HC Grants Relief to Foreign Airline, Quashes 0.1% TDS; Orders Nil Withholding Certificate

In a significant ruling, the High Court has granted relief to a foreign airline by setting aside the order directing deduction of 0.1% TDS and has directed issuance of a Nil withholding certificate under Section 197 of the Income Tax Act.

The judgment reinforces the supremacy of Double Taxation Avoidance Agreements (DTAA) over domestic TDS provisions where treaty protection is clearly available.

Brief Background of the Case

The foreign airline was operating international flights to and from India. Its income from such operations was covered under the relevant Article of the applicable DTAA, which provides that profits from international air transport are taxable only in the country of residence of the airline.

Despite this, the Assessing Officer directed deduction of 0.1% TDS on payments made to the airline and declined to issue a Nil certificate under Section 197.

Aggrieved by this decision, the airline approached the High Court.

Core Issue Before the Court

Whether TDS can be imposed at 0.1% when the DTAA clearly provides exclusive taxing rights to the country of residence, and whether the assessee is entitled to a Nil withholding certificate under Section 197.

High Court’s Observations

The Court observed:

• DTAA provisions override the Income Tax Act where they are more beneficial to the assessee.

• Article relating to international air transport grants exclusive taxation rights to the country of residence.

• If income is not chargeable to tax in India due to treaty protection, TDS cannot be mechanically imposed.

• Section 197 certificate must reflect actual tax liability, not hypothetical withholding.

The Court held that once treaty protection is established, there is no justification for directing even minimal TDS.

Final Ruling

The High Court:

• Quashed the 0.1% TDS direction

• Directed issuance of a Nil withholding certificate under Section 197

• Reaffirmed that treaty benefits cannot be diluted through administrative instructions

Legal Significance

This ruling is important for:

• Foreign airlines operating in India

• Non-resident entities covered under DTAA

• Businesses making payments to foreign companies

• Cases involving Section 195 and Section 197

The judgment makes it clear that withholding tax must align with actual tax liability under treaty provisions.

If income is not taxable in India, TDS cannot be forced.

Practical Takeaway

If a non-resident entity is covered under a DTAA providing exclusive taxation rights to another country:

• Examine the relevant treaty article carefully

• Apply for a Nil or lower withholding certificate under Section 197

• Challenge unjustified withholding orders

Treaty protection is not a concession. It is a legal right.

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