Delhi HC Cuts TDS to 2% in Software Taxation Dispute; Cites Lack of Reasoning in Section 197 Order:

Delhi HC Cuts TDS to 2% in Software Taxation Dispute; Cites Lack of Reasoning in Section 197 Order The Delhi High Court has announced its final judgement dated February 24, 2026, on a writ petition filed by a non-resident company, DocuSign Inc., against the Income Tax Department, challenging an order dated August 11, 2025, passed by the Office of Circle Int Tax 1(2)(2). Through the impugned order, the tax authorities had issued a certificate under Section 197 of the Income Tax Act, 1961, directing that tax be withheld at 4% on its payments.

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The assessee is a software company of the United States of America (USA), with its principal place of business in San Francisco, California, USA. The assessee company provides its services in India through the global distribution arrangements and direct sales arrangements. The company argued that it is a tax resident of the US and that its transactions with Indian customers do not involve royalty or “Fees for Included Services” under the India-USA Double Taxation Avoidance Agreement. It also relied on the Supreme Court’s ruling in Engineering Analysis Centre of Excellence Ltd v. CIT, which clarified the taxability of software payments. DocuSign contended that the tax authority gave no proper reasons for fixing the 4% rate.

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The tax department argued that the nature of the company’s transactions had not yet been fully examined and that final tax liability would be determined during assessment proceedings. It added that excess tax, if any, could later be refunded. When the High Court analysed the facts of the case, it noted that the tax authorities had not provided adequate reasons in their order. Observing that most of the financial year had already passed and that 4% tax was being deducted, the Court directed the department to issue a revised certificate allowing tax deduction at 2% for Assessment Year 2026-27. The petition was partly allowed, with directions for proper consideration in future years.