CIT v. Infosys Ltd. (2024)

🧾 CIT vs. Infosys Ltd – Supreme Court on TDS under Section 206AA vis-à-vis DTAA (2024)

📌 Background

Tax Deduction at Source (TDS) under Section 206AA of the Income-tax Act, 1961, mandates deduction at a higher rate (20%) if the deductee fails to furnish a Permanent Account Number (PAN). However, where the payment is made to a non-resident, the applicable rate may be reduced by a Double Taxation Avoidance Agreement (DTAA) under Section 90 of the Act.

In CIT v. Infosys Ltd. [(2024) 300 Taxman 113 (SC)], the issue before the Supreme Court revolved around whether the DTAA rate could prevail over the higher rate prescribed under Section 206AA when the non-resident deductee does not possess a PAN.

📂 Facts of the Case

• Assessee: Infosys Ltd.
• Assessment Year: 2011–12
• Nature of Payment: Fees for technical services/royalty to non-resident entities based in China.
• Relevant Sections: Sections 9(1)(vi), 9(1)(vii), 90, 206AA of the Income-tax Act; Article 12 of the India–China DTAA.

Key Facts:

• Infosys made payments to Chinese residents for technical services and royalty.
• The non-resident recipients did not possess Indian PANs.
• The Assessing Officer applied Section 206AA, directing Infosys to deduct TDS at 20%.
• Infosys contended that under Article 12 of the India–China DTAA, the applicable rate was 10%, and such DTAA provisions override domestic law under Section 90(2).

❓ Point of Dispute

Whether the TDS rate under the DTAA (10%) can prevail over the statutory rate of 20% under Section 206AA, even when the non-resident deductee fails to furnish PAN.

📑 Submissions by the Assessee (Infosys Ltd.)

• Treaty Override: The provisions of DTAA prevail over the domestic Act wherever beneficial to the assessee as per Section 90(2).
• PAN Non-requirement for Non-residents: The obligation to furnish a PAN under Section 206AA cannot defeat the beneficial provisions of DTAA.
• CBDT Circulars & Judicial Precedents: CBDT Circular No. 333 (1982) and judicial pronouncements such as Danisco India (P) Ltd. v. UOI (2018) support the view that treaty benefits cannot be denied for non-furnishing of PAN.

📑 Submissions by the Revenue

• Mandatory PAN under Section 206AA: The law expressly requires a higher rate of 20% if PAN is not furnished.
• Withholding Obligations: The payer cannot rely on treaty rates unless complete compliance, including PAN requirement, is fulfilled.
• Administrative Necessity: PAN ensures traceability and audit trail for cross-border payments.

⚖️ Legal Principles & Court’s Findings

1. Interplay between Section 206AA and Section 90(2)

• Section 206AA is a procedural provision ensuring proper collection of tax.
• Section 90(2) is a substantive enabling provision, giving primacy to DTAA rates if they are more beneficial to the taxpayer.

The Court reiterated that where the provisions of a DTAA apply, they override the provisions of the domestic law to the extent they are beneficial to the assessee.

2. Tribunal & High Court Findings

• The ITAT Bangalore held that TDS must be deducted at the lower DTAA rate even if the non-resident lacks a PAN.
• The Karnataka High Court affirmed this, observing that Section 206AA cannot supersede Section 90(2).
• The High Court also relied on precedents such as Engineering Analysis Centre of Excellence (P) Ltd. v. CIT (2021) to emphasize treaty supremacy.

3. Supreme Court Decision

• The Special Leave Petition (SLP) was filed after a delay of 255 days against the High Court order.
• The Supreme Court found the explanation for delay unsatisfactory and dismissed the SLP on the ground of delay.
• As a result, the High Court’s decision upholding the primacy of DTAA rates over Section 206AA remained final.

🏁 Held

✅ Where the rate of tax under the DTAA is lower than 20% under Section 206AA, TDS shall be deducted at the lower DTAA rate, even if the non-resident does not possess a PAN.

❌ Section 206AA cannot be invoked to deny treaty benefits to a non-resident.

🕒 The Supreme Court’s dismissal of the SLP, though on grounds of delay, affirms the High Court’s legal position on the supremacy of DTAA.

✅ Practical Impact on Taxpayers

• Certainty for Cross-Border Transactions: Taxpayers can rely on DTAA rates for TDS on payments to non-residents, regardless of PAN availability.
• Reduced Compliance Burden: Removes unnecessary procedural hurdles for foreign entities without Indian PANs.
• Consistency with Global Standards: Aligns with international tax principles that prioritize treaty obligations over domestic procedural laws.
• Need for Documentation: Deductors must maintain evidence such as Tax Residency Certificates (TRC) and Form 10F to substantiate treaty claims.

🔑 Key Takeaways

1. DTAA prevails over Section 206AA—beneficial treaty provisions cannot be overridden by procedural domestic law.
2. Non-furnishing of PAN by a non-resident does not mandate 20% TDS if the DTAA rate is lower.
3. Tax Residency Certificate is essential to claim treaty benefits.
4. SLP dismissal reaffirms settled law—courts uphold treaty supremacy in tax matters.

📢 Why This Case Matters

The CIT v. Infosys Ltd (2024) ruling reinforces a crucial international tax principle—treaty obligations override conflicting domestic provisions. It provides much-needed clarity for companies making cross-border payments, especially in the technology and service sectors.

The case also demonstrates the judiciary’s emphasis on certainty, fairness, and consistency in applying tax treaties, promoting India’s image as a transparent tax jurisdiction for foreign investors.

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