In a landmark judgment, the Supreme Court of India has ruled that Tax Deduction at Source (TDS) on foreign remittances to non-resident entities cannot exceed 10% when a Double Taxation Avoidance Agreement (DTAA) applies. This ruling puts a decisive end to disputes where the Income Tax Department demanded 20% TDS on the grounds that the foreign recipient did not furnish a Permanent Account Number (PAN) under Section 206AA of the Income Tax Act, 1961.

The apex court held that when a non-resident is eligible for treaty benefits, the DTAA provisions prevail over domestic tax law, reinforcing that the Income Tax Act cannot override DTAA.

This key judgment delivers significant clarity and relief for NRIs, foreign companies, multinational businesses operating in India, and Indian companies making cross-border payments.

Key Highlights of the Supreme Court Ruling

• TDS on payments to non-residents is restricted to 10% when DTAA applies.
• Section 206AA (20% TDS for non-PAN holders) cannot override DTAA.
• Applies even when the non-resident payees do not possess an Indian PAN.
• Upholds earlier rulings by the Karnataka High Court (2022) and Delhi High Court (2022).
• Strengthens the principle that treaty provisions supersede domestic taxation law in case of conflict.

This ruling came after the Income Tax Department appealed to impose 20% TDS on companies such as Wipro, Mphasis, and Manthan Software Services, which were making payments for technical and IT services to foreign companies without deducting 20% tax due to absence of PAN. The Supreme Court rejected the appeal.

Why the Judgment Is Important for NRIs & Cross-Border Business Transactions

This decision protects foreign recipients and international service providers from excessive tax withholding. It supports:

• Fair tax treatment under global tax treaties
• Ease of doing business with India
• Protection against undue tax burden and litigation
• Improved cash flow and reduced administrative challenges for Indian payers

Professions & sectors that benefit

DTAA vs Income Tax Act: Which Law Applies?

Legal Interpretation

DTAA benefits prevail over domestic tax provisions, and the tax rate cannot exceed the treaty-prescribed rate, even if PAN is not provided.

Compliance Requirements for Claiming Lower TDS Under DTAA

Businesses should maintain:

• Valid Tax Residency Certificate (TRC)
• No-PE declaration (if applicable)
• Form 10F
• Service agreement / invoice copies
• Form 15CA & Form 15CB (as applicable)

Practical Impact of the Ruling

Before Supreme Court Ruling

TDS could be imposed at 20% if PAN not available.

After Supreme Court Ruling

TDS cannot exceed DTAA rate of 10%, regardless of PAN availability.

Example

What Businesses & NRIs Should Do Now

• Review existing international contracts & TDS policies
• Reprocess cases where higher TDS was deducted and refund may be due
• Update internal SOPs for cross-border payments
• Ensure documentation for DTAA compliance to prevent scrutiny

Conclusion

The Supreme Court ruling capping TDS on foreign remittances at 10% is a major win for NRIs, foreign companies, exporters, tech firms, and Indian payers involved in cross-border transactions. It reinforces India’s commitment to international taxation principles and reduces compliance uncertainty.

Key takeaway

Section 206AA cannot override DTAA — TDS on foreign remittances must be capped at treaty rate (usually 10%), even without PAN.

Need Expert Assistance with DTAA, NRI Taxation, or Cross-Border Compliance?

At Dinesh Aarjav & Associates, we specialize in:

• NRI taxation & DTAA advisory
• Foreign remittance & repatriation planning
• Form 15CA/CB certification
• Capital gains taxation for NRIs
• Tax consultancy for global businesses