Case Law Details

Case Name : Nagarjuna Fertilizers and Chemicals Limited Vs ACIT (ITAT Hyderabad)
Appeal Number : I.T.A. No. 1187/H/2014
Date of Judgement/Order : 13/02/2017
Related Assessment Year : 2011-2012
Courts : All ITAT (4213) ITAT Hyderabad (237)

Provisions of section 206AA of the Act will not have a overriding effect for all other provisions of the Act and the provisions of the Treaty to the extent they are beneficial to the assessee will override section 206AA by virtue of section 90(2). Assessee cannot be held liable to deduct tax at higher of the rates prescribed in section 206AA in case of payments made to non-resident persons having taxable income in India in spite of their failure to furnish the Permanent Account Numbers.

1. The issue that requires our consideration in this context is whether the rate of tax as provided in the relevant DTAAs and adopted for the purpose of tax deduction at source being rate in force by virtue of section 2(37A) would be applicable or the higher rate as provided in section 206 by virtue of the overriding effect given to the said provision, for the purpose of deduction of tax at source. Here it is necessary to understand the scope and applicability of the provisions of Tax Treaty, vis-a-vis, the provisions of Domestic Law and the norms governing the co-existence of Tax Treaties and Domestic Law Legislation. A useful reference in this regard can be made to the landmark decision of the Hon’ble Andhra Pradesh High Court in the case of Sanofi Pasteur Holding SA –vs.- Department of Revenue & Others (supra). In the said case, the core issue was required to be decided on appreciation of synergies between the DTAA provisions and those of the Domestic Law and while deciding the same, the origins and evolution of tax treaties and how those conflate, cooperate with domestic tax legislation and converge to signal a unified raft of applicable norms, were taken into consideration by the Hon’ble Andhra Pradesh High Court in the light of relevant judicial pronouncements including the decision of the Hon’ble Supreme Court in the case of Azadi Bachao Andolan (supra) and P.V.A.L. Kulandagan Chettiar (supra). In this regard, a reference was made to the decision of the Hon’ble Supreme Court in the case of Azadi Bachao Andolan (supra), wherein it was held that when Double Taxation Avoidance Treaty, Convention or Agreement (for short, ‘Treaty’) becomes operational and is notified by the Central Government for implementation of its terms under section 90 of the Act, provisions of the Treaty, with respect to cases to which they would apply, would operate even if inconsistent with provisions of the Act. As a consequence, if a tax liability is imposed by the Act, the treaty may be referred to for negativing or reducing it and in case of conflict between the provisions of the Act and of the Treaty, the provisions of the Treaty would prevail and are liable to be enforced. It was also held that since the general principle of chargeability of tax under section 4 and the general principle of ascertainment of total income under section 5 of the Act are subject to the provisions of the Act, the provisions of the Treaty would automatically override the provisions of the Act in the matter of ascertainment of chargeability to income tax and ascertainment of the total income, to the extent of inconsistency with Treaty terms.

