2026 (3) TMI 238 - HC - Income Tax

Nil deduction certificate under Section 197 required where PE attribution is absorbed by distributor remuneration, mandating nil rate for the year.

Nil deduction certificate under Section 197 was required for AY 2026-27 because the factual matrix matched prior years where nil certificates were issued, ... Validity of certificate u/s 197 - payment to the petitioner are required to deduct tax at the rate of 10% or a nil rate certificate should be issued HELD THAT: - The Court found that the factual matrix for AY 2026-27 was identical to the preceding years during which the Revenue had granted certificates at nil rate after due consideration of materials. In those preceding years certificates dated 26.09.2023 and 19.03.2025 were issued at nil rate. On the materials before it the Court concluded that the competent authority could not have issued a fresh certificate prescribing a 10% rate for AY 2026-27. The determinative reasoning was that there was no change in facts or law warranting departure from the prior nil-rate approach and that the record and earlier decisions which treated the relevant receipts as not taxable or absorbed by payments to Indian distributors had attained finality for the present purpose. The Court therefore directed issuance of a nil-rate certificate for AY 2026-27 and prescribed timelines and conditional directions for subsequent applications. [Paras 9, 11, 12] Impugned 10% certificate quashed and direction issued to competent authority to grant a nil-rate certificate for AY 2026-27 within fifteen days; directions given for subsequent applications. Relevance of subsequent demand for prior certificate - Argument of Respondent that an outstanding demand was created for the AY 2023-24 vide order dated 11.11.2025 is concerned, the same could not have formed the basis to issue the impugned certificate at the rate of 10 percent as the tax withholding certificate was issued on 22.07.2025, much prior to the issuance of demand notice dated 11.11.2025, and even if such demand had arisen the respondent department could effectively recover such demand instead of issuing the tax withholding certificate at 10 percent. Effect of prior appellate/tribunal and Supreme Court findings - In view of the position emerging from the record, particularly the decision of Hon’ble the Supreme Court vide order dated 19.04.2023, which upheld the approach adopted by the Tribunal in attributing 15% of the total revenue to the Indian Permanent Establishment of the Petitioner, and in holding that such attribution stood fully absorbed by the remuneration paid to the Indian distributors, the said issue has attained finality. Respondents are directed to issue a certificate for ‘Nil’ deduction of tax at source under Section 197 of the Act to the Petitioner for the AY 2026-27, in accordance with law and in terms of the observations made herein. Final Conclusion: The writ petition is allowed: the 10% withholding certificate for AY 2026-27 is quashed and the competent authority is directed to issue a nil-rate certificate for AY 2026-27 within fifteen day. Issues: Whether the certificate under Section 197 of the Income-tax Act, 1961 for Assessment Year 2026-27 prescribing deduction of tax at 10% could be sustained, or whether a nil rate certificate should be issued to the petitioner.Analysis: The factual matrix for AY 2026-27 was found to be identical to preceding assessment years for which the respondents had issued nil rate certificates after considering the material on record. The record includes a prior appellate approach attributing 15% of total revenue to the Indian permanent establishment and the Supreme Court order dated 19.04.2023 upholding that attribution and holding it absorbed by remuneration to Indian distributors. The impugned certificate dated 22.07.2025 at 10% was issued before the demand notice dated 11.11.2025 and therefore could not be justified on the basis of a subsequently created demand. In light of the settled position on attribution and absorption by distributor remuneration, and absence of any change in the business model or facts, the continued practice of issuing nil rate certificates applies to the AY 2026-27. The competent authority is directed to issue a nil rate certificate and given procedural directions for future applications, subject to the authority recording a contrary finding on existence of taxable PE after notice to the petitioner.Conclusion: The impugned certificate prescribing 10% deduction is quashed and the respondents are directed to issue a certificate for nil deduction under Section 197 of the Income-tax Act, 1961 for AY 2026-27; directions provided for issuance of nil rate certificates for subsequent years and for procedure where a contrary PE finding is to be recorded.