2026 (3) TMI 280 - HC - Income Tax

Withholding tax certificate: court ordered lower deduction rate pending revenue examination to prevent undue taxpayer hardship.

Challenge concerned the rate of a tax withholding certificate issued under the income tax framework for AY 2026-27; the court found the Competent ... Tax withholding certificate at the rate of 10% u/s 197 - issuance of tax withholding certificate at a lower rate pending assessment - HELD THAT: - We find that the Competent Authority has not given any sustainable reason. He was required to dilate upon the nature of transaction and record his prima-facie opinion and also deal with petitioner’s contention and the judgments relied upon. Since almost 85% of the period is already over and the payments made to the petitioner have been subjected to 10% tax, though the transactions prima-facie looks to be not exigible to tax, we are of the view that it would be just and proper if a certificate of deduction at 2% is issued to the petitioner so that the concern of the Revenue that the petitioner can be subjected to scrutiny assessment can be addressed and some respite can be given to the petitioner as a substantial amount is otherwise being withheld by the respondents. Final Conclusion: The petition was partly allowed: the impugned certificate issued without recording reasons was found unsustainable and the respondent was directed to issue a tax withholding certificate requiring deduction at 2% for AY 2026-27 (FY 2025-26). The Competent Authority must consider future applications expeditiously and assessment proceedings remain the forum to determine ultimate tax liability. Issues: Whether the Competent Authority erred in issuing a tax withholding certificate at the rate of 10% under Section 197 of the Income-tax Act, 1961 for Assessment Year 2026-27 and whether a certificate at a lower rate should be issued.Analysis: The Court examined the impugned order and found that the Competent Authority failed to record any sustainable or prima-facie reasons concerning the nature of the petitioner's transactions or to deal with the petitioner's contentions and judgments relied upon. The Court noted competing contentions: the petitioner asserted that the transactions do not attract royalty or fees for technical services under the India-Ireland tax treaty and relied on precedent, while the Revenue emphasised that the nature of transactions was not yet examined and that withholding certificates are not final and refunds may follow on assessment. Balancing the Revenue's interest in safeguarding potential tax liabilities and the petitioner's hardship from substantial tax deduction where transactions prima facie appear non-taxable, the Court exercised its supervisory jurisdiction to grant interim relief by directing issuance of a lower rate withholding certificate for the specified assessment year, while preserving the Revenue's right to examine and assess the transactions in due course.Conclusion: The petition is partly allowed; the respondent is directed to issue a tax withholding certificate requiring deduction of tax at 2% for Assessment Year 2026-27 (financial year 2025-26) within 10 days; the direction applies only to the certificate issued pursuant to the petitioner's application for AY 2026-27 and the Competent Authority shall consider subsequent years in accordance with law.