2026 (2) TMI 410 - HC - Income Tax

Tax withholding certificate under Section 197: temporary 2% certificate granted pending tribunal, applicability limited to FY 2025-26

A certificate for withholding tax under Section 197 is to be issued at a 2% rate as a temporary measure, because the competent authority relied on ... Certificate u/s 197 of the Income Tax Act, 1961 - respondent has required its counterpart in India to deduct tax at the rate of 15% on the payments made and credited to the petitioner - HELD THAT:- Firstly, because the competent authority has not considered the application and judgments which the petitioner had cited and has simply picked up the findings of the AO recorded in the assessment orders for AYs 2021-22 and 2022-23 and secondly, because it has placed strong reliance upon the judgment rendered by the AAR in the case of Shell India Markets Private Limited [2012 (2) TMI 98 - AUTHORITY FOR ADVANCE RULINGS] completely ignoring the fact that the same stands overruled by the Bombay High Court in the appeal filed by said assessee reported in [2024 (3) TMI 216 - BOMBAY HIGH COURT] These two reasons are sufficient to set aside the impugned order which we hereby do. We are inclined to accept the petitioner’s alternative plea that a certificate be directed to be issued at 2% rate (equal to the equalization levy), which a levy or amount the petitioner has been paying up to 31.03.2025. Appeal of the petitioner against the order of DRP is pending before the Tribunal and pronouncement of the order of the Tribunal may take some more time. In the meanwhile, if at the end of financial year (i.e. on 31.03.2026), the petitioner’s application for issuance of certificate under Section 197 of the Act of 1961 shall be rendered redundant. Hence, as a temporary measure, we direct the competent authority to issue a certificate under Section 197 of the Act of 1961 at 2% rate. Same shall be issued within a period of 15 days from today. The impugned order, purportedly dated as 02.05.2025 and the certificate dated 18.06.2025 are hereby set aside The petition is accordingly partly allowed. We hereby make it clear that our order shall apply only for the certificate to be issued pursuant to the petitioner’s application for AY 2026- 27 (i.e. FY 2025-26). For subsequent year(s), the competent authority shall consider the application in accordance with law subject of course to the order of the Tribunal. Any of the parties aggrieved with the order of the Tribunal shall obviously be free to assail the same in accordance with law. Issues: Whether the competent authority's order denying a NIL withholding tax certificate and issuing a certificate at 15% (with consequential certificate) was legally sustainable, and whether a certificate at 2% should be directed for the relevant year.Analysis: The challenged order was examined for compliance with statutory procedure and consideration of materials placed before the competent authority. The competent authority had relied on assessing officer findings and an AAR decision without engaging with the petitioner's application, submissions, and cited judgments; the adopted AAR precedent had been overruled by a High Court decision. The pending appeals and assessments before tax authorities and appellate fora were noted, and the question of ultimate taxability was left open for those forums. Given the procedural defects and the petitioner's prior payment of equalization levy at 2%, a temporary measure was considered appropriate until appellate adjudication.Conclusion: The impugned order and certificate are set aside and a certificate under Section 197 of the Income-tax Act, 1961 is directed to be issued at 2% for the specified year; the direction is limited to the specified assessment year and is without prejudice to the rights of parties before adjudicatory authorities.Ratio Decidendi: A certificate under Section 197 must be issued after the competent authority considers the applicant's submissions and relevant judicial decisions; reliance on assessment orders or AAR precedents overruled by a High Court, without application of mind to the filed application, renders the order unsustainable and warrants setting aside and appropriate interim relief.