Supreme Court Declines to Reopen TDS Dispute on Payments to Overseas Affiliates; HC Decision Final

The Revenue had approached the Supreme Court through multiple Special Leave Petitions challenging the Karnataka High Court’s judgment dated 5 December 2022. The High Court had dismissed the Revenue’s appeal and affirmed the ITAT’s findings in favour of Manthan Software Services Pvt. Ltd. The dispute arose from a series of orders treating the company as an assessee-in-default for alleged non-deduction of tax at source on payments made to its overseas group entities situated in USA.

Appeals: The ITAT had restored the matter to the CIT(A) for a fresh and reasoned finding on the threshold question, whether the payments were indeed sales commissions, as argued by the assessee, or fell within the scope of royalty/FTS. The Tribunal also upheld the view that section 206AA cannot override section 90(2), thus requiring adoption of the lower DTAA rate wherever applicable. The High Court dismissed the Revenue’s appeal outright, answering the questions of law in favour of the assessee. It was this dismissal that Revenue sought to challenge before the Supreme Court.

Core Issue: Whether the Supreme Court should interfere with the Karnataka High Court’s decision affirming ITAT’s remand and the application of DTAA-based tax rates over section 206AA in respect of payments made to non-resident group entities.

SC Decided: The Supreme Court noted that the issues raised by the Department were already covered by its earlier order dated 4 July 2023 in CIT (Intl. Taxation) v. Air India Ltd., where similar grounds had been rejected. After hearing both sides, the Court reproduced the Air India order, which had condoned delay but dismissed the SLP, holding that no interference was warranted with the lower court’s decision. Taking this precedent as binding, the Bench concluded that the present matters did not merit a different view. Thus, all the SLPs were dismissed in the same terms, without entering into the factual or legal merits afresh.

The Karnataka High Court’s ruling stands undisturbed. This means the findings in favour of the assessee, that the matter must be reconsidered by the CIT(A) through a speaking and reasoned order, that DTAA rates prevail over section 206AA, and that no automatic inference of royalty/FTS can be drawn without examining the nature of payments, remain intact.

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