Delhi HC: AO Must Form Prima Facie Opinion Before Rejecting Section 197 Application for Nil or Lower TDS

The Delhi High Court said that before rejecting the application of the taxpayer u/s 197 of the Income Tax Act 1961 for nil TDS or deduction of tax at a lower rate, the assessing officer should form a presumption view for the taxability of the taxpayer in India.

The taxpayer is been permitted under section 197(1) of the Act to make an application for a certificate directing the deduction of tax at a lower rate or no deduction at all if the Assessing Officer is pleased that the total income of the recipient explains such nil deduction or deduction at a lower rate.

The Division Bench of Justices Tushar Rao Gedela and Vibhu Bakhru 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.”

The applicant SDFC Ireland was not satisfied with the order of AO authorizing it to get the payments from SFDC India merely after withholding Tax Deduction at Source (TDS) at the rate of 2%.

As per the applicant, its income consequence from the receipts from SFDC India was not levied to tax in India. It asserted it did not have any place of business in India did not involve any employee and did not have any sort of presence in India. It had entered into a reseller agreement appointing SFDC India as a non-exclusive reseller of SFDC Products.

While AO claims that SFDC India was a Permanent Establishment (PE) of the applicant and that several clauses of the reseller agreement show the dependency of SFDC India over the applicant for example it provides the authority to SFDC India to enter into the contract with the clients on behalf of SDFC Ireland within Indian territory. SFDC India was too cited to be engaged in the cost determination procedure.

At the outset, the High Court took note of Section 2.2 of the Reseller Agreement which illustrates the relationship between the applicant and SFDC India. It expressly furnishes that the transactions shall be performed on a principal-to-principal basis and that the parties shall in the performance of the obligations stay independent contractors.

Therefore it noted that “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.”

The court also rejected the assertion that SFDC India has a role in the price determination of SFDC Products, mentioning a lack of adequate foundation.

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It expressed, “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 noted that an enterprise will not acknowledge having a PE in India if the agent has an independent status and is counted 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.”

It is important to mark that concerning FY 2023-24, the HC permitted the application of applicant u/s 197 of the act for getting the payments from SFDC India with Nil TDS.

It was claimed by the applicant that the AO had disregarded Rule 28AA of the Income Tax Rules, 1962 which demands the Assessing Officer to regard and give due regard to the TDS in previous years.

Agreeing, the High Court carried, “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.”

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