AI OCR 
TaxTMI 
TaxTMI 
TaxTMI 
2025 (12) TMI 1532
X X X X Extracts X X X X
X X X X Extracts X X X X
....ness of providing software-based IT solutions and resells its software along with ancillary services to clients in (End-User)India. 3. The respondent is the Deputy Commissioner of Income Tax (DCIT) who has issued the certificate dated 06.05.2025 and passed the order dated 07.05.2025 read with continuation order dated 16.05.2025 under Section 197 of the Act. ISSUE INVOLVED: 4. The petitioner stated that it filed an application for 'Nil Withholding Certificate' before the Assessing Officer (AO), Circle International Tax 3(1)(1) DEL, who rejected the application vide the impugned order dated 07.05.2025 by relying upon the assessment orders of preceding years i.e. Assessment Years (AYs) 2021-22 and 2022-23. 5. The issue agitated before this Court is that the assessment orders for AYs 2021-22 and 2022-23 have been set aside by the Income Tax Appellate Tribunal, Delhi Bench D, New Delhi (ITAT) by order dated 18.06.2025. As such the impugned orders/certificate are liable to be set aside, as the assessment orders for AY 2021-22 and AY 2022-23 is the sole basis for the AO to reject the application of the petitioner for 'Nil Withholding Certificate'. FACTUAL CONTEXT: 6. The....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... India and its entire revenue from software services/solutions from Indian clients would be taxed as business income in India, in view of the assessment orders of the preceding AYs. On this basis, the entire income from software solutions was attributed to Permanent Establishment at an arbitrary rate of 25% (net attribution). 10. On 16.05.2025, the respondent in continuation to the speaking order dated 07.05.2025 issued another order, wherein, the attribution rate of 25% was affirmed. The relevant extract of both the orders are as follows: Order dated 07.05.2025. "3. It must be appreciated that the proceedings u/s 197 are provisional in nature and the scope of enquiry is limited. The true nature of the income is scrutinized during the final assessment proceedings in the case of the assessee in details. In this respect, assessment orders passed in Applicant's case for preceding years has established that M/s Zscaler Softech India Pvt. Ltd., the Indian subsidiary of the Assessee company which provides sales/ marketing support to Assessee company for securing of orders for selling/licensing of Zscaler Software products to Indian distributors, creates a dependent a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....in the case of Siemens Mobile Communications SPA vs. DCIT, [2020] 182 ITD 479 (Delhi -Trib.). Secondly, the reliance placed on the judgment of Rolls Royce Singapore (P.) Ltd. vs. ADIT, [2012] 347 ITR 192 (Delhi), is also misplaced inasmuch as, in that case the Tribunal had given a factual finding that there existed DAPE and the Hon'ble High Court after concluding that the Tribunal had arrived on wrong conclusion, remanded the matter back to reconsider the issue. In the present case, it has been sufficiently demonstrated above that Zscaler India does not constitute DAPE of the Appellant and is only providing marketing support services to the Appellant. 20. Consequently we are inclined to sustain the ground no 4. The remaining grounds are general or consequential, so need no separate adjudication. The appeals are allowed." CASE OF THE PETITIONER: 12. Mr. Kamal Sawhney, learned counsel for the petitioner submitted that, at the time of issuing the impugned certificate and orders, the appeals for both AY 2021-22 and AY 2022-23 were pending consideration, and the entire basis for passing impugned order under Section 197 of the Act was the final assessment orders of the abo....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ied upon assessment orders passed in petitioner's preceding AY. Since the question of DAPE was never raised by the AO prior to AY 2021-22, and both assessments for AY 2021-22 and AY 2022-23 are the only orders relied upon by the AO, the finding of the ITAT on the non-existence of DAPE completely nullifies the prima facie case established by the AO, and as such, the impugned order has no legs to stand. 16. He stated that this Court in SFDC Ireland Ltd. v. Commissioner of Income-tax., WP (C) No.12847/2024, vide order dated 17.02.2025, has settled the position of law with regard to Section 197 of the Act and the AO was only required to take a prima facie view on the taxability and final assessment need not be passed. Insofar as the question of having a prima facie view on the existence of DAPE is concerned, this Court has made it clear that the existence of Permanent Establishment is a fact-finding exercise that has to be done for each AY and that even for Section 197 orders, a prima facie view on the question of "habitually concludes contracts as agent" must be answered. In this regard, he has also relied upon the decision of the Supreme Court in DIT v. E-Funds IT Solution [2017] ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....business income (income from PE) only after the decision of the Supreme Court in of Engineering Analysis Centre of Excellence (supra). 