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, earlier attribution of revenue to the Indian permanent establishment was held absorbed by remuneration to Indian distributors, and no change in business model or facts justified a 10% certificate. The 10% certificate predated a later demand and therefore could not be sustained; respondents are directed to issue a nil rate certificate and given procedural directions if a contrary taxable PE finding is to be recorded after notice.

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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.

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