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Issues: (i) Whether the competent authority's issuance of a certificate under Section 197 of the Income-tax Act, 1961 at the rate of 0.1% in respect of income from operation of airline services (which are claimed to be exempt under Article 8 of the India-United Kingdom Double Taxation Avoidance Agreement read with Section 90 of the Income-tax Act, 1961) was sustainable, and whether a certificate at nil rate should be issued.
Analysis: The competent authority recorded that airline operation services were not exigible to tax but issued a certificate at 0.1% apparently influenced by an erroneous factual premise of outstanding demands shown on the ITBA portal for earlier assessment years. The record showed that the asserted outstanding demands were factually incorrect and that refunds were due/made. The authority's contemporaneous admission that airline operations are not taxable, combined with a long history of nil-rate certificates for substantially similar transactions and absence of any lawful change in the nature of the transactions or tax law, indicates that the 0.1% certificate reflected inconsistent application of mind. The statutory scheme permits issuance of a Section 197 certificate to adjust withholding rates in light of treaty entitlement and taxability; advance collection under such certificate remains subject to final assessment, but that does not justify maintaining a non-nil certificate where exemption under the applicable DTAA and Section 90 applies and no valid contrary factual or legal basis exists.
Conclusion: Certificate issued under Section 197 of the Income-tax Act, 1961 at the rate of 0.1% is set aside and a certificate at nil rate is to be issued in respect of income from operation of airline services exempt under Article 8 of the India-United Kingdom Double Taxation Avoidance Agreement read with Section 90 of the Income-tax Act, 1961.
Ratio Decidendi: Where income is exempt under a tax treaty (India-United Kingdom DTAA) read with Section 90 of the Income-tax Act, 1961 and there is no valid factual or legal basis (including outstanding demands) to the contrary, the competent authority must issue a certificate under Section 197 of the Income-tax Act, 1961 at nil rate; an issuer's inconsistent application of mind or reliance on incorrect factual entries renders a non-nil certificate liable to be set aside.
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