Delhi High Court annuls higher Section 197 TDS rate after PE conclusion is nullified by ITAT

Background and context

The Delhi High Court, in the matter of GE Energy Parts INC Vs ACIT & Anr., examined two writ petitions filed by non-resident entities engaged in offshore supply of gas turbines, spare parts, and offshore repair services. Both petitions raised identical legal and factual issues and were therefore decided together. For convenience, the Court drew the factual matrix primarily from W.P.(C) No. 10260/2025.

The core controversy related to the rate of Tax Deducted at Source (TDS) prescribed under Section 197 of the Income Tax Act 1961 for AY 2025–26, particularly in the light of an earlier departmental finding that the assessee had a Permanent Establishment (PE) in India—a finding which had subsequently been set aside by the Income Tax Appellate Tribunal (ITAT) on 17.10.2025.

The ruling reiterates that the discretion under Section 197 must be anchored in prevailing and enforceable factual and legal positions. Once the foundational fact (here, the alleged PE) is judicially removed, it cannot be relied upon to sustain a higher TDS rate.

Facts of the case

Business profile of the petitioner

  1. The petitioner in the lead writ, a company incorporated in Switzerland in 2015, is engaged in:

    • Supply of Gas Turbines and related spare parts; and
    • Offshore repair of machinery manufactured outside India.

  2. The assessee’s consistent stance has been that:

    • It operates entirely from outside India for the relevant activities;
    • It does not maintain any Permanent Establishment in India; and
    • Consequently, no income is chargeable to tax in India in respect of these offshore supplies and repair services.

TDS deduction and earlier Section 197 certificates

  1. Despite the assessee’s position that no income accrues or arises in India, its Indian customers have routinely deducted TDS from payments made to it, citing obligations under the Income Tax Act 1961.

  2. To mitigate this situation, the assessee regularly filed applications under Section 197 seeking a certificate authorising:

    • Nil deduction of tax at source, on the ground that its income is not taxable in India.

  3. Historically, the Assessing Officer (AO) did not grant a nil rate but consistently issued certificates prescribing TDS at 1.5%, which the assessee accepted and operated under.

  4. On earlier occasions, when the Revenue attempted to raise this rate above 1.5%, the assessee approached the Delhi High Court through writ petitions, notably:

    • WP(C) No. 13189/2021
    • WP(C) No. 10055/2022

    In those cases, the Court directed the Department to issue Section 197 certificates at 1.5%, restoring the lower rate.

Dispute for AY 2025–26

Impugned certificate at 3.5%

  1. For AY 2025–26, the AO issued a fresh Section 197 certificate dated 16.05.2025, directing deduction of TDS at an elevated rate of 3.5%, instead of the earlier and judicially sustained rate of 1.5%.

  2. The assessee, in its application and submissions before the AO, specifically relied on:

    • The historical pattern of certificates at 1.5%; and
    • The earlier High Court orders that had rejected higher rates and mandated 1.5% TDS.

  3. The grievance in the writ petitions was that:

    • The impugned order departed from this settled position;
    • The increase to 3.5% was unwarranted, arbitrary, and contrary to both the factual record and binding judicial directions.

Revenue’s justification for the enhanced rate

Reliance on alleged PE finding in AY 2022–23

  1. On behalf of the Revenue, the learned Senior Standing Counsel, Puneet Rai, defended the higher rate by contending that:
  • While it was correct that earlier certificates were issued at 1.5%, the situation changed for AY 2022–23.
  • During assessment proceedings for that year, the AO had recorded a finding that the assessee had a PE in India.