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 was justified absent adjudication by an assessing authority. The material showed a prima facie arguable case that higher withholding may not apply; the competent authority's exercise of discretion warranted an intermediate withholding pending regular assessment. The impugned certificate was quashed and a fresh certificate was directed fixing reduced withholding within a short timeframe, with future Section 197 applications to be decided within a prescribed 30 day period to prevent undue delay.

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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.

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