21. He contended that, it is admitted that the receipts in question are not royalty, and a provision concerning tax rate of royalty cannot be taken as a basis for attribution. The AO has not undertaken any exercise to derive the attribution rate based on activities performed by the alleged Permanent Establishment which is sine-qua-non for AY 2021-22 whereas for AY 2022-23 the AO has attributed profits at 2.5% and even the profit margin of 25% calculated is completely arbitrary as the same is without any basis or reasoning. The entire attribution is done relying on the assessment orders in AY 2021-22 and AY 2022-23, which is arbitrary. 22. According to him, the AO after realising the computation mistake, in the subsequent AY 2022-23 has taken a profit margin of 6.25% and later computed tax at 2.5% of the total revenue. In this regard, the petitioner has relied upon the decision in GE Energy Parts Inc. v. CIT., [2019] 411 ITR 243 (Delhi) and has produced the following table to demonstrate the incorrect attribution:- S.No. Remarks Attrib....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... modify or improve their case by adding additional reasons that were not part of the impugned order. As the argument of the Revenue before the ITAT was that the petitioner failed to provide the underlying agreement, the actions of the Revenue would amount to supplanting the reasons to impugned order. He has relied on the judgment in Shreyansh Retail Private Limited v. DCIT, 2023: DHC: 8085-DB, to contend that the order under Section 197 of the Act, the respondent cannot be improved by supplanting reasons. 26. Relying upon the judgment of this Court in SFDC Ireland Ltd. (supra), he submitted that, a prima facie case of existence of DAPE cannot be made out by the AO in the Section 197 order given that proceedings under Section 197 of the Act are tentative and not final. He has also submitted that, even if the Revenue files an appeal against the ITAT order, the same would not change the fact that the respondent/AO continues to be bound by the decision of ITAT by virtue of the principles of judicial discipline and the impugned order falls afoul of the ITAT order upholding the non-existence of DAPE in favour of petitioner. 27. Mr. Sawhney contested the submission made by the Reven....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Assessment order in AY 2022-23 following the DRP Directions (pg.99 of wp) If Final Assessment Order in AY 2022-23 is followed in this year as AO himself has relied upon the said assessment order in the Impugned Order Attribution adopted in the Impugned Order (pg.72 of wp) 1. Profits arising from the Indian revenue was taken 25% Profits arising from the Indian revenue was taken 25% Profits arising from the Indian revenue was taken 25% 2. Income attributable to the PE in India was taken @ 25% (Because even as per DRP, Petitioner would not have the entire income in India only out of the activities of Zscaler India, so 25% of the entire profit was attributed to the activities of Zscaler India). Income attributable to the PE in India shall be taken @ 25% Not computed at all which even as per the final assessment order for AY 2022-23 ought to have been done. 3. Final taxability therefore was=40% (tax rate applicable to the AY) * 25% (profit margin) * 25% (income attributed to PE) = 2.5% of Indian sale Final taxability therefore shall be= 35% (tax rate applicable to the AY) * 25% (profit margin) * 25% (income attributed to PE) = 2.18% of Indi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ble to certificates issued under Section 197 of the Act and that exercise can be completed only during scrutiny assessment proceedings. He submitted that the issue of Permanent Establishment is to be decided on a year to year basis, as it is an exercise in determination of facts. He also submitted that, the ITAT order for earlier AYs do not become a res judicata or estoppel for other AYs, more so when each AY is fact specific. 34. It is his submission that the petitioner has a subsidiary in India; namely ZSIPL, which is economically wholly dependent on the petitioner. Therefore, the subsidiary constitutes a Permanent Establishment of the petitioner in India in terms of Article 5.5 of India-USA DTAA and this disqualifies the status "agent of independent status" unless the payment to the agent is established on Arms-Length basis. It is also his submission that, whether the payment to economically dependent subsidiary is on Arms-Length basis or not, cannot be established during proceedings under Section 197 of the Act, that exercise can be carried out only during subsequent proceeding by referring the matter to the Transfer Pricing Officer (TPO). 