Withholding tax relief where payments are prima facie non taxable under the treaty-certificate reduced to 2% for the specified year.

Where payments to a non-resident prima facie are not exigible to tax under the Income tax Act read with the India-USA tax treaty, the Competent Authority must apply the law consistently with binding precedent and consider granting reduced withholding to avoid disproportionate tax deduction while preserving the Revenue's right to assessment and refund. The document directs issuance of a withholding certificate requiring deduction at 2% for assessment year 2026 27 within ten days, limited to that year and without prejudice to the Competent Authority's future lawful scrutiny or applications.

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Issues: Whether the Competent Authority erred in issuing a tax withholding certificate directing deduction at 15% under Section 197 of the Income-tax Act, 1961 for the petitioner (a non-resident US tax resident) for AY 2026-27, and whether a certificate for deduction at a lower rate should be issued.

Analysis: The Court examined whether the Competent Authority correctly applied relevant legal principles, including Section 197 of the Income-tax Act, 1961 and the India-USA Double Taxation Avoidance Agreement, in determining the rate of deduction. The Court found that the petitioner's case is covered by the reasoning in Engineering Analysis Centre of Excellence Ltd. (supra) and that the Competent Authority did not correctly deal with that precedent or take relevant factors into account. The Court noted that the transactions prima facie appear not to be exigible to tax under the Act read with the India-USA Treaty, and observed that the certificate at 15% was issued without adequate reasoning. Considering that most of the relevant period had elapsed and substantial amounts were being withheld, but acknowledging the Revenue's right to examine the transactions in assessment proceedings and seek refund if appropriate, the Court determined that a lower withholding certificate at 2% would suitably balance the parties' interests while preserving the Revenue's right to scrutiny.

Conclusion: The petition is partly allowed; the respondent is directed to issue a tax withholding certificate requiring deduction of tax at the rate of 2% for AY 2026-27 within 10 days. The direction applies only to the certificate for AY 2026-27 and does not preclude the Competent Authority from considering future applications in accordance with law.

Ratio Decidendi: Where transactions prima facie are not exigible to tax under the Income-tax Act, 1961 read with an applicable tax treaty, the Competent Authority must apply Section 197 of the Income-tax Act, 1961 consistently with binding precedent and may grant a certificate for deduction at a lower rate to prevent disproportionate withholding while preserving the Revenue's right to assessment and refund.

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