Software Receipts Can't Be Taxed On PE Assumption Already Rejected By ITAT: Delhi High Court

The Delhi High Court has held that software receipts cannot be subjected to tax deduction at source (TDS) on the assumption of a Permanent Establishment (PE) when such an assumption has already been rejected by ITAT, setting aside a withholding certificate issued under Section 197 of the Income Tax Act.A division bench of Justices V. Kameswar Rao and Vinod Kumar was dealing with a petition filed by Zscaler Inc, a US-based software company, challenging the Assessing Officer's order granting TDS certificate (withholding certificate) under Section 197 at 8.75% on payments received from company's Indian customers.Petitioner contended that the withholding certificate was premised on the existence of a Dependent Agent Permanent Establishment (DAPE) in India, an issue that had already been examined and set aside by the ITAT in earlier proceedings. Despite this, the AO proceeded to issue the Section 197 certificate on the same PE assumption, merely noting that the Revenue proposed to challenge the ITAT's order.Rejecting this approach, the High Court held that once the very foundation of the withholding order i.e. the existence of a PE had been set aside by the appellate authority, the AO could not continue to rely on it. “The fact remains that the only basis on which the petitioner/assessee can be taxed, is if it is proved 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.”The Court observed that judicial discipline requires authorities to follow binding appellate orders unless they are stayed or reversed."We are conscious of the fact that when the order was passed by the AO, he had before him the valid assessment orders stating that ZSIPL is a dependent PE of the petitioner/assessee. However, as of now, such conclusion does not exist, and the very basis for the AO to issue the impugned certificate/order has fallen.”The Bench reiterated that the mere intention of the Revenue to file an appeal against the ITAT's order does not dilute its binding nature. It noted that allowing the AO to ignore such orders would result in uncertainty and undermine the statutory appellate framework.“The submission of Mr. Agarwal that the Revenue is in the process of filing an appeal against the order of the ITAT, is of little help to the Revenue, as the law in this regard has been quite well settled by the Supreme Court.”Accordingly, it set aside the impugned certificate and directed the AO to reconsider the petitioner's application afresh.Appearance: For the Petitioner : Mr. Kamal Sawhney, Mr. Arun Bhadauria and Mr. Puru Medhira, Advocates. For the Respondent : Mr. Sunil Agarwal, SSC, Mr. Viplav Acharya, JSC, Ms. Priya Sarkar, JSC with Mr. Anugrah Dwivedi and Mr. Utkarsh Tiwari, AdvocatesCase title: Zscaler Inc v. Deputy Commissioner Of Income Tax, Circle 3(1)(1), New DelhiCase no.: W.P.(C) 10556/2025Click here to read order

Software Receipts Can't Be Taxed On PE Assumption Already Rejected By ITAT: Delhi High Court

Kapil Dhyani

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