Tax deduction certificate and residence/PE of a foreign company officers duty and improper withholding direction quashed

Challenge to issuance and validity of a certificate for deduction of tax at source under Section 197, and whether a foreign company is resident in India or has a permanent establishment. The court applied the management and control test to conclude that grant of a power of attorney to an India resident and filing of forms by that agent does not render a foreign-incorporated company resident in India; consequence: residence and PE were not established on the record. The competent officer was held to have failed in statutory duty by ignoring binding precedents and exercising purported discretion improperly; consequence: the impugned order directing a non-nil withholding rate was quashed and the petition allowed.

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Issues: (i) Whether the order dated 26.09.2025 and certificate dated 11.09.2025 requiring deduction of tax at 10% under Section 197 of the Income-tax Act, 1961 are liable to be quashed; (ii) Whether the petitioner is entitled to a certificate of nil rate for AY 2026-27 and subsequent years under Section 197 of the Income-tax Act, 1961.

Issue (i): Validity of the impugned order dated 26.09.2025 and certificate dated 11.09.2025 requiring 10% tax deduction under Section 197 of the Income-tax Act, 1961.

Analysis: The impugned order does not record any concrete factual or legal finding explaining how the petitioners receipts for the relevant year are exigible to tax or how the petitioners residential status or PE in India has changed. Earlier High Court orders in the petitioners own matters granting nil-rate certificates for preceding years and related reasoning including consideration of relevant statutory provisions and Rule 28AA were not meaningfully distinguished by the competent officer. The officers stated justification that the certificate is interlocutory and subject to final assessment does not substitute for a reasoned finding required under Section 197 before issuing a non-nil certificate.

Conclusion: The impugned order dated 26.09.2025 and the certificate dated 11.09.2025 requiring deduction of tax at 10% are quashed and set aside.

Issue (ii): Entitlement of the petitioner to a certificate of nil rate for AY 2026-27 and subsequent years under Section 197 of the Income-tax Act, 1961.

Analysis: The petitioners nature of transactions and lack of presence/PE in India were not shown to have changed for the year under consideration. Absent any recorded change of facts or a specific finding that the petitioner is resident in India or has a PE, the competent authority lacks a basis to refuse nil-rate relief. However, the competent authority may, for future years, record findings to the contrary after issuing notice and on disclosure of material facts by the petitioner.

Conclusion: A certificate of nil rate shall be issued in favour of the petitioner for AY 2026-27 and subsequent years, subject to the competent authority being free to record and communicate any contrary finding after notice if it concludes that the petitioner has a PE in India or receipts are taxable.

Final Conclusion: The petition is allowed, the impugned order and certificate are set aside, and directions are given for issuance of nil-rate certificates for the relevant and subsequent years while preserving the authority's power to re-open the question on demonstrable change of facts after notice.

Ratio Decidendi: Where prior reasoned High Court determinations on the taxability and residential/PE status of a foreign company exist, a competent officer issuing a non-nil certificate under Section 197 must record concrete, reasoned findings demonstrating change in facts or law justifying departure; absent such findings a non-nil certificate is arbitrary and liable to be quashed.

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