Draft Order Can Not give Rise to Demand for Any Other Purpose.

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The assessee ,a non-resident company operates in India with branches at New Delhi and Mumbai and is engaged in the business of providing consultancy on strategic planning and related activities. The assessee has filed returns in India from assessment year 1993-94.

On 8-1-2010 the petitioner made an application under section 195(3) of the Income-tax Act, 1961 for assessment year 2011-12 to the Deputy Director of Income-tax, International Taxation – 4(1) – seeking a nil withholding certificate for payments received for services rendered to clients/customers, group entities and for interest received on deposits made with banks. The assessee has received certificates under section 195(3) for assessment year 1998-99 to assessment year 2010-11.

The A.O rejected the application of the assessee for the grant of a nil withholding certificate for assessment year 2011-12 on the ground that demand in earlier assessment years are determined , although pending before DRP.

The issue before , Bombay High Court in Mckinsey & Company Inc vs CIT 323 ITR 524;234 CTR 153 (SC)/[2010] was

Whether demand raised in a draft order pending before DRP can be considered for invoking Rule 29B of I.T.Rules?

The Bombay High Court held vide its order 4/13/2010 as under :

12. There is merit in the submission which has been urged on behalf of the petitioner that the order which has been passed by the Assessing Officer in the present case discloses a complete non-application of mind to the provisions of the inter-governmental MoU dated 25-9-2002 and the governing principles stipulated in rule 29B. The Petitioner having invoked the Mutual Agreement Procedure (MAP), the consequence under the MoU between the Government of India and the Government of the U.S. is a suspension of the collection of tax demands and withholding taxes on income. The petitioner invoked the provisions of Article 27 of the U.S. India Tax Treaty for assessment year 2005-06 by a communication dated 24-2-2009. In a response dated 20-3-2009 the Internal Revenue Service in the Department of Treasury of the U.S. Government acknowledged receipt of the application for competent authority assistance and stated that the Government of India was being requested to intervene to suspend collection actions on such portion until the proceeding was completed. The petitioner was granted certificates under section 195(3) both before and after the assessment order was passed for assessment year 2005-06. The Assessing Officer has declined to grant a certificate under section 195(3) on the ground that the balance outstanding for assessment year 2005-06 is Rs. 9.33 crores. The Assessing Officer has acknowledged the pendency of MAP proceedings. The basis on which a certificate under section 195(3) was declined is, ex facie, contrary to law and amounts to a patent disregard of the binding provisions of the MoU between the Governments of India and the U.S.