35. Mr. Agarwal stated that the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....titioner is entitled to Nil Withholding Certificate under Section 197 of the Act. He submitted that the jurisdiction to conduct this exercise rests with AO, and not with this Court in writ jurisdiction. In support of this submission, he has relied upon the following judgments in Union of India v. TELCO, (1997) 8 SCC 730, Chhatrasinhji Kesarisinhji Thakore v. CIT, (1966) 59 ITR 562, and National Petroleum Construction Company (supra). 38. He submitted that the burden of proof is upon petitioner, not upon the AO and the judgments relied upon for 'Royalty' is not applicable to the facts of petitioner's case. For exempting business income, it has to be proved as a fact that no PE exists in the source State during the AY 2026-27, which eventuality is yet to arrive. Assuming in future, it is found as a fact that, no PE existed during relevant AY income is not taxable, even in that event TDS that is to be deducted at this stage, will be refunded along with interest. 39. He also contended that, it is a well settled position in Taxation Law that the burden of proof for exemption from taxability lies upon the assesseee and the petitioner's claim is that the impugned income is from busi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....is activity, subject to availability of full facts after FY 2025-26 is over, is likely to constitute Service Permanent Establishment of petitioner in India under Article 5.2 (l) of India-USA DTAA. vi. That, Indian Subsidiary does market research in India to discover preferences/likes/dislikes of Indian End-Users to provide inputs to the petitioner so that it can mould/modify/improve its service offerings to Indian End-Users. vii. That, the Indian dependent Subsidiary finds out suitable Indian resellers and thereafter recommends the names of such short-listed Indian Resellers to the petitioner. On this basis, the petitioner signs the agreement with Indian Reseller, who in turn finds out maximum number of Indian End-Users and drives them back to petitioner to sign "Click Through EUSA", thus completing the seem less, composite, integrated, systematic cycle described in this section. viii. That, the petitioner has not even denied the correctness of this business model, let alone controvert it or disprove it by any acceptable piece of relevant evidence. All this is without prejudice to the impact of subsequent prospective amendments to S.9(1)(i)/Explanation-1(....
X X X X Extracts X X X X
X X X X Extracts X X X X
....revocably. However, the petitioner has granted limited license to Indian Subsidiary, this is the sign of unequal bargaining power of the Indian Subsidiary, an unconscionable contract, where the petitioner has made the Indian Subsidiary to sign on the dotted line, which is not a normal feature of contracts signed with uncontrolled independent parties. Such terms annihilate the petitioner's claim of a P to P relationship. iii. It is settled position in Transfer Pricing that, presence of clauses in controlled party agreements, which clauses are not found in uncontrolled party agreements, may require re-adjustment of pricing by the TPO/AO, hence, petitioner's contentions cannot be accepted at face value. iv. ZSIPL is compensated on Cost-Plus Basis with the petitioner having access to ZSIPL's books of accounts. This is not the hallmark of a real P to P relationship. Cost-Plus basis rules out the compensation attributable to Risk element in FAR analysis [FAR analysis of Transfer Pricing=Functions performed + Assets used + Risks assumed], which must be paid to ZSIPL. v. In the Petitioner-Indian Reseller Agreement, the conclusions recorded by the ITAT are in igno....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nd computed in the manner provided by the Act. ii. In contrast, the statutory test for issuance of certificate under Section 195 is-if the remittance from India to the non-resident is "chargeable to tax". iii. There is a world of difference between "chargeable sum" and "Total Income". Chargeable sum refers to gross sum, in which taxable sum may be a small fraction embedded in gross sum. In contrast, Total Income requires full accounts to show gross receipts and details of expenses incurred in India and outside India to be deducted from gross receipts to arrive at the figure of Total Income. 47. He submitted that at minimum, the petitioner was required to submit to AO; estimated Profit & Loss Account of petitioner as drawn for USA for the current FY 2025-26 and actual P/L account for prior FYs to prove percentage of profitability comprised in Rs 1300 crore, plus remittances from Indian End-Users. On that figure, the AO would arrive at total income and total tax as per the Act. The figure of tax as applied to gross remittance of Rs 1300 crore will provide the percentage at which AO could issue lower TDS certificate. Relevant documents were not placed by the petit....
