SC Rules TDS on Foreign Payments Cannot Exceed 10% Under DTAA.
The Supreme Court of India has clarified that tax deduction at source (TDS) on remittances to non-resident entities cannot exceed 10% under various Double Tax Avoidance Agreements (DTAA). The decision comes in response to the Income Tax Department’s attempts to impose a higher 20% TDS in cases where Permanent Account Numbers (PANs) were not furnished, providing much-needed clarity to Indian companies making cross-border payments for technical services.
Key Highlights of the Supreme Court Ruling
- The apex court heard appeals involving companies such as Mphasis, Wipro, and Manthan Software Services, which had made payments to non-resident entities in various countries.
- The Income Tax Department argued that under Section 206AA of the Income Tax Act, the absence of PAN warranted a 20% TDS deduction.
- Companies contended that the payments were made in accordance with the DTAA, which capped TDS at 10% for eligible foreign recipients.
- The Supreme Court held that the Income Tax Act must be read in conjunction with the DTAA, and that TDS cannot exceed the treaty-prescribed rate if the foreign recipient is eligible for DTAA advantages.
- The ruling upholds the Karnataka High Court’s 2022 order, which stated that demanding TDS above the DTAA rate would be “incongruous.”
- SC in 2023 upheld the Delhi High Court’s July 2022 ruling, where it was held that Section 206AA cannot override provisions of the DTAA.
- The Income Tax Department had reported that surveys under Section 133A(2A) revealed companies making remittances without deducting TDS, and sought the higher 20% rate in the absence of PAN.
- The Supreme Court clarified that even without PAN, the DTAA rate prevails, ensuring alignment with international treaty obligations.
Conclusion
This clarification from SC makes it clear that DTAA provisions take priority over the Income Tax Act for TDS on foreign payments. Capping TDS at 10% where treaty benefits apply gives companies clarity on cross-border payments, aligns domestic law with international agreements, and reduces disputes over the higher 20% rate under Section 206AA. For businesses providing technical or professional services abroad, this decision makes compliance easier and ensures certainty in international transactions.
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