Withholding tax certificate must match accepted PE profit attribution under section 197, or it cannot stand

A withholding tax certificate issued under section 197 must be consistent with the accepted profit attribution to a permanent establishment. Where the record accepted attribution of 26% to the PE, the resulting withholding rate was stated to be no higher than 1.04%, and a 4% rate was not reconciled with that basis. The analysis confined itself to the legality of the withholding certificate and did not decide the underlying assessment issues for the relevant years. The impugned order was therefore treated as unsustainable on the stated record and was quashed in favour of the assessee.

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Issues: Whether the withholding tax certificate issued under section 197 of the Income-tax Act, 1961 at 4% could be sustained when the accepted profit attribution to the permanent establishment was 26% and the resulting withholding rate could not exceed 1.04%.

Analysis: The accepted position in the record was that the profit attributable to the permanent establishment in India was 26%. On that basis, the withholding tax rate computed by the parties could not exceed 1.04%. The impugned order, however, fixed withholding at 4% without satisfactorily reconciling that rate with the accepted attribution percentage. Since the taxability issue for the relevant years was confined to the certificate under section 197, the Court confined itself to the legality of the impugned withholding rate and left the substantive assessment contentions open.

Conclusion: The impugned order fixing withholding tax at 4% could not be sustained and was quashed; the issue was answered in favour of the assessee.

Ratio Decidendi: Where the rate of profit attribution to a permanent establishment is accepted on the record, a withholding tax certificate under section 197 must be consistent with that accepted attribution and cannot be fixed at a higher rate without a legally sustainable basis.

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