Supreme Court caps TDS on foreign remittances at 10%, says Income Tax Act cannot override DTAA

New Delhi: The Supreme Court on Tuesday clarified that tax deduction at source on remittances to non-resident entities cannot exceed 10% as specified in various Double Tax Avoidance Agreements (DTAA), and any demand raised by the income tax department beyond this would be inconsistent with the treaty.

Rejecting the income tax department’s appeals that wanted higher tax of 20% to be deducted at source (TDS) by various information technology companies like Mphasis, Wipro and Manthan Software Services, the apex court said that the TDS provisions in the Income Tax Act 1961 must be read along with the DTAA for computing the tax liability, and that when the foreign recipient is eligible for treaty benefits, the deduction cannot exceed the 10% cap specified in the DTAA.

The department wanted higher tax of 20% to be deducted at source as these companies had failed to furnish permanent account numbers in terms of Section 206AA of the Income Tax Act.

Upholding the Karnataka High Court’s 2022 order, the top court said that the rate of taxation in the DTAA signed by these companies, which in some cases was 10%, would prevail over Section 206AA. Any other interpretation to permit the taxing authority to raise a demand beyond 10% would be incongruous, the high court had held.

Even the SC had in 2023 had upheld the Delhi High Court’s July 2022 ruling that also held that the provisions of Section 206AA cannot override the provisions of the DTAA.

The revenue had told the court that during a survey u/s. 133A(2A)A, these assessees were found to have made remittances to non-resident entities without deducting TDS. It further argued that every payee was required to furnish a permanent account number and in the absence of the same, the rate of tax applicable shall be 20% in terms of Section 206-AA(1)(iii).

The companies, which provide software support and development services, during the hearing had argued that they had made payments towards technical services to various recipients in different countries as per DTAA.