Tax Authorities Cannot Arbitrarily Change Their Stance—Consistency in Withholding Tax Treatment is a Must: Delhi High Court

Once a View is Accepted, Revenue Cannot Depart Without Justification – Delhi High Court Warns Against Arbitrary Taxation and ruled that tax authorities cannot arbitrarily change their stance on withholding tax without providing a valid justification. The Court quashed an order that required withholding tax at 2% on payments to SFDC Ireland Limited, despite the fact that in the previous financial year, the same company had been granted zero withholding tax. The ruling strongly reinforced the principle that consistency in taxation is essential and arbitrary departures from settled positions erode tax certainty.

Justice Vibhu Bakhru, delivering the judgment, made it clear that “when an issue has been adjudicated and a view has been accepted in a previous year, the Revenue must provide cogent reasons for taking a different approach in subsequent years. A mere change of opinion is impermissible in tax matters.”

The Case of SFDC Ireland Limited: A Dispute Over Withholding Tax
The case arose when SFDC Ireland Limited, a tax resident of Ireland, applied for a Nil withholding tax certificate under Section 197 of the Income Tax Act, 1961. The company operates in the Customer Relationship Management (CRM) software and cloud-based services sector and had entered into a Reseller Agreement with its Indian subsidiary, Salesforce.com India Private Limited (SFDC India). Under this agreement, SFDC India merely resold SFDC Ireland’s products in India, without acting as an agent or intermediary.

In the previous financial year (2023-24), the Delhi High Court had ruled in favor of SFDC Ireland, holding that the payments received from SFDC India were not taxable in India. Based on this ruling, the Assessing Officer (AO) had granted a Nil withholding tax certificate, ensuring that SFDC India did not deduct any tax at source.

However, for the next financial year (2024-25), the same Assessing Officer issued a certificate requiring SFDC India to withhold 2% tax, arguing that SFDC Ireland had a Permanent Establishment (PE) in India through its subsidiary. The company challenged this decision before the Delhi High Court, arguing that the Revenue had offered no justification for deviating from the earlier ruling and had violated the principles of consistency and legitimate expectation.

Delhi High Court: Revenue Bound by Precedents Unless There is a Material Change
The Delhi High Court ruled that tax authorities cannot arbitrarily depart from their own decisions unless there is a material change in facts or law. The Court found that the Assessing Officer had failed to justify why a different withholding rate was applied when SFDC Ireland’s business structure, agreements, and tax residency status remained unchanged.

Rejecting the Revenue’s argument that each assessment year is independent, the Court clarified that while assessment years are separate, past legal determinations must be respected in the absence of fresh evidence warranting a different conclusion. The judgment firmly held that “once a view has been accepted by the Department in one year, any departure in the subsequent year must be backed by tangible material evidence. An arbitrary change in stance undermines tax certainty and fairness.”

The Court also noted that Section 195 of the Income Tax Act mandates that withholding tax applies only if the payment is chargeable to tax in India. Since SFDC Ireland had no Permanent Establishment in India, and its income was classified as business profits under Article 7 of the India-Ireland DTAA, the payment was not taxable in India. The ruling emphasized that “the obligation to deduct tax at source arises only if the income is chargeable to tax under Indian law. Without a finding of taxability, imposing withholding tax is illegal.”

Withholding Tax Cannot Be Applied Arbitrarily Without Assessing Chargeability
The Revenue attempted to justify its decision by arguing that SFDC India acted as a dependent agent, thereby creating a Permanent Establishment for SFDC Ireland in India. The Court rejected this argument outright, holding that “the Reseller Agreement establishes an independent contractual relationship where SFDC India merely resells products and does not act as a dependent agent. There is no evidence to suggest that SFDC Ireland carries out business operations in India through SFDC India.”

The Court also stressed that taxpayers are entitled to certainty and predictability in tax treatment, particularly when their circumstances remain unchanged. “Taxpayers who have received favorable determinations in earlier years have a legitimate expectation that the same position will be maintained unless the Revenue demonstrates compelling reasons to the contrary.”

Revenue Cannot Arbitrarily Deviate From Past Rulings
With this ruling, the Delhi High Court has reaffirmed that tax authorities cannot arbitrarily change their stance on withholding tax without a material change in facts or law. The Court’s decision strengthens the principle that taxpayers deserve consistency and fairness in tax administration.

Justice Vibhu Bakhru, delivering the final verdict, made it clear that “the impugned order and certificate are unsustainable as they fail to demonstrate any material change from the previous year’s assessment. The Revenue cannot be permitted to take inconsistent positions year after year, creating uncertainty for taxpayers.”

This judgment serves as a strong precedent, ensuring that tax authorities maintain consistency in their rulings and do not arbitrarily alter their positions without valid justification. It reinforces that withholding tax cannot be imposed unless there is a clear and legally justified reason for doing so, protecting businesses from unpredictable and unfair tax treatment.
 

Date of Decision: 17 February 2025