Facts of the Case

The petitioner, SFDC Ireland Limited, is a company incorporated in the Republic of Ireland and a tax resident thereof under Article 4 of the India–Ireland Double Taxation Avoidance Agreement. The petitioner is engaged in providing cloud-based Customer Relationship Management platforms and standardized software products to customers in India through its Indian reseller, Salesforce.com India Private Limited. The petitioner does not have any office, employees, place of business, or permanent establishment in India.

For Financial Year 2025-26, the petitioner applied for issuance of a certificate under Section 197 of the Income-tax Act seeking nil deduction of tax at source. Despite identical facts and despite earlier orders of the Delhi High Court for Financial Years 2023-24 and 2024-25 directing issuance of nil rate certificates in the petitioner’s own case, the competent authority issued a certificate dated 11.09.2025 directing deduction of tax at the rate of 10 percent. A subsequent reasoned order dated 26.09.2025 attempted to justify the same. Aggrieved, the petitioner approached the High Court under Articles 226 and 227 of the Constitution.

Issues Involved

Whether the competent authority could issue a Section 197 certificate directing deduction of tax at 10 percent without recording any finding of existence of a permanent establishment in India, whether binding High Court judgments in the petitioner’s own case could be ignored without demonstrating any change in facts, and whether revenue considerations alone could justify deviation from settled legal position.

Petitioner’s Arguments

The petitioner contended that there was no change whatsoever in the nature of transactions, business model, or factual matrix as compared to earlier years when nil withholding certificates were directed by the High Court. It was argued that the impugned order was passed mechanically, without examining taxability under the Act or the DTAA, and was driven solely by the volume of sales in India. The petitioner further submitted that the order violated Section 197, Rule 28AA, and binding judicial precedents, and was arbitrary and unsustainable in law.

Respondent’s Arguments

The Revenue argued that income-tax proceedings are year-specific and that the competent authority is entitled to take a different view in subsequent years. It was contended that earlier High Court orders were per incuriam as the statutory scheme of Sections 195 and 197 was allegedly not considered. The Revenue further argued that Form 13 and Form 10F were filed by a person resident in India, and therefore the petitioner should be treated as a resident in India under Section 6(3) of the Act.

Court Order / Findings

The Delhi High Court categorically rejected the Revenue’s contentions. The Court held that mere filing of applications or forms by a power of attorney holder resident in India does not render a foreign company resident in India under Section 6(3), which requires that the place of effective management be in India. The Court found that no finding had been recorded by the competent authority to establish that the petitioner had a permanent establishment in India.

The Court further observed that the impugned order did not record any reason whatsoever to justify deduction of tax at 10 percent, except stating that the certificate under Section 197 is interim and subject to final assessment. Such reasoning was held to be wholly arbitrary and contrary to law. The Court noted with concern that the competent authority had side-tracked and ignored two binding judgments of the High Court passed in the petitioner’s own case for earlier years without demonstrating any factual change.

The Court held that while the Assessing Officer may depart from earlier judicial views in appropriate cases, such departure must be supported by concrete findings of change in facts or law. In absence thereof, failure to follow binding precedent renders the order a nullity. The Court also emphasized that Section 197 authorities must adopt a pragmatic, justice-oriented approach and not be driven by revenue collection.

Important Clarification

The High Court clarified that issuance of certificates under Section 197 cannot be guided by revenue considerations or volume of transactions. Binding High Court judgments must be followed unless there is a demonstrable change in facts. Arbitrary insistence on higher TDS in the absence of taxability undermines ease of doing business and violates statutory discipline.

Final Outcome

The writ petition was allowed. The impugned order dated 26.09.2025 and the certificate dated 11.09.2025 directing deduction of tax at the rate of 10 percent were set aside. The respondents were directed to issue a certificate for deduction of tax at nil rate under Section 197 not only for Assessment Year 2026-27 but also for subsequent years, unless a reasoned finding is recorded after due notice that the petitioner has a permanent establishment in India or its receipts are otherwise taxable under the Income-tax Act.

Link to download order https://www.mytaxexpert.co.in/uploads/1769504127_SFDCIRELANDLIMITEDVsCOMMISSIONEROFINCOMETAXINTERNATIONALTAXATION3NEWDELHIANR..pdf

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