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Informist, Tuesday, Jan. 20, 2026

 

NEW DELHI – The Delhi High Court has pulled up the income tax department for its approach of trying to fetch "extra revenue" when deciding applications seeking tax deducted at source at lower or nil rate. "The present authority and the authorities dealing with the application under Section 197 of the (Income Tax) Act of 1961 are supposed to adopt a pragmatic and justice-oriented approach--they should decide the applications in accordance with law, rather than being guided by the revenue which they might generate, if the certificate(s) are issued at 10% rate or rate higher than 'nil' rate of tax," said a bench of Justice Dinesh Mehta and Justice Vinod Kumar.

 

This approach of the tax authorities hits at the root of the business environment and the idea of ease of doing business, the court said. Such orders constrict the free flow of trade within the country and discourage foreign entities from doing business in India, it said. Besides, they create an environment inconducive to trade and industry, thus hindering the country's economic growth.

 

"Ease of doing business cannot be confined to slogans and government policies; it has to percolate down in executive actions and quasi judicial orders," the bench said. Passing similar orders year after year portrays an unhealthy and unwelcoming picture of the country's bureaucracy while giving a false sense of satisfaction to the tax department, it said. False because, in any case, on furnishing returns, the amount that is in the nature of advance tax has to be refunded with interest in case the underlying transactions are not liable to be taxed. The court observed that the Income Tax Act gives enough power to bring payments made to foreign companies into the tax net if such payments result in income liable to be taxed.

 

The high court set aside the tax department's order asking the reseller of SDFC Ireland Ltd. to deduct tax at the rate of 10% on the amount to be paid to the petitioner company. It said the department shall issue a certificate to SDFC Ireland for nil tax not only for the assessment year 2026-27 (Apr-Mar), but also for subsequent years.

 

However, if the department comes to the conclusion that SDFC Ireland has a permanent establishment in India, then it can ask the company to pay tax deducted at source at a higher rate without being bound by the court's current order, it added.

 

SDFC Ireland had said the tax department was moved by the volume of sales--INR 10.83 billion--achieved by the company in India and had cursorily passed the order to deduct tax at the rate of 10%, justifying its action by noting that this is only advance tax subject to final adjustment on completion of assessment proceedings. The company said the department was cognizant of the fact that its earlier orders requiring deduction at 10% and 2%, respectively, for the financial year 2023-24 and FY25 had been set aside by the high court. Yet, it mechanically passed the current order, that too without explaining how the transactions done or likely to be done by the petitioner company in FY26 were liable for tax under the Income Tax Act, 1961.

 

The court rejected the department's argument that SDFC Ireland should be considered an Indian company as it had given a power of attorney to sign documents to Himank Bhatia, who had submitted the application for a nil rate certificate and has an Indian residential address and phone number. Simply because a power of attorney has been given to a person residing in India and all formalities required are done by such person, a company incorporated in Ireland, or in any other country outside India, cannot be held to be a company resident in India within the meaning of Section 6(3) of the Income Tax Act, the court said.

 

"...we are constrained to observe that the approach of the competent officer has been arbitrary and propelled, rather impelled, by the revenue considerations," the court said. "In the over-enthusiasm of fetching extra revenue, that too in the form of TDS, he has even sidetracked two previous judgments of this court, passed in the petitioner's own case."  End

 

Reported by Surya Tripathi

Edited by Rajeev Pai

 

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