Madras High Court Protects Cognizant: IPLC Payments Shielded from TDS Under India–US DTAA

Madras High Court Protects Cognizant: IPLC Payments Shielded from TDS Under India–US DTAA

Court says DTAA ensures parity between domestic and cross-border transactions

Ruling clarifies treatment of IPLC payments, offers relief for IT and outsourcing firms

By Our Legal Correspondent

New Delhi: December 05, 2025:

In a landmark judgment, the Madras High Court has ruled that payments made by Cognizant Technology Solutions India Pvt. Ltd. to Sprint USA for International Private Leased Circuit (IPLC) services are not subject to additional Tax Deducted at Source (TDS) burdens. The Court applied Article 26(3) of the India–US Double Taxation Avoidance Agreement (DTAA), which ensures that cross-border transactions are not treated more harshly than domestic ones.

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This ruling provides significant clarity for India’s IT and outsourcing industry, which frequently relies on IPLC services for secure international data transmission.

Background of the Case

• Issue: The tax department argued that IPLC payments made by Cognizant to Sprint USA should attract TDS under Indian law.
• Cognizant’s stance: The company maintained that IPLC payments were routine business expenses and not taxable as royalty or fees for technical services.
• Court’s finding: The Madras High Court agreed with Cognizant, ruling that DTAA protections apply and that such payments cannot be subjected to discriminatory tax treatment.

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What is Article 26(3) of the India–US DTAA?

• Ensures non-discrimination between domestic and cross-border transactions.
• Prevents India from imposing higher tax burdens on US entities compared to Indian companies.
• Protects businesses engaged in international trade and services from double taxation or unfair treatment.

Tribunal’s Observations

• No royalty: IPLC payments do not qualify as royalty under Section 9 of the Income Tax Act.
• Business expense: Payments are part of routine IT infrastructure costs.
• Parity principle: DTAA ensures that foreign service providers are treated on par with domestic ones.
• Relief granted: Cognizant was shielded from unwarranted TDS liability.

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Why This Ruling Matters

1. Clarity for IT firms: IT and outsourcing companies often rely on IPLC services for global operations.
2. Reduced litigation: The ruling sets a precedent, reducing disputes over similar payments.
3. Boost for cross-border trade: Reinforces India’s commitment to honouring DTAA obligations.
4. Investor confidence: Provides assurance to multinational companies operating in India.

Global Context

• United States: Similar DTAA provisions protect Indian companies operating in the US.
• United Kingdom & EU: Courts have upheld non-discrimination clauses in tax treaties to protect cross-border payments.
• Global trend: Countries increasingly rely on DTAA frameworks to avoid double taxation and encourage international business.

Expert Opinions

• Tax professionals say the ruling strengthens India’s reputation as a fair jurisdiction for cross-border trade.
• Legal experts note that the judgment aligns with international treaty obligations.
• Industry leaders believe the decision will encourage more outsourcing and IT investments in India.

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Implications for Businesses

• Documentation is key: Companies must maintain clear records of IPLC and similar payments.
• Treaty reliance: Businesses can invoke DTAA protections to avoid unfair tax burdens.
• Future disputes: The ruling will serve as a precedent in other DTAA-related cases.

Conclusion

The Madras High Court’s ruling in favor of Cognizant is a landmark in India’s tax jurisprudence. By applying Article 26(3) of the India–US DTAA, the Court ensured that IPLC payments are treated fairly and shielded from discriminatory TDS burdens.

This judgment not only relieves Cognizant of unwarranted tax liability but also strengthens India’s position as a reliable destination for global IT and outsourcing firms.

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