The Supreme Court on Tuesday decided that tax deduction at source on international remittances to non-resident organisations should comply with the 10% threshold imposed under Double Tax Avoidance Accords. The court ruled that tax collection agencies cannot insist on a higher rate where the treaty specially indicates the existence of a capped rate in the case of qualified foreign beneficiaries.
The decision followed the appeal by the Income Tax Department against previous cases involving companies such as Mphasis, Wipro, and Manthan Software Services. The department claimed a 20% deduction as there are no Permanent Account Numbers of foreign beneficiaries under Section 206AA of the Income Tax Act. The court concluded that treaty terms will provide uniformity in cross-border transactions; therefore, such matters should guide the calculation of taxes.
The court also found that such decisions have been made before. In 2023, the Supreme Court upheld the Delhi High Court's decisions and ruled that the provisions of Section 206AA cannot be interpreted as conflicting with the provisions of the DTAA structure.
The Supreme Court upheld the previous decision of the Karnataka High Court, which had affirmed that treaty rates should be preeminent in cases where tax authorities calculate withholding tax on foreign remittances. It was inconsistent for the High Court to find it challenging to apply a 20% deduction in the situation, when the DTAA specified a 10% rate.
The Income Tax Department asserted that the companies failed to file the Permanent Account Numbers in instances where foreign payees were involved, resulting in a 20% deduction in accordance with Section 206AA. The survey provided in Section 133A indicates that some payments for technical services and software-related services have been charged without tax deduction.
The companies engaged informed the court that they paid technical services to companies located in different jurisdictions. These jurisdictions had corresponding DTAA that was applied in determining the rate of taxes. The court agreed that the benefits of the treaty were used, and the deduction on taxes should not exceed the fixed limit.
The ruling provides certainty to companies involved in international business. The organisations that are used to calculating withholding taxes using the treaties are now sure that the provisions within the country cannot impose taxes on them that are higher than the DTAA rate.
The decision also helps companies that handle non-resident service providers. Taxes require that the taxpayer be able to follow the treaty rate where necessary, and the authorities cannot demand that the greater deductions be used because of the lack of Permanent Account Numbers.