The Delhi High Court has clarified that no tax is required to be deducted at source (TDS) under Section 195 of the Income Tax Act, 1961, on remittances made by an Indian branch office to its foreign head office, holding that such transactions do not involve a payer-payee relationship.
The bench of Justice Dinesh Mehta and Justice Rajneesh Kumar Gupta directed that no coercive action should be taken against the airline’s Indian branch for not deducting tax on such remittances.
The case arose after the Indian branch of United Airlines Inc., a U.S.-based airline, challenged an order dated 16 April 2026 passed by the Assistant Commissioner of Income Tax, Circle (International Taxation)-3(1)(1), New Delhi, under Section 195(2) of the Income Tax Act for the Financial Year 2026-27.
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For several previous financial years, the Income Tax Department had been issuing certificates permitting the airline to remit funds from its Indian branch to its U.S. head office without deduction of tax at source. However, when the airline sought a similar certificate for FY 2026-27, the Competent Authority refused to issue one. The airline approached the Delhi High Court, contending that the rejection was unjustified and contrary to the Department’s earlier practice.
The Competent Authority examined the nature of the remittances and concluded that the transactions were between the Indian branch and its own head office, rather than between two distinct legal entities.
Accordingly, the authority held that the remittances did not fall within the ambit of Section 195, which governs tax deduction at source on payments made to non-residents. Since the provision itself was found inapplicable, the authority declined to issue a certificate under Section 195(2).
The Court observed that the Competent Authority had correctly appreciated the legal character of the remittances and had rightly concluded that a branch office and its head office cannot be treated as separate parties for the purpose of Section 195. In the absence of a payer-payee relationship, the statutory requirement of tax deduction at source does not arise.
The petitioner had effectively sought issuance of a certificate permitting remittances without deduction of tax. However, the High Court held that such a direction was unnecessary because the Competent Authority had already concluded that Section 195 itself was inapplicable.
The Bench observed that once the authority had taken the position that no certificate was required since no TDS obligation existed, the Court could not compel the authority to issue such a certificate. It emphasized that the consequence of the impugned order was itself that no tax was required to be deducted on the remittances from the Indian branch to the U.S. head office.
Recognizing the possibility of future disputes, the Court granted protective relief to the petitioner.
It directed that, subject to any other lawful objections available to the tax authorities, no adverse or prejudicial action should be taken against the airline merely because it did not deduct tax at source on remittances made to its head office in the United States. The protection flows directly from the Competent Authority’s own conclusion that Section 195 does not apply to such transactions.
The Delhi High Court disposed of the writ petition by affirming the Competent Authority’s interpretation that Section 195 does not apply to remittances from the Indian branch of United Airlines to its U.S. head office.
The Court further directed that no coercive action should be initiated against the petitioner for non-deduction of TDS on such remittances, while leaving open any other objections that may otherwise be available to the tax authorities.
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