The Supreme Court has made it clear that Indian companies cannot be forced to deduct more than 10% tax when they make payments to foreign companies, if India has a tax treaty (DTAA) with that country.
The ruling comes after the income tax department had argued that since many foreign recipients did not have a Permanent Account Number (PAN), the TDS should be 20% under Section 206AA of the Income Tax Act.
The Court rejected this argument, saying that international tax treaties override domestic tax rules, and the 10% rate specified in the DTAA must be respected. The ruling upholds earlier decisions of the Karnataka and Delhi High Courts.
What Was The Dispute?
The income tax department said these foreign companies did not provide a PAN (Permanent Account Number).
Under Section 206AA, if someone does not give a PAN, the tax deducted should automatically be 20%.
So, the IT department wanted Indian companies like Mphasis, Wipro, Manthan Software to deduct 20% TDS, not 10%. However, the companies during the hearing had argued they had made payments towards technical services to various recipients in different countries as per DTAA.
What The Supreme Court Ruled
The Supreme Court agreed with the companies and said that tax treaties (DTAA) override the domestic law (Section 206AA of the Income Tax Act). If the DTAA says TDS should be 10%, India cannot demand 20%. Not having a PAN does not mean the rate automatically becomes 20%.
This means the income tax department cannot force a higher deduction just because the foreign party doesn’t have a PAN.
Why Is This Important?
Whenever an Indian company pays money to a foreign company, for example, for software services or technical support, it must deduct a small portion of tax before sending the money abroad. This is called tax deducted at source (TDS).
India has Double Tax Avoidance Agreements (DTAA) with many countries. These treaties usually say that India can deduct only 10% tax on such payments.
The ruling gives clarity and relief to Indian IT and software companies that often pay foreign firms for technical services. It ensures smooth cross-border business, especially in the tech sector. It also prevents double taxation.
Meanwhile, Deloitte India on Tuesday said the Budget for 2026-27 should streamline the withholding tax regime. To further streamline the withholding tax regime and enhance compliance efficiency, it suggested using GST to reduce TDS/TCS compliance. It also recommended that withholding tax provisions be designed for 3 categories– goods, services and residuary transactions, (like interest and dividends).
