Facts of the Case

The petitioner, a non-resident company incorporated in Denmark, is engaged in providing IP video management software and surveillance-related products globally. It entered into Distributor Partner Agreements in India for the sale of its software.

The petitioner applied under Section 197 seeking a NIL withholding tax certificate for FY 2021–22. However, the tax authorities issued a certificate prescribing a 9.99% withholding tax rate, rejecting the NIL claim.

The petitioner contended that the software supplied was merely licensed and did not involve transfer of copyright, relying on the Supreme Court ruling in Engineering Analysis Centre of Excellence Pvt. Ltd..

  Issues Involved

  1. Whether consideration received from sale of software amounts to “royalty” under Section 9(1)(vi) and DTAA?
  2. Whether the Assessing Officer failed to properly consider the Supreme Court ruling in Engineering Analysis case?
  3. Whether rejection of NIL withholding certificate under Section 197 without proper reasoning is valid?
  4. Scope and application of Rule 28AA while determining withholding tax rates.

 Petitioner’s Arguments

  • The software supplied does not transfer copyright; only a limited license is granted.
  • Hence, the income cannot be treated as royalty under Section 9(1)(vi) or DTAA.
  • The Assessing Officer ignored the binding Supreme Court judgment in Engineering Analysis.
  • The order failed to examine the Distributor Agreement terms.
  • Therefore, NIL withholding certificate should have been granted.

 Respondent’s Arguments (Revenue)

  • Proceedings under Section 197 are not equivalent to assessment proceedings.
  • Detailed examination of taxability is not required at this stage.
  • Under Section 195, withholding tax is the rule; lower/NIL deduction is an exception.
  • The certificate issued at 9.99% is justified.

 Court’s Findings / Observations

  • The Assessing Officer failed to examine the core issue, i.e., whether the payment constitutes royalty.
  • The authority improperly ignored the binding precedent of the Supreme Court merely because a review petition was pending.
  • There was no analysis of Distributor Agreement clauses, which was essential to determine nature of rights granted.
  • The approach adopted did not comply with Rule 28AA requirements for estimating income.
  • Withholding tax obligation arises only when income is chargeable to tax, which was not properly examined.

 Court Order / Decision

  • The impugned withholding tax certificate and order were set aside.
  • The matter was remanded back to the Assessing Officer for fresh consideration.
  • The authority was directed to:
    • Examine the Distributor Agreement
    • Apply the Supreme Court ruling in Engineering Analysis
    • Follow Rule 28AA parameters
  • The decision must be taken within 8 weeks.

Important Clarifications by Court

  • Pending review of a Supreme Court judgment cannot be a ground to ignore it.
  • Even under Section 197, authorities must conduct a prima facie but meaningful examination.
  • Determination of withholding tax must consider whether income is actually chargeable to tax.
  • Rule 28AA compliance is mandatory while issuing lower/NIL TDS certificates.

Link to download the order -https://delhihighcourt.nic.in/app/showFileJudgment/RAS14032023CW36392022_163045.pdf

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