The Supreme Court has ruled that Indian companies cannot be compelled to deduct more than 10% TDS on payments made to foreign companies if a Double Tax Avoidance Agreement (DTAA) applies.
The apex court categorically held that tax treaties override domestic tax provisions, including Section 206AA of the Income Tax Act, which mandates a 20% TDS rate when the payee does not furnish a Permanent Account Number (PAN).
The ruling settles a long-running dispute between the Income Tax Department and companies such as Mphasis, Wipro, and Manthan Software and upholds earlier favourable judgments from the Karnataka High Court and Delhi High Court.
Background: IT Department Wanted 20% TDS Due to No PAN
The controversy began when the Income Tax Department insisted that Indian companies must deduct 20% TDS while making payments for technical services to foreign entities that did not possess a PAN.
- Section 206AA states that if PAN is not provided, tax must be deducted at 20%.
- However, several Indian companies argued that their payments were covered under the DTAA, which typically prescribes a concessional 10% withholding tax on fees for technical services.
The IT Department argued that the absence of PAN invalidated DTAA benefits-an argument the Supreme Court has now firmly rejected.
Supreme Court: DTAA Prevails Over Section 206AA
The Supreme Court held that:
- DTAA provisions override conflicting sections of the Income Tax Act.
- TDS must be deducted at the DTAA-prescribed rate, even if the non-resident does not have a PAN.
- PAN is not a precondition to avail treaty benefits.
- The IT Department cannot insist on a higher 20% deduction just because PAN is not available.
This judgment cements the principle that international tax treaties enjoy supremacy over domestic law wherever inconsistencies arise.
Why the Ruling Matters
The decision is expected to significantly ease cross-border business operations, especially in sectors dependent on global technical expertise.
Key Implications:
- Lower tax costs for Indian companies making payments to overseas service providers.
- No unnecessary 20% deduction, preventing excess withholding and refund delays.
- Stronger certainty and stability in cross-border taxation.
- Boost to the IT, software and consulting industries, which routinely engage foreign experts.
- Better alignment with global tax principles and India's treaty obligations.
The ruling also prevents situations where foreign companies, despite being eligible for reduced DTAA rates end up facing double taxation due to excessive TDS in India.
Industry Reaction: Calls for Broader Simplification
Meanwhile, Deloitte India has recommended that the upcoming Budget 2026-27 should further streamline India's complex withholding tax regime.
It suggested:
- Integrating GST data to reduce TDS/TCS compliance burden.
- Designing withholding tax rules around three categories-goods, services, and residual transactions such as interest and dividends.
Industry experts believe such reforms could complement the Supreme Court's ruling and enhance the ease of doing business for Indian and foreign firms alike.
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