Withholding under section 195(2) must reflect proper income attribution, not assumptions or wholesale Indian sourcing.

In proceedings under section 195(2), withholding must be confined to the portion of income chargeable to tax and cannot rest on assumptions or a wholesale attribution of the entire remittance to an Indian permanent establishment. The attribution exercise must follow the treaty framework, with proper allowance for deductions and apportionment between Indian and overseas activities, and a treaty claim cannot be rejected on an erroneous assumption that the foreign recipient is not an incorporated entity. The applicant must furnish relevant financial information, but the withholding determination cannot be made de novo on a defective basis; the order should instead be modified to reflect the limited scope of the provision.

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Issues: (i) Whether the Assessing Officer was justified in treating the remittance to the foreign supplier as wholly attributable to a permanent establishment in India and in denying the treaty benefit on the premise that the foreign recipient was not an incorporated entity; (ii) Whether, in proceedings under section 195(2), the applicant was required to furnish the relevant financial information and whether the withholding determination could be made de novo without proper attribution of income.

Issue (i): Whether the Assessing Officer was justified in treating the remittance to the foreign supplier as wholly attributable to a permanent establishment in India and in denying the treaty benefit on the premise that the foreign recipient was not an incorporated entity.

Analysis: The material relied upon by the Assessing Officer proceeded on assumptions not supported by the record, including the assumption that consolidated AWS figures in the public domain represented the foreign recipient alone. The assumption that the foreign recipient was not an incorporated entity was found to be ex facie erroneous. The existence of a permanent establishment remained contentious, and even on that assumption, the attribution exercise had to be undertaken in accordance with the treaty framework, including allowance for relevant deductions and apportionment between India and overseas activities. The entire remittance could not be treated as attributable to India without such exercise.

Conclusion: The wholesale attribution of the remittance to an Indian permanent establishment was not justified, and the treaty position could not be rejected on the erroneous premise that the foreign recipient was not an incorporated entity.

Issue (ii): Whether, in proceedings under section 195(2), the applicant was required to furnish the relevant financial information and whether the withholding determination could be made de novo without proper attribution of income.

Analysis: Proceedings under section 195(2) are confined to determining the proportion of income chargeable to tax for withholding purposes. The applicant cannot avoid furnishing the necessary information on the footing that the Revenue may independently access it. At the same time, the determination cannot proceed as a fresh assessment disregarding the limited scope of the provision or existing material relating to the payee's tax position. In the circumstances, and considering the elapsed period, the matter was appropriately resolved by modifying the withholding direction rather than sending it back for a fresh round of litigation.

Conclusion: The applicant was obliged to furnish relevant information, but the withholding order required modification rather than a de novo determination on the existing defective basis.

Final Conclusion: The impugned withholding order was substantially scaled down and confined to a limited period, resulting in partial relief to the petitioners while preserving the Revenue's liberty in relation to other periods and the substantive tax proceedings concerning the payee.

Ratio Decidendi: In proceedings under section 195(2), the withholding determination must be confined to the proportion of income chargeable to tax and must rest on a proper attribution exercise supported by relevant material, not on assumptions or a wholesale treatment of the entire remittance as India-sourced income.

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