In a major relief to Indian businesses and foreign vendors, the Supreme Court of India has ruled in a landmark judgement dated 25 November 2025 that the beneficial tax rates provided under Double Taxation Avoidance Agreements (DTAAs) will prevail over the 20% TDS rate mandated by Section 206AA of the Income Tax Act, 1961, even if the foreign recipient does not have an Indian Permanent Account Number (PAN).
Background of the Dispute
Income Tax Department’s Position
- Many foreign entities do not possess an Indian PAN.
- Section 206AA requires TDS at 20% (or the rate in force, whichever is higher) in the absence of PAN.
- The Department had initiated proceedings against several Indian companies — including Mphasis, Wipro, and Manthan Software — for deducting TDS at lower DTAA rates on payments for software licences and technical services.
Taxpayers’ Argument
- The payments qualified as royalties or fees for technical services under the relevant DTAA, which typically prescribe rates of 10–15%.
- Section 90(2) of the Income Tax Act itself gives overriding effect to more beneficial DTAA provisions.
- Non-furnishing of PAN cannot take away treaty benefits.
The Supreme Court Verdict (25 November 2025)
A Bench of Justices Surya Kant and M.M. Sundresh dismissed a batch of Revenue appeals and upheld the earlier rulings of the Karnataka High Court (2022) and Delhi High Court (2022, affirmed by the Supreme Court in 2023).
Key Takeaways from the Judgment
- Section 206AA is only a machinery provision and cannot override the substantive beneficial rates in a DTAA.
- Once a valid Tax Residency Certificate (TRC) and Form 10F (or equivalent declaration) are furnished, the Indian payer is entitled to apply the DTAA rate irrespective of PAN.
- Forcing 20% withholding would breach India’s treaty obligations and result in economic double taxation.
- The principle applies to all payment categories covered under DTAAs (royalties, fees for technical services, interest, dividends, etc.) where the treaty rate is lower than 20%.
Practical Implications
For Indian Companies (IT/ITeS, consulting, manufacturing, etc.)
- Safe to deduct TDS at DTAA rates without fear of disallowance of expenses or penal interest.
- Huge reduction in litigation and compliance costs.
For Foreign Vendors
- Predictable cash flows with minimal excess, excess withholding now unlikely.
- Excess tax, if any, refundable with interest.
For Tax Authorities
- Focus shifts to verifying genuine treaty eligibility rather than insisting on PAN.
Important Note: Treaty benefits are available only if the foreign entity meets all conditions of the DTAA (residency, beneficial ownership, LOB clauses in applicable treaties, Form 10F, etc.).
Conclusion
The 25 November 2025 judgment is a taxpayer-friendly, pro-treaty decision that finally removes a major irritant in cross-border transactions. By giving unequivocal primacy to DTAAs over Section 206AA, the Supreme Court has brought certainty, reduced disputes, and reinforced India’s credibility as a reliable treaty partner.
Case Reference: Commissioner of Income Tax (International Taxation) v. Mphasis Ltd & Ors. (along with connected matters) decided on 25 November 2025.
Indian companies no longer need to deduct 20% TDS just because PAN is missing. As long as the foreign company gives its Tax Residency Certificate and Form 10F, the lower TDS rate as per DTAA treaty rate is fully safe choice and a valid compliance. This SC Ruling ends years of disputes and penalties on this issue.
This SC ruling hinges on “valid” TRC and Form 10F, but lacks detailed guidelines on what constitutes “validity.” Revenue has historically challenged TRCs for being self-declaratory or lacking apostille. Without PAN, tracking foreign payees becomes harder, potentially enabling shell entities to misuse treaty benefits (e.g., via conduit routing to tax havens). This could erode tax base integrity, especially post-BEPS (Base Erosion and Profit Shifting) reforms where India has pushed for anti-abuse clauses.
The SC could have mandated CBDT circulars for standardized verification (e.g., integrating TRC with Aadhaar-like global ID checks) to balance relief with anti-evasion safeguards. In absence thereof, we can expect future amendments to Section 206AA or new reporting under Form 26AS/Annual Information Statement.
One more thing..
This ruling applies only to DTAA-covered payments (royalties, FTS, interest, dividends) where treaty rates are <20%. It sidesteps non-treaty scenarios or payments to blacklisted jurisdictions (e.g., under GAAR). Also, Limitation of Benefits (LOB) clauses in treaties like India-US/India-Singapore remain enforceable, but the ruling doesn’t address evolving interpretations (e.g., "beneficial ownership" tests).
For taxpayers in non-IT sectors (e.g., manufacturing royalties to China), ambiguity persists if treaties lack explicit caps. The decision’s "all categories" language is aspirational but risks over-interpretation, inviting Revenue scrutiny in audits.