Lower tax withholding certificate must be supported by reasoned findings on the nature of transaction.

The Petitioner, a non-resident company incorporated in Ireland, provides enterprise software products and related services.

It entered into a distribution agreement with Workday India Global Services Pvt Ltd to distribute its products in India on a principal-to-principal basis.

The Petitioner applied for a lower tax withholding certificate under Section 197 of the Income Tax Act, 1961, contending that its receipts are neither "Royalty" nor "Fees for Technical Services" (FTS) under the India-Ireland Double Taxation Avoidance Agreement (DTAA).

On October 10, 2025, the Competent Authority issued a certificate at a 10% rate without providing detailed reasons or addressing the judicial precedent cited by the Petitioner.

The Petitioner challenged this order via a writ petition.

Whether the Competent Authority was justified in issuing a tax withholding certificate at the rate of 10% without recording specific reasons or considering applicable judicial precedents.

Whether the Petitioner is entitled to a lower rate of tax withholding for the financial year 2025-26 based on the nature of its software distribution transactions.

The court primarily applied Section 197 of the Income Tax Act, 1961, which governs the issuance of certificates for deduction of tax at a lower rate.

It considered the India-Ireland Double Taxation Avoidance Agreement (DTAA) regarding the definitions of "Royalty" and "Fees for Technical Services".

The court relied on the precedent set in *SFDC Ireland Ltd. v. Commissioner of Income Tax and Anr.* [2024] 465 ITR 471 (Delhi), which addresses the taxability of software-related payments under similar treaty provisions.

The Court observed that the Competent Authority failed to provide "sustainable reasons" or dilate upon the nature of the transaction in the impugned order.

The Authority neglected its duty to record a prima facie opinion or address the Petitioner’s reliance on the *SFDC Ireland Ltd.* judgment.

While the Revenue argued that the nature of the transaction requires detailed examination during assessment and that any excess tax could be refunded, the Court noted that 85% of the relevant period had already elapsed with tax being withheld at 10%.

The Court found that the transactions prima facie did not appear to be exigible to tax at the rate of 10%; however, to balance the Revenue's interest in conducting a future scrutiny assessment with the Petitioner's need for liquidity, it determined that a 2% withholding rate was just and proper.

It held that the 10% withholding rate was not justified due to the lack of reasoned findings by the Authority.

The Court directed the Respondent to issue a revised tax withholding certificate at the rate of 2% for the assessment year 2026-27 (FY 2025-26) within 10 days.

It further directed the Competent Authority to consider future applications for subsequent years independently and in accordance with the law.