S.197 IT Act | AO Must Form Prima Facie Opinion Regarding Taxability In India Before Rejecting Assessee's Application For Nil TDS: Delhi HC

Section 197(1) of the Act enables an assessee to make an application for a certificate requiring the deduction of tax at a lower rate or no deduction at all if the Assessing Officer is satisfied that the total income of the recipient justifies such nil deduction or deduction at a lower rate.

A division bench of Justices Vibhu Bakhru and Tushar Rao Gedela observed,

“It is, thus, incumbent upon the Assessing Officer to consider whether in the given facts, a lower rate or nil rate of withholding tax is justifiable. It is well settled law that at this stage, the Assessing Officer is not required to finally determine the question of taxability or the quantum of tax…However, it is essential for the Assessing Officer to examine the question of taxability in the given facts…the Assessing Officer is required to take a view – even though it may not be a final view – as to the chargeability of the receipt of tax under the Act.”

In the case at hand, Petitioner SDFC Ireland was aggrieved by AO's order authorizing it to receive the payments from SFDC India, only after withholding TDS at the rate of 2%.

According to the petitioner, its income resulting from the receipts from SFDC India was not chargeable to tax in India. It claimed it did not have any place of business in India; did not engage any employee; and did not have any sort of presence in India. It had merely entered into a Reseller Agreement, appointing SFDC India as a non-exclusive reseller of SFDC Products.

The AO on the other hand argued that SFDC India was a Permanent Establishment (PE) of the Petitioner and that several clauses of the Reseller Agreement indicated dependency of SFDC India over the petitioner, for instance, it empowered SFDC India to enter into contract with customers on behalf of SDFC Ireland, within Indian territory. SFDC India was also said to be involved in the price determination process.

At the outset, the High Court took note of Section 2.2 of the Reseller Agreement which explains the relationship between the petitioner and SFDC India. It expressly provides that the transactions would be undertaken on a principal-to-principal basis and that the parties shall in the performance of the obligations remain independent contractors.

It thus observed, “given the unambiguous terms of the Reseller Agreement, the conclusion that SFDC India is empowered to bind the petitioner or enter into contracts on its behalf cannot, absent any other definitive material establishing to the contrary, be sustained.”

Court also rejected the contention that SFDC India has a role in the price determination of SFDC Products, citing a lack of sufficient foundation. It said, “Even if SFDC India is involved in providing any inputs for determination of pricing, the same would not render SFDC India as a dependent PE.”

It observed that an enterprise will not be deemed to have a PE in India if the agent has an independent status and is covered under paragraph 8 of Article 5 of the India-Ireland DTAA, i.e. it is a broker, general commission agent or any other agent of independent status and acts in the normal course of its business.

Significant to note that with respect to the FY 2023-24, the High Court had allowed the petitioner's application under Section 197 of the Act for receiving payments from SFDC India with nil TDS.

Petitioner contended that the AO had disregarded Rule 28AA of the Income Tax Rules, 1962 which requires the Assessing Officer to consider and give due regard to the TDS in previous years.

Agreeing, the High Court held, “We are unable to sustain the impugned order as in the given facts, there is little indication at least at this stage, that amounts paid by SFDC India to the petitioner as consideration for sale of SFDC Products are chargeable to tax under the Act. It is also important to note that the AO has not returned any findings, which indicate to the contrary. There is no express finding on a prima facie basis that the petitioner has a PE in India. And, the impugned order does not disclose sufficient grounds, which would substantiate this assumption.”

Accordingly, it set aside the impugned order and directed the AO to issue the certificate under Section 197(1) of the Act for nil withholding tax.

Appearance: For the Petitioner: Mr Ajay Vohra, Senior Advocate with Mr Aniket D Agarwal and Mr Samarth Chaudhari, Advocates. For the Respondent : Mr Sunil Aggarwal, Senior Standing Counsel, Mr Shivansh B Panday, Ms Priya Sarka, Mr Viplav Acharya, JSCs and Mr Utkarsh Tiwari, Advocates.

Case title: SFDC Ireland Limited v. Commissioner Of Income Tax & Another

Citation: 2025 LiveLaw (Del) 225

Case no.: W.P.(C) 12847/2024

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