Delhi HC Quashes 8.75% Withholding Tax Certificate Based on Assessment Orders Already Set Aside by ITAT

The Delhi High Court has set aside a withholding tax certificate issued under Section 197 of the Income Tax Act, 1961, holding that the Income Tax Department cannot rely on assessment orders for earlier years that have already been quashed by the Income Tax Appellate Tribunal (ITAT). The bench of Justice V. Kameswar Rao and Justice Vinod Kumar that once the foundation of a finding—namely, the existence of a dependent agent permanent establishment (DAPE)—has been nullified by the appellate authority, any consequential withholding order based on such findings cannot survive. The case concerned a non-resident software company engaged in providing cloud-based software solutions and ancillary services to Indian customers through distributors and resellers. For several years, receipts from India were offered to tax as royalty under the India–USA Double Taxation Avoidance Agreement (DTAA). Following the Supreme Court’s landmark ruling in Engineering Analysis Centre of Excellence Pvt. Ltd., which clarified that consideration for resale of copyrighted software does not constitute royalty, the company altered its tax position from Assessment Year (AY) 2021-22 onwards and claimed refunds of tax deducted at source. The Income Tax Department initiated scrutiny assessments for AYs 2021-22 and 2022-23 and treated the Indian subsidiary as a dependent agent permanent establishment, thereby taxing the receipts as business income attributable to a permanent establishment in India. For Financial Year 2025-26 (AY 2026-27), the assessee applied for a Nil Withholding Certificate under Section 197 in respect of proposed receipts exceeding ₹1,300 crore. The Assessing Officer rejected the request and issued a certificate directing deduction of tax at 8.75%, attributing 25% of profits to the alleged permanent establishment and applying the applicable corporate tax rate for foreign companies. The Assessing Officer relied entirely on the assessment orders for AYs 2021-22 and 2022-23 to justify both the existence of a permanent establishment and the profit attribution. Subsequently, the ITAT, Delhi Bench, by a common order dated 18 June 2025, set aside the assessment orders for AYs 2021-22 and 2022-23. The Tribunal held that the Indian subsidiary did not constitute a dependent agent permanent establishment and was merely providing marketing support services. It further ruled that, in the absence of a permanent establishment, business income could not be taxed in India. Relying on this ITAT ruling, the assessee challenged the withholding certificate before the Delhi High Court, arguing that the very basis of the Section 197 order no longer existed. The court observed that the sole basis for issuing the withholding certificate at 8.75% was the assessment orders for AYs 2021-22 and 2022-23. Those assessment orders had already been set aside by the ITAT, which found no permanent establishment in India. In the absence of a surviving finding of permanent establishment, the foundation for taxing the receipts as business income collapsed. The Court rejected the Revenue’s argument that Section 197 certificates are merely provisional and intended to safeguard revenue interests. It held that provisionality cannot justify reliance on findings that have been nullified by a higher appellate authority. The High Court also rejected the contention that the department was in the process of filing an appeal against the ITAT’s order. Relying on settled principles of judicial discipline, the Court held that until the ITAT’s decision is stayed or reversed, the Revenue authorities are bound to follow it. The Bench further noted that the expiry of the financial year did not render the dispute academic, as the legality of the withholding certificate itself was under challenge. The Court quashed the withholding tax certificate dated 6 May 2025, along with the speaking order dated 7 May 2025 and the continuation order dated 16 May 2025. The Assessing Officer was directed to reconsider the Section 197 application afresh, without being influenced by the overturned assessment orders, after granting an opportunity of hearing and examining relevant documents for the year concerned. Case Details Case Title: Zscaler Inc Versus DCIT Case No.: W.P.(C) 10556/2025 & CM APPL. 43739/2025 (stay) Date: 23.12.2025 Counsel For Petitioner: Kamal Sawhney, Arun Bhadauria and Puru Medhira Counsel For Respondent: Sunil Agarwal, SSC Click Here To Read Order Read More: Marketing, Technical Support Services Provided To Overseas Group Entity Are “Intermediary Services” Under IGST And Not Export Of Services: Karnataka High Court

Delhi HC Quashes 8.75% Withholding Tax Certificate Based on Assessment Orders Already Set Aside by ITAT

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Delhi HC Quashes 8.75% Withholding Tax Certificate Based on Assessment Orders Already Set Aside by ITAT

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