Supreme Court clarifies tax treatment on overseas remittances, says DTAA rate governs TDS

The top court held that any higher demand raised by the income tax department would run contrary to the treaty framework

The Supreme Court has reaffirmed that tax deducted at source on payments made to non-resident entities cannot exceed the 10% limit prescribed under the applicable Double Tax Avoidance Agreements (DTAA), The Economic Times reported. The court held that any higher demand raised by the income tax department would run contrary to the treaty framework.

As highlighted by The Economic Times, the Tuesday ruling came while dismissing the tax department's appeals seeking a 20% TDS rate from firms such as Mphasis, Wipro and Manthan Software Services. The bench noted that TDS provisions under the Income Tax Act, 1961 must be applied in conjunction with the DTAA, and once a foreign payee qualifies for treaty benefits, the withholding rate cannot exceed the treaty-specified 10%.

The department had sought to impose the higher 20% rate on the grounds that the payees had not furnished permanent account numbers, invoking Section 206AA of the Income Tax Act. However, the Supreme Court upheld the Karnataka High Court's 2022 view that treaty rates prevail over Section 206AA when a DTAA applies-an interpretation previously endorsed by the Delhi High Court and later upheld by the Supreme Court in 2023, The Economic Times noted.

The revenue authorities argued that surveys under Section 133A(2A) revealed remittances made without appropriate TDS and that, in the absence of a PAN, Section 206AA(1)(iii) mandates a 20% deduction. The companies contended that the payments were for technical services rendered by overseas recipients and were subject to DTAA provisions that cap the withholding rate.

The Economic Times reported that the Supreme Court's latest ruling reinforces that DTAA protections continue to override domestic provisions where the treaty provides a more beneficial rate.