Facts of the Case

The writ petitions were filed by GE Energy Parts Inc., USA and GE Global Parts and Products GmbH, Switzerland, challenging certificates issued under Section 197 of the Income-tax Act, 1961 for Assessment Year 2025–26 directing deduction of tax at source at the rate of 3.5%. The petitioners are foreign companies engaged in supplying gas turbines, spare parts and offshore repair services for equipment manufactured outside India. The petitioners consistently claimed that they do not have a Permanent Establishment in India.

In earlier assessment years, the Revenue had issued certificates under Section 197 directing deduction at the rate of 1.5%, and whenever higher rates were prescribed, the same were set aside by the Delhi High Court in earlier writ petitions with directions to issue certificates at 1.5%. For AY 2025–26, however, the Assessing Officer issued a certificate dated 16.05.2025 requiring deduction at 3.5%, relying upon a finding recorded during proceedings for AY 2022–23 that the petitioners had a Permanent Establishment in India.

Subsequently, the Income Tax Appellate Tribunal, by order dated 17.10.2025, set aside the finding of existence of Permanent Establishment for AY 2022–23.

Issues Involved

Whether the certificate issued under Section 197 prescribing higher TDS at 3.5% could survive once the ITAT had set aside the finding of Permanent Establishment, whether the Revenue could continue to rely on a foundation that no longer existed, and what safeguards should govern issuance of certificates for future years.

Petitioner’s Arguments

The petitioners contended that the sole basis for issuing the higher TDS certificate was the finding of Permanent Establishment for AY 2022–23, which had already been set aside by the ITAT. It was argued that once the foundation for issuing the higher rate certificate ceased to exist, the impugned certificate was unsustainable in law. The petitioners further submitted that the issue was squarely covered by earlier orders of the Delhi High Court directing issuance of certificates at 1.5%.

Respondent’s Arguments

The Revenue argued that issuance of a certificate under Section 197 is within the discretion of the Assessing Officer based on facts available at the relevant time. It was contended that when the impugned certificate was issued, the finding of Permanent Establishment existed on record and therefore the Assessing Officer was justified in prescribing a higher rate of TDS. The Revenue also submitted that the ITAT order could still be challenged under Section 260A of the Act.

Court Order / Findings

The Delhi High Court observed that prior to AY 2022–23, the Revenue had consistently issued certificates under Section 197 at the rate of 1.5%, and whenever higher rates were prescribed, the same were set aside by the Court. The Court held that although at the time of issuing the certificate dated 16.05.2025 there may have been some justification based on the then-existing finding of Permanent Establishment, the subsequent order of the ITAT dated 17.10.2025 setting aside that finding had completely eroded the foundation of the impugned certificate.

The Court held that once the very basis for issuing the higher rate certificate had ceased to exist, the certificate prescribing deduction at 3.5% could not be sustained. Accordingly, the impugned certificate was quashed and the Revenue was directed to issue a fresh certificate under Section 197 prescribing deduction at the rate of 1.5% within fifteen days.

The Court further clarified that while the Revenue is free to challenge the ITAT order under Section 260A, and may issue certificates at a higher rate in future if the ITAT order is reversed or if fresh material establishes existence of a Permanent Establishment, such action can be taken only after issuing notice to the petitioner and considering its response.

Important Clarification

The High Court clarified that certificates under Section 197 prescribing higher rates of TDS can be issued only if there is cogent material establishing existence of a Permanent Establishment in India. Mere reliance on a finding that has been set aside cannot justify higher deduction. The petitioner’s right to challenge any future certificate prescribing higher TDS was expressly preserved.

Final Outcome

Both writ petitions were allowed. The certificate dated 16.05.2025 prescribing deduction of tax at source at 3.5% was quashed. The Revenue was directed to issue a fresh certificate under Section 197 providing for deduction of tax at the rate of 1.5% within 15 days. The respondents were further directed to continue issuing certificates at 1.5% for future years unless the ITAT order is reversed or fresh evidence establishes existence of a Permanent Establishment in India, subject to due process of law.

 

Link to download order https://www.mytaxexpert.co.in/uploads/1769503908_GEENERGYPARTSINCVsASSISTANTCOMMISSIONEROFINCOMETAXANR..pdf

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