Nil withholding tax certificate cannot be reduced without cogent reasons when treaty-based non-taxability is supported by the record.

Where the taxpayer's income from aircraft operations in international traffic was shown on the existing record, and by past consistent treatment, to be not chargeable to tax in India under Article 8 of the India-Germany DTAA, a nil withholding tax certificate could not be reduced to a positive rate without cogent reasons or supporting material. The record showed that prescribed information had been furnished and queries answered, while the Revenue did not controvert the treaty-based non-taxability claim. The reduction to 0.10 per cent was therefore unsupported, and the authorities were directed to issue a nil withholding tax certificate, leaving assessment-stage examination of taxability open in accordance with law.

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Issues: Whether the rejection of the application for a nil withholding tax certificate under Section 195(3) of the Income-tax Act, 1961 and the grant of a reduced-rate certificate under Section 197(1) of the Income-tax Act, 1961 could be sustained where the petitioner's income was claimed to be not chargeable to tax in India under Article 8 of the India-Germany Double Taxation Avoidance Agreement.

Analysis: The petitioner had consistently been granted nil withholding certificates in earlier years and its business activity and nature of receipts remained unchanged. The rejection order proceeded on the ground that the petitioner had not produced sufficient material to satisfy Rule 29B(1) and Rule 29B(2) of the Income-tax Rules, 1962, but the record showed that the petitioner had furnished the prescribed information and responded to queries. The Revenue did not controvert the petitioner's assertion that the relevant income from aircraft operations in international traffic was not chargeable to tax in India under Article 8 of the treaty. In these circumstances, the reduction of withholding to 0.10 per cent instead of nil rate was not supported by reasons or by the material on record, and remand was considered impracticable because the relevant financial year was about to expire.

Conclusion: The impugned rejection and reduced-rate certificate could not be sustained, and the petitioner was entitled to a certificate for nil withholding tax.

Final Conclusion: The petition succeeded and the authorities were directed to issue a nil withholding tax certificate, while leaving open the assessment-stage examination of taxability in accordance with law.

Ratio Decidendi: Where the taxpayer's income is shown, on the existing record and past consistent treatment, to be not chargeable to tax in India, a withholding certificate cannot be reduced from nil to a positive rate without cogent reasons and material support.

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