2. Hon’ble Andhra Pradesh High Court in the case of Sanofi Pasteur Holding S.A. –vs.- Department of Revenue & Others (supra) also relied on the decision of the Hon’ble Supreme Court in the case of CIT –vs.- P.V.A.L. Kulandagan Chettiar (supra), wherein it was held that the taxation polity is within the power of the Government and section 90 of the Act enables the Government to formulate its policies through treaties entered into by it and such treaties determine the fiscal domicile in one State or the other and this determination in the treaty prevails over the other provisions of the Act. After taking into consideration, inter alia, the decisions of the Hon’ble Supreme Court in the case of Azadi Bachao Andolan & Another (supra) and P.V.A.L. Kulandagon Chettiar (supra), the origins and evolution of Tax Treaties and other relevant aspects, it was held by the Hon’ble Andhra Pradesh High Court that Treaty provisions are expressions of sovereign policy of more than one sovereign State, negotiated and entered into at a political or diplomatic level and have several explicit, subliminal and unarticulated considerations as their basis. Principles relevant to treaty interpretation are not the same as those pertaining to interpretation of municipal legislation. A strained construction which subverts the policy underlying India entering into a Double Taxation Avoidance Treaty with another State, by enabling dual taxation through artificial interpretation of treaty provisions, either by the tax administrator or by the judicial branch at the invitation of the Revenue of one of the Contracting States to a treaty would transgress the inherent and vital constitutional scheme, of separation of powers. It was held that the provisions of the treaty must receive a good faith interpretation and where the operative treaty’s provisions are unambiguous and their legal meaning clearly discernible and lend to an un-contestable comprehension on good faith interpretation, no further interpretive exertion is authorized for that would tantamount to unlawful encroachment into the domain of treaty-making under Article 253. It was further held that where the provisions of the Act and of the DTAA are overlapping and competing legal magisteria, the proper interpretive role requires, on harmonious construction and in accordance with the relative weight and priority, to give effect to both competing provisions, as per the inter se weightage mandate by the overreaching legal norms, set out in section 90(2) of the Act. The ratio laid down by the Hon’ble Supreme Court in the cases of Azadi Bachao Andolan and Another (supra) and P.V.A.L. Kulandagan Chettiar (supra) as further explained and clarified by the Hon’ble Andhra Pradesh High Court in the case of Sanofi Pasteur Holding SA –vs.- Department of Revenue & Others (supra) makes it abundantly clear that whenever there is a conflict between the provisions of the Treaty and the provisions of the Domestic Law, the provisions of Treaty will prevail and override even the charging provisions of the Domestic Law. Keeping in view this legal position, we do not find merit in the contention raised by the ld. CIT(D.R.) that as per section 9 0(2) of the Act, treaty does not override the Act but gets overridden and reject the same being completely contrary to the proposition propounded inter alia by the Hon’ble Apex Court.

3. The ld. D.R. in support of the Revenue’s case on the issue under consideration has raised an argument that the role of the assessee as a payer of the sum is limited to deducting tax at source as per the relevant provisions of Chapter-XVII-B and he has nothing to do with the determination of tax liability eventually in the hands of the payee, which is to be done by the Assessing Officer alone as per the relevant charging provisions of the Act. To counter this argument of the ld. D.R., reliance has been placed on behalf of the assesese on the decision of the Hon’ble Supreme Court in the case of Eli Lilly And Co. (India) P. Limited, wherein it was held that it cannot be stated as a broad proposition that the TDS provisions, which are in the nature of machinery provisions to enable collection and recovery of tax, are independent of charging provisions, which determine the assessability in the hands of the payee. Reliance is also placed on behalf of the assessee on the decision of the Hon’ble Supreme Court in the case of G.E. Technology Centre (P) Limited. In the said case, the contention was raised on behalf of the Department that the moment there is remittance, the obligation to deduct tax at source arises and the same was rejected by the Hon’ble Supreme Court by observing that the obligation to deduct tax at source arises only when there is a sum chargeable under the Act. It was held that the relevant TDS provisions as contained in section 195 have to be read in conformity with the charging provisions of sections 4, 5 & 9 and while interpreting the provisions of the Income Tax Act, one cannot read the charging section of that Act de hors the machinery section. It was held that the Act is to be read as an integrated code. It was held that the provisions for deduction of tax at source as contained in Chapter-XVII and the charging provisions of the Income Tax Act form one single integral inseparable code and, therefore, the provisions relating to TDS cannot be applied independent of the charging provisions. It is pertinent to note here that this decision in the case of G.E. Technology Centre (P) Limited is rendered by the Hon’ble Supreme Court after taking into consideration the earlier decision rendered in the case of Transportation Corporation of A.P. Limited (supra) on which reliance has been placed by the ld. CIT, D.R.

4. The ratio of the two decisions of the Hon’ble Supreme Court in the case of Ili Lilly And Co. (India) P. Limited (supra) and G.E. Technology Centre (P) Limited (supra) as discussed above clearly shows that the charging provisions control and override the machinery provisions dealing with tax deduction at source. Similarly, the provisions of DTAAs by virtue of section 90(2) to the extent more beneficial to the assessee override the provisions of Domestic Law as held, inter alia, by the Hon’ble Supreme Court in the case of Azadi Bachao Andolan & Another (supra) and P.V.A.L. Kulandagan Chettiar (supra). Since section 206AA falls in Chapter XVII-B dealing with tax deduction at source, it follows that the treaty provisions which override even the charging provision of the Domestic Law by virtue of section 90(2) would also override the machinery provisions of section 206AA irrespective of non-obstante clause contained therein and the same is required to be restricted to that extent and read down to give effect to the relevant provisions of DTAAs, which are overriding being beneficial to the assessee.