X X X X Extracts X X X X
X X X X Extracts X X X X
....stablishment exists", even at this belated stage, at least establishes that the petitioner does not deny the possibility of existence of Permanent Establishment in current AY 2026-27. He submitted that the petitioner blows hot and cold in the same breath, wherein paragraph 15 of the petitioner's submissions; the petitioner denies the existence of PE. In any case, the jurisdiction to decide existence of Permanent Establishment is vested with AO, not with the petitioner. So, these prevarications have no value. In support of this submission, he has relied on the judgment of this Court in DIT v. GE Packaged Power Inc, (2015) 373 ITR 65 (Del) 52. According to him, in Ground "G", the petitioner relies upon the judgment of the Supreme Court in E-Funds IT Solution (supra), wherein, the Court records a finding of fact that the assessee therein did not render any service to its customers in India. On this basis, Service Permanent Establishment was held to be not constituted. In contra-distinction, in petitioner's case, admittedly, the non-resident petitioner signs contracts with End-Users based in India, End-Users pay subscription fee to the petitioner. So, they are the petitioner's custo....
X X X X Extracts X X X X
X X X X Extracts X X X X
..... It is well-settled that the Income Tax Act is a self-contained Code, which has to be applied as per its own provisions without relying upon provisions of other statutes, unless provisions of other statutes are incorporated by reference or incorporation [in terms of S. 8 of the General Clauses Act] into the Income Tax Act as held in Rao Bahadur Ravulu Subba Rao v. CIT, AIR 1956 SC 604. 54. According to him, the petitioner controverts Statutory Form for Section 197 versus Section 195 of the Act; the petitioner has withheld information, and has made unsubstantiated arguments. 55. He seeks dismissal of the petition. ANALYSIS AND CONCLUSION: 56. Having heard the learned counsel for the parties and perused the record, the short issue which arises for consideration is whether the respondent/Revenue is justified in issuing the impugned certificate dated 06.05.2025 and order dated 07.05.2025 read with continuation order dated 16.05.2025. 57. In the impugned certificate/order, the AO has worked out the tax rate at 8.75% by applying tax rate at profit margin of 25% on net basis. Mr. Sawhney has contended that the only ground on which the AO has certified the rate at 8.75% is ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....titioner has a DAPE in India through ZSIPL, the said conclusion has been set aside by the ITAT. 62. The submission of Mr. Agarwal that the Revenue is in the process of filing an appeal against the order of the ITAT, is of little help to the Revenue, as the law in this regard has been quite well settled by the Supreme Court in the case of Union of India v. Kamlakshi Finance Corporation Ltd, (1991) 55 ELT 433 SC, wherein it was held that the order of higher appellate authorities should be followed unreservedly and the mere fact that the decision is not acceptable to the Revenue cannot be a ground for not following the decision of the higher authority. Nothing has been placed before us to show that the order of the ITAT has been set aside. 63. We are conscious of the fact that when the order was passed by the AO, he had before him the valid assessment orders stating that ZSIPL is a dependent PE of the petitioner/assessee. However, as of now, such conclusion does not exist, and the very basis for the AO to issue the impugned certificate/order has fallen. 64. In the order impugned before us, the AO has referred to the assessment orders of the 'preceding years'. As submitted by ....