India–US DTAA Bars 100% Disallowance On Payments To US Firms Without TDS: ITAT Delhi

The Delhi bench of the Income Tax Appellate Tribunal (ITAT) recently held that restricting disallowance to 30% on payments made by an Indian company to US companies for not deducting tax at source on fees for technical services did not cause any prejudice to the Revenue, as such restriction was required under the non-discrimination clause of the India–US tax Double Taxation Avoidance Agreement.

A coram of Judicial Member Vikas Awasthy and Accountant Member Naveen Chandra quashed a revision order passed under Section 263 of the Income-tax Act in an appeal filed by LinkedIn Technology Information Pvt. Ltd. for the 2018–19 assessment year.

According to the Tribunal, since TDS defaults on payments to resident firms attract only a 30% disallowance, payments made to US companies cannot be fully disallowed, as the India–US tax treaty bars such discriminatory treatment.

It noted that “the application of disallowance @100% u/s 40(a)(i) is held as discriminatory in so far as quantum of disallowance is concerned. The quantum of disallowance for resident is restricted to 30% u/s 40(a)(ia), and therefore to meet the requirement of discriminatory clause of Article 26(3) of DTAA, the disallowance for payment made to nonresident, without deducting TDS, should as well be restricted to 30% u/s,40(a)(i) of the Act.”

It added that since similar failures involving payments to residents attract only a 30% disallowance, the same standard must apply to non-resident payments to comply with Article 26(3) of the DTAA.

The case involved payments of Rs 8.61 crore made by LinkedIn India to LinkedIn Corporation and Rs 53.94 lakh paid to HireRight LLC, without deduction of tax at source. While the original assessment was completed in April 2021, the tax department later reopened the case, treating the foreign remittances as fees for technical services.

In the reassessment order passed in March 2023, the Assessing Officer disallowed 30% of the total remittances of Rs17.76 crore.

However, after observing an error in computation, the Principal Commissioner revised the order, holding that 100% of Rs 9.15 crore ought to have been disallowed under Section 40(a)(i) since the payments were made to non-residents.

Rejecting this view, the tribunal reiterated that revisionary power can be invoked only when an order is both erroneous and prejudicial to the interests of the Revenue.

It held that since the Assessing Officer had already applied a 30% disallowance in line with treaty protection, “there is no occasion to say that the revenue is prejudiced as far as the quantum of disallowance is concerned.”

Accordingly, the revision order was set aside.

Case Title: LinkedIn Technology Information Pvt Ltd vs The P.C.I.T

Citation: 2026 LLBiz ITAT(DEL) 9

Case Number: ITA No. 2492/DEL/2024 [A.Y 2018-19]

For Assessee: Sriram Seshadri, CA Ms. Riddhi Maru, CA

For Department: Nethrapal, CIT-DR