Delhi Court Directs Income Tax Department to Issue Fresh Tax Withholding Certificate at 2% Instead of 10%

The Delhi High Court has granted relief to a company in a tax withholding case with the Income Tax Department by reducing the tax rate.

The petitioner company, Workday Limited, is an NRI company in Ireland. The company offers enterprise software products and related services for finance, human resources, planning, and operations. The company signed a principal-to-principal distribution agreement with Workday India Global Services for the distribution of its products in India, where it pays consideration to the petitioner.

The issue started when the income tax authority issued a tax withholding certificate at 10%. The company said that its transactions do not qualify for the royalty of ‘Fees for Technical Services‘ as per the India-Ireland Double Taxation Avoidance Agreement. It further contended that the tax authority did not record any reason for withholding tax at 10%.

The High Court examined the case and agreed with the company’s contentions, observing that the tax authorities did not give any sustainable reason. The court also noted that 80% of the period is already over and the payments made to the petitioner have been taxed at 10%.

Therefore, the court directed the income tax department to issue a fresh certificate with a reduced withholding rate of 2% for Assessment Year 2026-27. The new certificate must be issued within 10 days.

The court clarified that this 2% rate should only be applicable for AY 2026-27. The court clarified that for the later years, the authority must consider the petitioner’s application and issue a tax withholding certificate as per the law.