2026 (2) TMI 1245 - HC - Income Tax

Withholding tax certificate review: court quashed higher certificate and directed reduced interim withholding and prompt re-consideration.

Challenge to a withholding tax certificate issued under Section 197 concerning SaaS/licence based supplies was framed around whether higher withholding ... Certificate u/s 197 - withholding tax rate determination - NIL withholding or @15% - Competent Authority practically rejecting the petitioner's application and issuing a certificate at 15% - HELD THAT:- Since no authority including the Assessing Authority has so far considered the nature of transactions and other relevant material, as an Adjudicating Authority, we are not inclined to issue direction to issue a certificate at ‘NIL’ rate, as prayed. The writ petition is, therefore, partly allowed. While quashing the order dated 04.03.2025 and the certificate dated 20.08.2025, we hereby direct the Competent Authority to issue a certificate at 2% so that the assessee is required to file its return and the petitioner's case may be taken up for scrutiny if the same falls within the ambit of the scrutiny criteria as set by the Central Board of Direct Taxes (CBDT) from time to time. The requisite certificate be issued within a period of 15 days from today. Taking note of the extant facts, we find that the petitioner had filed the application for grant of certificate on 04.03.2025 and the certificate came to the issued on 20.08.2025, even though there is a guideline for issuing the certificate within a period of 30 days. We, therefore, direct that in case the petitioner files an application u/s 197 for subsequent year(s), and the nature of the transaction remains the same, the Competent Authority shall consider the application within a period of 30 days from the day when the application is filed and shall issue the certificate, as deemed expedient. Issues: Whether the order and certificate issued under Section 197 of the Income-tax Act, 1961 denying NIL withholding and fixing tax deduction at source at 15% should be quashed and a certificate at a lower rate be issued; and whether directions as to time limits for consideration of future Section 197 applications should be issued.Analysis: The petitioner's services were identified as SaaS/licence-based software services supplied to Indian customers and the Competent Authority had issued a certificate at 15% under Section 197 of the Income-tax Act, 1961. The material on record, including the agreement and refunds previously granted for relevant assessment years, demonstrates a prima facie arguable case that the transactions may not attract the higher withholding claimed by the Competent Authority, but no adjudication on merits has been completed by an assessing authority under a regular assessment process. The Competent Authority's power under Section 197 was exercised after examining the agreement, yet the circumstances warrant directing an intermediate withholding rate to allow statutory return-filing and potential scrutiny by the assessing authority under applicable scrutiny criteria. Additionally, the delay in issuance of the certificate was noted and a direction for timely consideration of future applications under Section 197 was considered necessary.Conclusion: The impugned order and certificate dated 04.03.2025 and 20.08.2025 are quashed; a fresh certificate under Section 197 of the Income-tax Act, 1961 shall be issued fixing withholding at 2% within 15 days; and for subsequent years similar applications shall be considered within 30 days of filing.