2026 (2) TMI 769 - HC - Income Tax

Nil withholding certificate under Section 197 must follow treaty and precedent; denial for departmental litigation intent is unlawful.

Section 197 applications for withholding certificates must be decided in accordance with the Act and applicable tax treaties, and a Competent Authority ... Rejection of application u/s 197 - certificate at ‘nil’ rate - as submitted domain name registration charges are essentially for granting the right to use the petitioner’s services and are not exigible to income tax as per the provisions of the Act of 1961 read with the terms of the India-USA Double Taxation Avoidance Agreement - HELD THAT:- The Authority deciding application u/s 197 of the Act of 1961 has an obligation of deciding the application as per the provisions of the Act of 1961, while having due regard to the treaties between the two countries. He should not be driven or swayed by the Revenue targets/considerations. For what we have stated hereinabove and following the reasoning which we have given in our order of even date in AECOM International Holdings UK Ltd. [2026 (2) TMI 711 - DELHI HIGH COURT] we hereby allow the present writ petition; quash and set aside the impugned order dated 06.03.2025 so also the consequential certificate dated 21.08.2025. We hereby direct the Competent Authority to issue a certificate at ‘nil’ rate within a period of fifteen days from today with the additional directions, as below: (i) The competent officer or any other authority who is supposed to consider the petitioner’s application under Section 197 of the Act of 1961, shall issue a certificate of nil rate of tax not only for the Financial Year 2025-26 (AY 2026-27), but also for the subsequent years in case an application is filed. The certificate(s) shall be issued within 30 days of the day when application is filed. (ii) The competent authority dealing with petitioner’s subsequent application(s) under Section 197 of the Act of 1961 shall not be bound by direction given in clause (i) above, if he comes to a conclusion and records a finding that the petitioner is having a PE in India and the transactions which the company has carried out in India are liable to be taxed in India. However, before recording such finding, a notice in this regard shall be issued to the petitioner. (iii) It will also be required from the petitioner-company to disclose truly and fully all facts in its applications to be filed each year. It shall be required of the petitioner to extend full cooperation when any such notice (as provided in clause (ii) above) is issued for the subsequent year(s). Issues: Whether the Competent Authority lawfully rejected the petitioner's application under Section 197 of the Income-tax Act, 1961 despite a binding judgment of the High Court holding that the petitioner's domain name registration charges were not taxable, and whether the impugned order and consequential certificate should be quashed with a direction to issue a nil rate certificate.Analysis: The Court examined the impugned order dated 06.03.2025 and the consequential certificate dated 21.08.2025 in light of the earlier judgment of this Court dated 11.12.2023 which had held that the domain name registration charges constituted the right to use services and were not taxable under the Income-tax Act, 1961 read with the India-USA Double Taxation Avoidance Agreement. The Court found that the Competent Authority's sole stated reason for rejection-that the Department proposed to file a Special Leave Petition-did not constitute a legally sustainable reason. The Court reiterated the statutory obligation of the authority deciding applications under Section 197 to determine applications in accordance with the Act and applicable treaties, and that revenue targets or speculative departmental actions do not justify disregarding binding judicial decisions. The Court also considered procedural safeguards for future applications, including provision for issuing notice and recording a finding if a permanent establishment in India is alleged.Conclusion: The impugned order dated 06.03.2025 and consequential certificate dated 21.08.2025 are quashed and set aside; the Competent Authority is directed to issue a certificate at nil rate within fifteen days and to issue nil-rate certificates for subsequent years on application within 30 days, subject to the authority recording a reasoned finding (after notice) if it concludes the petitioner has a permanent establishment in India. The relief is in favour of the assessee.