The Delhi High Court has directed income tax officials to abandon a "fetching extra revenue" mindset and instead adopt a pragmatic, justice-oriented approach, warning that aggressive tax actions contradict India's stated objective of improving the ease of doing business.
A division bench comprising Justice Dinesh Mehta and Justice Vinod Kumar observed that tax officers must decide cases involving foreign companies seeking tax relief strictly in accordance with law and not be influenced by revenue-generation considerations.
Section 197 Certificates Should Not Be Denied Arbitrarily
The court made these observations while dealing with cases where overseas companies seek lower or nil TDS Certificates under Section 197 of the Income Tax Act, 1961.
Such certificates enable recipients to receive payments such as royalties, interest or fees with reduced or zero tax deduction at source, thereby preventing over-deduction where the actual tax liability is lower or nil.
The bench cautioned that routinely rejecting or restricting such certificates has serious economic consequences.
"Such an approach of the authorities hits at the very root of the business environment and the very idea of providing ease of doing business," the court remarked.
Aggressive Tax Actions Harm Trade and Investment
The High Court noted that mechanically insisting on higher TDS restricts the free flow of trade, discourages foreign entities from doing business in India and creates an environment unconducive to trade and industry, ultimately hampering economic growth.
Importantly, the bench underlined that any excess tax deducted functions merely as advance tax, which the department would ultimately have to refund with interest if the income is found non-taxable, making such an approach counterproductive.
Ease of Doing Business Cannot Be Just a Slogan
In a pointed remark, the court said:
"Ease of doing business cannot be confined to slogans and government policies; it has to percolate down in executive actions and quasi-judicial orders."
The judges added that passing similar restrictive orders year after year paints an unwelcoming picture of India’s bureaucracy and provides only "pseudo satisfaction" to the Revenue.
Law Already Empowers Tax Authorities Where Income Is Taxable
The bench clarified that the Income Tax Act, 1961, already provides sufficient powers to bring payments to foreign companies within the tax net, where such payments generate income chargeable to tax in India.
Therefore, denying nil or lower TDS certificates merely as a precautionary or revenue-protective measure is unjustified.
SFDC Ireland Case: Nil TDS Certificate Directed for Future Years
The observations came in the case of SFDC Ireland vs Commissioner of Income Tax (International Taxation).
The High Court set aside the order of the Assistant/Deputy Commissioner of Income Tax (International Taxation), which had directed salesforce.com India, acting as a payer/reseller, to deduct 10% TDS on payments made to SFDC Ireland.
The court directed the tax department to issue a nil TDS certificate not only for AY 2026-27, but also for subsequent years.
No Permanent Establishment, No Taxability
Senior counsel representing SFDC Ireland submitted that:
- The company does not have a Permanent Establishment (PE) in India under the India-Ireland DTAA and
- The payments made were not taxable under the Income Tax Act, 1961.
Accepting these submissions, the court ruled in favour of the assessee.
Key Takeaway for Taxpayers and Foreign Investors
The ruling sends a clear signal that revenue-centric tax administration will not be judicially endorsed, especially where it undermines legal certainty and India’s global business image.
For multinational companies and Indian payers dealing with overseas entities, the judgment reinforces that Section 197 relief must be granted based on law, not suspicion.
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