AO Must Ignore Quashed Orders While Fixing TDS Under Section 197, Says Delhi HC

Zscaler Inc., a US-based non-resident company providing software-based IT solutions to Indian end-users, filed an application under Section 197 of the Income-tax Act, 1961 seeking a NIL Withholding Certificate for prospective receipts of Rs. 13,19,12,77,703 for FY 2025-26 (AY 2026-27). The Assessing Officer rejected the application and issued a certificate directing tax deduction at 8.75%, relying solely on assessment orders for AYs 2021-22 and 2022-23, which had treated Zscaler Softech India Pvt. Ltd. (its Indian subsidiary) as a Dependent Agent Permanent Establishment (DAPE).

Thereafter, the ITAT, by a common order, set aside those assessment orders and categorically held that no DAPE existed in India. Despite this, the AO’s Section 197 certificate continued to rest entirely on the quashed findings. Zscaler challenged the certificate and related orders before the High Court.

Main Issue: Whether a Section 197 certificate fixing withholding tax can be sustained when it is founded exclusively on assessment orders that have been set aside by the ITAT, and whether the AO is bound to reconsider the application afresh in light of such appellate findings.

HC’s Decision: The Delhi High Court set aside the impugned Section 197 certificate and the accompanying speaking and continuation orders. The Court held that the sole basis for fixing withholding at 8.75% had ceased to exist once the ITAT annulled those findings.

The Court ruled that pending or proposed appeals against the ITAT order could not justify continued reliance on overturned assessments. The AO was directed to reconsider the Section 197 application de novo for AY 2026-27, after granting the petitioner an opportunity of hearing and examining the relevant agreements and materials for the relevant year, uninfluenced by any appeal filed by the Revenue. A fresh order was directed to be passed within three weeks.

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