Each Assessment Year is Independent, Earlier Orders cannot be Basis for issuing Certificate u/s 197: Delhi HC [Read Order]

“It is a settled proposition of law that in taxation, each assessment year has to be seen on the basis of the facts applicable to that particular year” observed the Delhi High Court while ruling that earlier assessment orders cannot be considered while issuing Certificate under Section 197 of the IncomeTax Act, 1961.

Justice V. Kameswar Rao and Vinod Kumar, in a petition filed by Zscaler Inc, an American based company observed that each assessment year is different and it is settled jurisprudence in the taxation law. The same cannot be a ground to reject the S. 197 Certificate.

The petitioner, a non-resident company, had sought a ‘nil or lower withholding certificate’ under Section 197 for Assessment Year 2026-27. The Assessing Officer rejected the application and issued a certificate prescribing tax deduction at 8.75%.

As per the petitioner’s counsel, Adv. Kamal Sawhney, the officer, depended on the assessment orders passed in the previous years. However the same was set aside by the income tax appellate tribunal ( ITAT ) where the fact finding authority itself ruled that the petitioner has no DAPE in India.

Also, the counsel submitted that the appellate authority ruled that the transfer of right to use a copy of a copy-righted software and that transfer of copy of a copy-righted software such (resale/EULA software) is not eligible to be taxed as ‘Royalty’.

The department’s counsel submitted that the issue of Permanent Establishment is to be decided on a year to year basis, as it is an exercise in determination of facts. He also submitted that the ITAT order for earlier AYs does not become a res judicata or estoppel for other AYs, more so when each AY is fact specific.

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He also contended that whether the payment to an economically dependent subsidiary is on Arms- Length basis or not, cannot be established during proceedings under Section 197 of the Act, that exercise can be carried out only during subsequent proceedings by referring the matter to the TransferPricing Officer (TPO).

The department also argued that the Assessing Officer must be satisfied that the recipient's total income justifies a tax deduction at a reduced or zero rate in order for a certificate under Section 197 to be issued. The non-resident recipient's application must constitute the basis for this satisfaction.

Sections 237 and 240 of the Act were compared in order to clarify the meaning of the phrase "if the AO is satisfied”, said the department seeking the dismissal of the petition.

It further stated that while Section 240 examines a scenario in which the Assessing Officer must decide to grant a refund suo motu, without any application being made, Section 237 places the burden on the assessee to place the necessary material on record to justify the relief sought.

The court observed that it is true that the intention of fixing a rate in the case of NRIs is to preserve the interest of the revenue. The bench said that, however, the only basis for the taxation is that if the assessee is provided that it has a DAPE in India.

Though the AO in the previous AYs 2021-22 and 2022-23 did conclude that the petitioner has a DAPE in India through ZSIPL, the said conclusion has been set aside by the ITAT, observed the court.

With regards to the department’s claim that they’re going to appeal the ITATs decisions, the high court observed the ruling by the Supreme court in Union of India v. Kamlakshi Finance Corporation Ltd, (1991) that “the order of higher appellate authorities should be followed unreservedly and the mere fact that the decision is not acceptable to the Revenue cannot be a ground for not following the decision of the higher authority.”

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The bench noted that passing ZSIPL constituted a DAPE in India as per the previous assessment orders (at least insofar as AYs 2021-22 and 2022-23 are concerned) no longer holds good. It was noted that as AO did not have relevant documents while passing the order, it clarifies that the officer relied only on the assessment orders of the preceding years to pass an order under Section 197 of the Act. It is the duty of AO to check whole documents and with an independent mind, in which the same fails here.

Considering the whole situation, the court reiterated the position of the law that every assessment year is ‘NEW’. It is ‘INDEPENDENT’.

The Division bench noted that the order of ITAT for AYs 2021-22 and 2022-23 holding that the petitioner - assessee does not have a DAPE settles the issue whether the receipts of the assessee is taxable in India during those AYs. However nothing has been brought to check whether assessments were carried out for AYs 2023-24 and 2024-25.

Additionally, it was said that if such assessment was carried out, then the department failed to submit the conclusion of AO with regards to the same.

The court, counting on all the submissions, directed the AO to reconsider the issue of certificate under Section 197 for the AY 2025-26. It directed to examine the current AY without looking into the past and also without being influenced by the ITAT orders. Accordingly the matter was disposed of.

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