section 197.

• The AO must consider whether the demand is final, stayed, or under appeal.

• Where rectification or appellate proceedings are pending, the AO must assess the probability of the demand being upheld before denying relief.

• The existence of a net refund position (as in this case) must be factored into the estimated tax liability calculation.

• Practitioners should always file a detailed reconciliation of outstanding demands and refunds alongside Section 197 applications.

• Voluntary undertakings to deposit a portion of disputed demand (as done here) can strengthen bonafides and expedite relief.

• Writ petitions under Article 226 remain an efficacious remedy where the order is non-speaking or violates statutory mandates - even if Section 264 revision is theoretically available.

• Jurisdictional objections based on Form 13 address are invalid if the substantive assessment and TDS jurisdiction have always been with another office - especially where prior orders and rectifications emanate from that office.