Delhi High Court Quashes 15% TDS Certificate On SaaS Under India–US DTAA, Orders 2% Certificate

The Delhi High Court has quashed a 15% tax deduction at source (TDS) certificate issued under Section 197 of the Income Tax Act, in respect of payments made for Software-as-a-Service (SaaS) to a US-based company providing a web-based Vendor Management System (VMS) to Indian clients, including Infosys Ltd.

A Division Bench of Justices Dinesh Mehta and Vinod Kumar held that the company had made out a prima facie arguable case on non-taxability under the India–US Double Taxation Avoidance Agreement (DTAA).

Petitioner-company had challenged the Income Tax Department's order directing deduction of tax at 15%, contending that the services rendered did not fall within the scope of “fees for included services” under the India–US DTAA.

It was argued that Petitioner merely provides access to a non-exclusive, non-transferable SaaS platform, without supplying manpower or transferring any technical know-how, skill, or process to Indian customers.

Revenue on the other hand argued that at the Section 197 stage, the tax authority was not required to conclusively adjudicate the nature of the transaction.

The High Court observed that the Petitioner had demonstrated a fairly arguable case, but refrained from issuing a direction for a nil TDS certificate, noting that the nature of the transactions had not yet been examined by the assessing authority in regular proceedings.

The writ petition was therefore partly allowed with the Court setting aside the impugned 15% TDS certificate and directing the authority to issue a fresh certificate at 2%.

For Petitioner: Senior Advocate Sachit Jolly, & Advocate Sohum Dua

For Respondent: Ruchir Bhatia, SSC with Anant Mann, JSC.