Disallowance of payments to non-residents without TDS capped at 30% under DTAA (non-discrimination clause) and not 100% as per Act

 In a significant and taxpayer-friendly ruling, the Hon’ble ITAT, Delhi Bench has recently delivered an important decision in LinkedIn Technology Information (P.) Ltd. v. PCIT, which provides much-needed clarity on the application of tax treaty protections, particularly the non-discrimination principle, in cases involving payments to foreign entities. The ruling assumes importance for Indian companies making cross-border payments to overseas group entities, vendors, or service providers, especially in situations where TDS disputes arise and consequential disallowances are proposed by the tax authorities.

In the present case, the assessee, is engaged in the business of providing marketing and customer support services to its associated enterprise (AEs), LinkedIn Singapore Pte. Ltd., and contract research and development services to LinkedIn Ireland Unlimited Company, both on a cost-plus basis with a predetermined mark-up. For AY 2018-19, the assessee filed its return of income, declaring a total income of Rs. 85.42 crores. The return was selected for complete scrutiny and assessment order was passed, accepting the returned income without any adjustment. Thereafter, the assessment was reopened, based on the information that the assessee had made foreign remittances allegedly in the nature of fees for technical services (FTS) to its AEs and vendors without deducting TDS. Accordingly, the AO passed a reassessment order making disallowance of 30% of the total remittances.

Subsequently, the Commissioner invoked revisionary powers and revised the reassessment order passed by AO, contending that payments made to non-residents without TDS should suffer 100% disallowance, as prescribed under the income-tax act, and that the AO’s order was erroneous and prejudicial to the interests of the revenue. Aggrieved by the said revisionary order, the assessee preferred an appeal before the Hon’ble ITAT.

The Hon’ble ITAT ruled decisively in favour of the taxpayer and quashed the Commissioner’s revisionary order. In doing so, the Hon’ble ITAT made the following important observations:

- The applicable DTAA contains a non-discrimination clause, which mandates that foreign enterprises should not be subjected to more burdensome taxation than domestic enterprises in similar circumstances.
- While domestic tax law prescribes a higher disallowance for non-resident payments, such differential treatment cannot override treaty protections.
- Restricting the disallowance to 30%, as done by the AO, ensured parity between resident and non-resident payments and was therefore consistent with the non-discrimination obligation under the DTAA.
- Since the AO had adopted a legally sustainable and treaty-compliant approach, the order could not be regarded as prejudicial to the interests of the revenue revisionary proceedings were unwarranted.

This ruling is a strong reaffirmation that tax treaties are not merely procedural instruments but substantive protections that override domestic law where they provide more favourable treatment to taxpayers. The ruling sends a clear message that Indian tax authorities cannot impose more onerous tax consequences on payments to non-residents than those applicable to similar payments made within India, merely by relying on domestic provisions. Where a tax treaty applies, its protections must be honoured in both letter and spirit.