Delhi High Court asks AO to issue a Nil withholding Tax Certificate in a matter of Lufthansa [Read Order]

Lufthansa Cargo AG, a German tax resident, is engaged in international cargo handling and transportation of cargo via aircraft. The petitioner applied for a Nil withholding tax certificate under Section 195(3) of the Income Tax Act, 1961, for the financial year 2024-25, claiming its income is exempt under Article 8 of the India-Germany DTAA. The application was rejected by the Assistant Commissioner of Income Tax (AO), citing insufficient documentation. Instead, a certificate under Section 197 was issued on May 17, 2024, allowing withholding tax at 0.10% instead of Nil.

Petitioner (Lufthansa Cargo AG)

The petitioner has been receiving Nil withholding tax certificates for over a decade, except for FY 2019-20, which was also successfully challenged in court. Its income is solely derived from international cargo operations and is not taxable in India under Article 8 of the DTAA. The AO’s rejection was erroneous, as the company had submitted the necessary indemnity bond and financial records. The AO failed to provide any justification for allowing a lower withholding tax rate (0.10%) instead of Nil.

Respondents (Income Tax Department)

The petitioner did not submit financial statements for the previous or projected years. Certain income components (e.g., interest income, commission, handling charges) were not clarified. The indemnity bond acknowledged that taxable income might arise, indicating potential taxability. The reduced rate of 0.10% was applied as a protective measure for revenue collection.

Court’s Decision and Rationale

The court found that Lufthansa Cargo AG had consistently been granted Nil withholding tax certificates in prior years. The AO failed to justify why a lower tax rate of 0.10% was imposed instead of Nil. The rejection of the application under Section 195(3) was arbitrary and lacked proper reasoning. Since FY 2024-25 was nearing completion, remanding the matter for fresh consideration would not be feasible. The court set aside the impugned orders and directed issuance of a Nil withholding tax certificate under Section 197. The AO was permitted to assess taxability separately in later proceedings, uninfluenced by this order.