CIT (IT) v. Infosys Ltd (2024)

🌐 CIT (IT) vs. Infosys Ltd. – Karnataka High Court on Section 206AA vs. DTAA Rates for TDS on Royalty/FTS (2024)

📌 Background

Tax deduction at source (TDS) provisions for payments made to non-residents often raise significant interpretational issues—especially where domestic law mandates a certain withholding rate, but the applicable Double Taxation Avoidance Agreement (DTAA) prescribes a lower rate.

A common controversy arose with Section 206AA, introduced to mandate a flat 20% TDS rate where the non-resident payee does not furnish a PAN. Companies making royalty or fees for technical services (FTS) payments faced a dilemma:

• Should they deduct TDS @ 20% under Section 206AA?
• Or should they apply the lower DTAA rate, even if the non-resident does not hold a PAN?

This issue reached the Karnataka High Court in CIT (IT) v. Infosys Ltd. (2024) 164 taxmann.com 280 (Karnataka HC), where the Revenue appealed against the ITAT’s decision favouring Infosys. The High Court examined whether DTAA relief overrides Section 206AA, even when PAN is not available.

📂 Facts of the Case

• Assessee: Infosys Ltd.
• Nature of Payments: Royalty / Fees for Technical Services (FTS) to non-residents.
• Issue: Whether TDS should be deducted:
  • @ 20% as per Section 206AA, since payees did not furnish PAN;
  • OR at lower DTAA rates under Article 12 (Royalty/FTS).
• ITAT’s View: DTAA rate prevails over Section 206AA.
• Revenue Appeal: Filed before Karnataka High Court with a delay of 273 days.

The High Court dismissed the appeal both on delay and merits, upholding the ITAT’s reasoning.

❓ Point of Dispute

Whether TDS on royalty/FTS paid to non-residents must be deducted at the higher domestic rate of 20% under Section 206AA, even if the DTAA provides a lower rate and the non-resident does not furnish PAN?

📑 Submissions by the Assessee

Infosys argued that:

• Section 90(2) expressly provides that where DTAA provisions are more beneficial, they override domestic law.
• Therefore, DTAA rate prevails, irrespective of the absence of PAN.
• Section 206AA cannot compel a higher rate where the treaty provides a lower one.
• Several judicial precedents (Delhi HC in Danisco India, ITAT Bangalore in G.E. India, etc.) have already held the same.

📑 Submissions by the Revenue

Revenue contented:

• Section 206AA is a special, overriding provision that mandates 20% TDS where PAN is not furnished.
• The law does not carve out an exception for non-residents.
• Therefore, the assessee was obliged to deduct at 20%.

⚖️ Legal Principles & High Court’s Findings

1. DTAA Overrides Domestic Law

Section 90(2) clearly states that where DTAA provisions are more beneficial, those provisions shall apply, even if inconsistent with domestic law.
Thus, if DTAA prescribes a rate lower than 20%, that lower rate must be applied.

2. Section 206AA Cannot Override DTAA

The Court held that Section 206AA cannot nullify the beneficial provisions of a treaty merely because the non-resident does not possess a PAN.

A domestic law cannot override international treaty obligations.

3. Judicial Trend Already Settled

The Court referred to multiple precedents holding that:

• PAN requirement under Section 206AA cannot be imposed on non-residents who are otherwise governed by DTAA.
• Treaty rates apply irrespective of PAN availability.

4. Delay in Filing Appeal

The Revenue filed the appeal with a delay of 273 days, without proper explanation.
The High Court rejected the appeal on grounds of:

• Unexplained delay, and
• No merit in the objection raised.

🏁 Held

The Karnataka High Court held that:

✔ Lower DTAA rate applies even when PAN is not furnished.

✔ Section 206AA cannot compel 20% TDS in such cases.

✔ ITAT order upheld; Revenue’s appeal dismissed.

✅ Practical Impact on Businesses

This ruling provides substantial relief to Indian companies making cross-border payments:

1. No mandatory 20% TDS under Section 206AA for non-residents

Non-residents need not obtain PAN in India merely to receive royalty/FTS income.

2. Lower DTAA rates assured

Businesses can safely apply treaty rates without fear of litigation.

3. Reduces compliance burden for foreign payees

Foreign entities need not navigate Indian PAN procedures.

4. Aligns India with international tax treaty practice

Reaffirms India’s commitment to treaty obligations.

🔑 Key Takeaways

1. DTAA prevails over domestic TDS rates under Section 206AA.
2. PAN not mandatory for applying beneficial DTAA rates.
3. The ruling strengthens the principle that treaties override conflicting domestic provisions.
4. A valuable precedent for companies engaged in cross-border transactions.

📢 Why This Case Matters

CIT (IT) v. Infosys Ltd. is a landmark affirmation that:

• International tax treaties cannot be defeated by domestic procedural requirements, and
• India remains committed to providing certainty to foreign investors.

This decision fits into a consistent judicial trend protecting treaty rights and reducing unwarranted compliance burdens when the domestic law conflicts with international obligations.

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