Facts of the Case

The petitioner, GE Global Parts and Products GmbH, is a company incorporated in Switzerland and is engaged in the business of supplying gas turbines, spare parts, and carrying out offshore repair of machines manufactured outside India. The petitioner asserted that it does not have any permanent establishment in India and that no income accrues or arises in India. Due to continued deduction of tax at source by Indian customers, the petitioner regularly applied for certificates under Section 197 of the Income-tax Act seeking nil or lower deduction of tax.

For several prior years, the respondent authorities had issued certificates directing deduction of tax at the rate of 1.5%. In Assessment Year 2025-26, however, the respondent issued a certificate dated 16.05.2025 directing deduction of tax at an enhanced rate of 3.5%, purportedly on the basis of a finding recorded during proceedings for AY 2022-23 that the petitioner had a permanent establishment in India.

Issues Involved

Whether a higher rate of tax deduction under Section 197 could be sustained when the sole basis for enhancement was a finding of permanent establishment that had subsequently been set aside by the Income Tax Appellate Tribunal, and whether the petitioner was entitled to continuation of the lower TDS rate applied in earlier years.

Petitioner’s Arguments

The petitioner contended that the higher TDS rate of 3.5% was illegal and arbitrary, as it was solely based on an alleged finding of existence of a permanent establishment in India for AY 2022-23. It was submitted that such finding had already been set aside by the ITAT vide order dated 17.10.2025. The petitioner further argued that in earlier writ petitions, the High Court had consistently directed issuance of certificates at the rate of 1.5% and that there was no fresh material justifying deviation from the settled position.

Respondent’s Arguments

The Revenue argued that issuance of a certificate under Section 197 is discretionary and dependent on the facts of each assessment year. It was submitted that at the time of issuance of the impugned certificate dated 16.05.2025, a finding regarding existence of permanent establishment was available on record, justifying deduction at a higher rate. The Revenue also submitted that the ITAT order could still be challenged under Section 260A.

Court Order / Findings

The Delhi High Court observed that it was undisputed that prior to AY 2022-23, certificates under Section 197 were consistently issued at the rate of 1.5%, and whenever a higher rate was stipulated, the same had been set aside by the Court. The Court noted that although at the time of issuance of the impugned certificate there existed a finding of permanent establishment, such finding had subsequently been set aside by the ITAT on 17.10.2025. As a result, the very foundation for issuance of the higher TDS certificate no longer survived.

The Court held that once the ITAT had set aside the finding of permanent establishment, the respondent authorities could not continue to rely on the same to justify deduction at a higher rate. Accordingly, the impugned certificate dated 16.05.2025 directing deduction at 3.5% was quashed. The respondents were directed to issue a fresh certificate providing for deduction of tax at the rate of 1.5% within 15 days.

The Court further directed that for future years as well, certificates under Section 197 should continue to be issued at the rate of 1.5%, unless the ITAT order is reversed or modified, or fresh material establishing existence of a permanent establishment comes on record after following due process.

Important Clarification

The High Court clarified that a higher rate of tax deduction under Section 197 cannot be sustained merely on the basis of a finding which no longer survives in law. Where the alleged existence of a permanent establishment is set aside by the appellate authority, the Revenue must revert to the earlier accepted position unless fresh evidence is brought on record after granting opportunity of hearing to the assessee.

Final Outcome

Both writ petitions were allowed. The certificate dated 16.05.2025 directing deduction of tax at the rate of 3.5% was quashed, and the respondents were directed to issue a fresh certificate under Section 197 providing for deduction of tax at the rate of 1.5%. Directions were also issued to continue granting certificates at the same rate for future years, subject to the outcome of any further appellate proceedings or emergence of fresh material.

 

Link to download order https://www.mytaxexpert.co.in/uploads/1769503984_GEGLOBALPARTSANDPRODUCTSGMBHVsASSISTANTCOMMISSIONEROFINCOMETAXANR..pdf

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