2026 (1) TMI 1206 - HC - Income Tax

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 ... Certificate u/s 197 - tax deduction at source u/s 195 - Permanent Establishment - Legality of the certificate directing deduction of tax at 10% under Section 197 and the duty of the competent officer - power of attorney has been given to a person residing in India HELD THAT:- Dealing with the argument about the person filing the forms and signing the writ petition on petitioner’s behalf, we are of the view that simply because a power of attorney has been given to a person residing in India and because all the required formations are done by such person, a company incorporated in Ireland or in any other country outside India, cannot be held to be a company resident in India within the meaning of Section 6(3) of the Act of 1961. For such purpose, one has to see the statutory provisions and according to which, the mandatory requirement is, that entire business of such company should be managed/controlled in India. Neither any finding has been recorded by the competent officer nor does it emanate from the record produced before us, that the petitioner company is resident in India or is having a PE in India. The mere fact that Form 13 and 10F have been filed by Mr. Himank Bhatia-a resident of India (admittedly having a Power of Attorney in his favour), makes hardly any difference to petitioner’s right to get a certificate of nil rate. The petitioner can neither be non-suited on such flimsy grounds nor can it be held as a company incorporated or situated in India. The officer has failed to discharge his statutory duties, envisaged under Section 197 of the Act of 1961. Mere use of expression ‘may’ given under Section 197 of the Act or purported discretion, the competent officer cannot be allowed to take whatever view he wishes to take. “Not to follow the binding precedents of the High Court cannot be countenanced in any manner and such approach renders the order a nullity”. The present authority and the authorities dealing with the application under Section 197 of the Act of 1961 are supposed to adopt a pragmatic and justice oriented approach-they should decide the applications in accordance with law, rather than being guided by the Revenue which they might generate, if the certificate(s) are issued at 10% rate or rate higher than ‘nil’ rate of tax. Such approach of the authorities hit at the very root of the business environment and the very idea of providing ease of doing business. Such orders restrict, rather constrict free flow of trade within the country so also discourages foreign entities from doing business in India. It also creates environment unconducive to trade & industry and in turn hinders the economic growth of the country. Thus, the impugned order dated 26.09.2025 is liable to be quashed and set aside which we hereby do. While doing so, we were thinking of imposing cost upon the author of the order, but refrained from doing so, as the order on ultimate analysis is found to be arbitrary but not malafide. The petition is, therefore, allowed. 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.