No Higher TDS Without Sustainable PE Finding: Delhi HC Quashes 3.5% S. 197 Certificate

The Delhi High Court has set aside an Income Tax Department order directing deduction of tax at source (TDS) at an enhanced rate of 3.5% on payments made to foreign GE group entities, holding that the very basis for imposing the higher rate—alleged existence of a Permanent Establishment (PE) in India—had been nullified by the Income Tax Appellate Tribunal (ITAT). The bench of Justice Dinesh Mehta and Justice Vinod Kumar directed the tax authorities to issue fresh certificates under Section 197 of the Income Tax Act, 1961, permitting deduction of tax at the concessional rate of 1.5%, consistent with past practice The ruling arose from two writ petitions filed by GE Energy Parts Inc., a US-based company, and GE Global Parts and Products GmbH, a Switzerland-incorporated entity engaged in the supply of gas turbines, spare parts, and offshore repair services. The petitioners asserted that they do not maintain any Permanent Establishment in India and, therefore, no income accrues or arises in India warranting tax deduction at source. Despite this, Indian customers were deducting TDS on payments made to the petitioners. To mitigate this, the companies routinely applied for certificates under Section 197, seeking nil or lower TDS. While the tax department had historically issued certificates permitting deduction at 1.5%, for Assessment Year 2025–26, the Assessing Officer issued a certificate dated May 16, 2025, mandating TDS at a higher rate of 3.5%. The department defended the higher rate by pointing to findings recorded during assessment proceedings for AY 2022–23, wherein the Assessing Officer had concluded that the petitioners had a PE in India. According to the Department, this finding justified a higher withholding rate and fell within the discretionary powers of the Assessing Officer under Section 197. However, the petitioners countered that the PE finding for AY 2022–23 had already been set aside by the ITAT on October 17, 2025, thereby eroding the foundation of the impugned TDS certificate. They also highlighted that in earlier years, whenever higher TDS rates were imposed, the Delhi High Court had intervened and restored the 1.5% rate. The court observed that while the Assessing Officer may have had some justification at the time of issuing the impugned certificate, that justification ceased to exist once the ITAT overturned the PE finding. The Court noted that prior to AY 2022–23, certificates under Section 197 were consistently issued at 1.5%. Earlier attempts by the Department to impose higher rates had already been struck down by the High Court. With the ITAT setting aside the PE finding, the basis for enhanced TDS had “lost its foundation.” Accordingly, the Court quashed the certificate dated May 16, 2025, and directed the Income Tax Department to issue a fresh certificate within 15 days, stipulating TDS at 1.5% Importantly, the Court also issued forward-looking directions, ordering the tax authorities to continue issuing certificates under Section 197 at 1.5% for future assessment years, as and when applications are filed by the petitioners. However, the Bench clarified that the Revenue would be at liberty to prescribe a higher rate in limited circumstances, including if the ITAT’s order for AY 2022–23 is overturned or modified in appeal under Section 260A; or if credible material emerges establishing the existence of a Permanent Establishment in India. Even in such cases, the Court mandated that the Department must first issue a notice and grant an opportunity of hearing to the assessee before imposing a higher TDS rate. Case Details Case Title: Ge Energy Parts Inc Versus ACIT Case No.: W.P.(C) 10259/2025, CM APPL. 42653/2025 Date: 05/01/2026 Counsel For Petitioner: Tushar Jarwal Counsel For Respondent: Sunil Aggarwal Click Here To Read Order Read More: Excel Sheet Seized From Builder Sufficient Basis to Issue Income Tax Reassessment Notice: Delhi HC

No Higher TDS Without Sustainable PE Finding: Delhi HC Quashes 3.5% S. 197 Certificate

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