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S. Soundara Rajan

Chartered Accountant

Published on: Mar 27, 2026

Supreme Court caps TDS on Foreign Remittances at DTAA Rate – A Definitive Ruling reinforcing Treaty Supremacy

 

1. Introduction

In a landmark judgment with far-reaching implications for cross-border taxation, the Supreme Court of India has reaffirmed that tax withholding on payments to non-residents must be governed by the rates prescribed under the applicable Double Taxation Avoidance Agreement (DTAA). The Court held that Section 206AA, which mandates a higher TDS rate (20%) in the absence of a PAN, cannot override treaty obligations.

This ruling conclusively settles a long-standing dispute and brings critical clarity to TDS under Section 195 for foreign remittances, particularly relating to royalty, software payments, and fees for technical services (FTS).

2. Case Name and Citation

Commissioner of Income Tax vs Manthan Software Services Pvt. Ltd. & Ors.

Supreme Court of India’s Order dated 24 November 2025, disposing of SLP (C) No. 21435 of 2023 and connected matters involving taxpayers such as Wipro Ltd., Mphasis Ltd., and Manthan Software Services Pvt. Ltd.

The appeals arose from High Court rulings that had held DTAA provisions override the higher TDS rate under Section 206AA, even when the non-resident recipient does not possess a PAN.

3. Background of the Litigation

The nature of the dispute is summarised below:

  • The Department insisted on 20% TDS under Section 206AA where foreign entities did not provide a PAN.
  • Taxpayers contended that payments were covered by DTAA provisions prescribing 10% TDS for royalty/FTS, and treaty rates should prevail.

4. Supreme Court’s Key Findings

4.1 DTAA Overrides Section 206AA

The Court reaffirmed the legal mandate under Section 90(2) which states that where treaty rates are more beneficial, they override conflicting domestic provisions. It held that Section 206AA is a machinery provision and cannot override substantive treaty law.

4.2 TDS Cannot Exceed DTAA Rate (Typically 10%)

Payments such as Royalty and FTS, commonly taxed at 10% under most DTAAs, cannot be subjected to 20% withholding solely due to non-availability of PAN.

4.3 PAN is Not Mandatory for Treaty Benefits

The Court confirmed that PAN is not a prerequisite for DTAA relief. Treaty benefits flow as long as the non-resident provides documentation establishing eligibility, such as a Tax Residency Certificate (TRC).

4.4 Consistency with Prior Judicial Precedents

The judgment is aligned with:

  • Karnataka High Court (2022)
  • Delhi High Court (2022), already affirmed by the Supreme Court in 2023
  • Union of India v. Azadi Bachao Andolan (SC)

5. Legal Analysis

5.1 Section 195 – Substantive Withholding Obligation

Section 195 requires withholding “at rates in force,” which includes DTAA rates. Thus, treaty rates form part of the statutory architecture itself.

5.2 Section 206AA – Procedural Provision

A procedural provision meant to regulate compliance cannot impose a higher tax burden than what the charging provisions and treaties permit.

5.3 Section 90(2) – Beneficial Provision Doctrine

Treaty provisions override domestic law to the extent they are more beneficial. This statutory position was reaffirmed unequivocally.

5.4 International Tax Alignment

The decision places India firmly in line with international norms that a treaty cannot be overridden by unilateral domestic amendments.

6. Implications of the Ruling

6.1 For Indian Payers

  • No more 20% TDS in absence of PAN when DTAA applies.
  • Clear, lower tax cost for cross-border payments.
  • Lower litigation exposure.

6.2 For Non-Resident Recipients

  • No requirement to obtain PAN solely for treaty benefits.
  • Lower TDS ensures accurate tax credit availability in home jurisdictions.

7. DTAA Documentation still Required

The following documents are still essential;

  • Tax Residency Certificate (TRC)
  • Form 10F
  • No-PE (Permanent Establishment) declaration, if applicable
  • Contract copies and invoices
  • Form 15CA / 15CB compliance

The ruling affects the tax rate, not the documentation norms.

8. Practical Steps for Taxpayers

8.1 Immediate Actions

  • Review all foreign remittances where 20% TDS was applied due to PAN non-availability.
  • Evaluate refund or rectification opportunities.

8.2 Going Forward

  • Adopt standard DTAA-rate withholding (10% for royalty/FTS, unless DTAA specifies otherwise).
  • Strengthen DTAA documentation procedures.
  • Update internal policies and educate cross-functional teams.

8.3 For Ongoing Assessments and Appeals

This SC ruling has binding force and can be cited before AO/CIT(A)/ITAT to conclude disputes favourably.

9. Conclusion

The Supreme Court’s ruling in CIT (International Taxation) v. Manthan Software Services Pvt. Ltd. & Ors. decisively resolves the long-standing conflict between DTAA rates and Section 206AA. The Court held that DTAA prevails, TDS is capped at 10% (in most cases), and PAN is not mandatory for treaty benefits.

This judgment brings essential clarity and consistency for taxpayers, strengthens India’s global tax credibility, and significantly reduces litigation relating to cross-border withholding tax.

Taxpayers should revisit their historic and ongoing cross-border payments to ensure compliance and take timely benefit of this crucial ruling.

 

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