DTAA Says the Income Is lower Rate/Nil Rate Taxable, then why Is a Section 197 Certificate Still Required?

The question makes complete sense. If the treaty protects the income from tax, why should anyone approach the tax department again? The answer lies in the difference between tax liability and tax withholding—a distinction that is often overlooked.

What the DTAA Actually Does

A DTAA is meant to avoid double taxation and clearly lay down when and how India can tax a non-resident’s income. It determines:

• Whether a particular type of income is taxable in India

• The conditions under which India can tax it

• The limits on India’s tax rights

In many cases, based on the DTAA:

• Certain services are Not taxable in India

• Or income is taxable only if specific conditions are met

• Or taxation is restricted to a lower rate

So from a legal standpoint, the DTAA answers one important question:

“Is this income chargeable to tax in India?”

But this is only part of the story.

The Real Issue: Withholding Tax Responsibility

Under Indian tax law, the obligation to deduct tax lies with the payer, not the non-resident recipient.

This means:

• The Indian company making the payment must decide whether tax should be deducted

• If tax is not deducted and the tax department later disagrees, the payer bears the consequences

Those consequences can include:

• Being treated as an assessee in default

• Interest and penalties

• Disallowance of expenditure

• Prolonged litigation

Because of this risk, most payers adopt a very cautious approach.

Even where the DTAA clearly supports non-taxability or lower rate taxability, payers often prefer to deduct tax rather than risk future action.

Why DTAA Protection Alone Is Not Enough in Practice

While DTAAs are binding law, applying them often involves:

• Interpretation of facts

• Classification of income

• Judgement calls

These are not always black-and-white decisions. From the payer’s perspective, relying solely on treaty interpretation can be risky—especially when tax authorities may later take a different view.

As a result:

• Tax is deducted “just to be safe”

• The non-resident suffers cash flow blockage

• Refund claims become routine

This is where Section 197 becomes crucial role.

What Is Section 197 Really For?

Section 197 provides certainty.

It allows a taxpayer to approach the tax department and request permission for:

• No tax deduction, or

• Deduction at a lower rate

Once such a certificate is issued:

• The payer is legally protected

• The tax department cannot later allege short-deduction

• Payments can be made smoothly, without unnecessary tax withholding

In simple terms, Section 197:

Converts DTAA relief from theory into practice.

How Section 197 and DTAA Work Together

It helps to see them as playing different roles:

• DTAA determines whether tax is legally payable

• Section 197 determines whether tax must be withheld at the time of payment

The DTAA protects the taxpayer’s rights.
Section 197 protects the payer from risk.

Without a Section 197 certificate, treaty protection often remains uncertain at the payment stage.

What Happens If Section 197 Is Not Obtained?

When no certificate is available:

• Tax is deducted

• The non-resident files a tax return

• Refund is claimed

• Money remains blocked for months or even years

All this happens even when:

• Income is clearly not taxable under the DTAA

• Past years support the taxpayer

• Judicial precedents exist

Section 197 exists to avoid this unnecessary and inefficient cycle.

Courts Have Recognized This Practical Reality

Indian courts have repeatedly acknowledged that:

• Withholding tax decisions are driven by risk, not final taxability

• Section 197 is an important statutory safeguard

• Authorities cannot deny certificates mechanically or on vague grounds like “protecting revenue”

Recent judicial decisions have reinforced that:

• Treaty benefits must be respected at the withholding stage

• Section 197 applications require proper consideration of facts and past records

• Denial of relief defeats the purpose of the DTAA itself

The Bigger Picture

International taxation is not just about legal provisions—it is also about practical administration.

DTAAs are designed to prevent double taxation, but that objective fails if:

• Tax is deducted first

• Refunds come much later

• Compliance costs increase unnecessarily

Section 197 plays a key role in ensuring that treaty benefits are actually delivered when payments are made—not years later through refunds.

Final Thought

A simple way to understand the relationship:

The DTAA decides whether tax is payable.
Section 197 ensures tax is not wrongly deducted.

Both are essential. One without the other leaves taxpayers stuck between legal clarity and practical uncertainty.