Income Tax Authority Must Record Prima Facie View On Taxability Before Issuing Withholding Certificate: Delhi High Court

The Delhi High Court has held that while issuing a certificate for lower deduction of tax at source under Section 197 of the Income Tax Act, 1961, the competent authority is required to record a prima facie view on the taxability of the receipts, and that such certificates cannot be issued mechanically or without reasons.

A division bench of Justices Dinesh Mehta and Vinod Kumar made the observation while disposing of a writ petition filed by Ireland-based Workday Limited, which had challenged a withholding certificate directing deduction of tax at the rate of 10% on payments received from India.

For context, Petitioner is engaged in providing cloud-based enterprise software solutions and had applied for a lower withholding certificate under Section 197, contending that the amounts received from Indian customers were not taxable in India as royalty or fees for technical services under the India–Ireland Double Taxation Avoidance Agreement.

The income tax authority, however, issued a certificate prescribing deduction of tax at 10%.

Aggrieved, the Petitioner approached the High Court alleging that the certificate had been issued in a mechanical manner.

Agreeing, the High Court observed that the Competent Authority had not given any sustainable reason for issuing a 10% TDS certificate whereas the transactions prima-facie appeared to be not exigible to tax in India.

It thus observed that the authority 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.”

In view of the above, the Court directed the Revenue to issue a fresh withholding certificate at the rate of 2%, operative for the remainder of the relevant financial year.

For Petitioner: Senior Advocate Ajay Vohra with Dr.Shashwat Bajpai & Advocates  Mayank Chaturvedi, Advs.

For Respondent: Puneet Rai, SSC with Rishabh Nangia, JSC & Advocate Ashvini