5. There is one more basis to support the above conclusion. As rightly pointed out on behalf of the assessee, Chapter-XA containing the provision relating to General Anti-Avoidance Rule (GAAR) has been inserted in the Statute by the Finance Act, 2013 with effect from 1st April, 2016 and although the provisions contained in the said Chapter are given overriding effect by virtue of non-obstante clause contained in section 95, a separate provision has been inserted simultaneously in the form of sub-section (2A) in section 90 providing specifically that notwithstanding anything contained in sub-section (2), the provisions of Chapter XA of the Act shall apply to the assessee even if such provisions are not beneficial to him. As rightly pointed out on behalf of the assessee, no such provision, however, is made separately and specifically in section 90 to give overriding effect to section 206AA over section 90(2), which clearly shows that the intention of the legislature is not to give overriding effect to section 206AA over the provisions of the relevant DTAA which are beneficial to the assessee. In the case of Sanofi Pasteur Holding SA –vs.- Department of Revenue & Others (supra), the contention raised on behalf of the Revenue was that the relevant retrospective amendments made in the Income Tax Act, 1961 override the tax treaties and the same was rejected by the Hon’ble Andhra Pradesh High Court on the ground that the relevant amendments were not fortified by a non-obstante clause expressed to override Tax Treaties as was made in case of the GAAR provisions specifically by inserting sub-section (2A) in section 90 to enable application of Chapter X-A even if the same be not beneficial to the assessee thereby enacting an override effect over the provisions of section 9 0(2). In the case of Bharat Hari Singhania (supra), it was held by the Hon’ble Supreme Court that the scope and purport of the non-obstante clause has to be ascertained by reading it in the context of the relevant provisions and consistent with the scheme of the enactment. As explained by CBDT while inserting the provision of section 206AA vide Circular No. 5 of 2010, the intention of the said provision is mainly to strengthen PAN mechanism and keeping in view this limited function and purpose, we are of the view that non-obstante clause contained in the machinery provision of section 206AA is required to be assigned a restrictive meaning and the same cannot be read so as to override even the relevant beneficial provisions of the Treaties, which override even the charging provisions of the Income Tax Act by virtue of section 90(2). In our opinion, it, therefore, cannot be said that the provisions of section 206AA, despite the non-obstante clause contained therein, would override the provisions of DTAA to the extent they are more beneficial to the assessee and it is the beneficial provision of treaty that will override the machinery provisions of section 206AA.

6. In the case of Bosch Limited (supra) relied upon by the ld. CIT(D.R.) in support of the revenue’s case, the issue relating to the applicability of section 206AA had come up for consideration before the Bangalore Bench of this Tribunal in two contexts. First, it was considered in the context of grossing up and while deciding the same, it was held by the Tribunal that the very nature of relevant income being business income not chargeable to tax in the hands of the non-resident recipients having no permanent establishment in India, the payments did not require withholding of tax at source under section 195 of the Act and the assessee was not under an obligation to withhold tax even as per the provisions of section 206AA at higher rate of 20%. In other context, the amount paid to the non-resident was found by the Tribunal to be in the nature of fees for technical services chargeable to tax in the hands of the non-resident in India and since there was a failure on the part of the concerned non-resident to furnish PAN to the assessee, the assessee was held to be liable to withhold tax at higher of rates prescribed in section 206AA by the Tribunal. It, however, appears that all the relevant aspects as discussed above, such as overriding effect of the Treaty provisions as per section 90(2), the limited effect of non-obstante clause contained in the machinery provision of section 206AA etc. were not argued before the Tribunal on behalf of the assessee and the Tribunal, therefore, had no occasion to consider the same while deciding this issue. On the other hand, Pune Bench of ITAT in the case of serum Institute of India Limited (supra) has considered some of these relevant aspects and after considering the propositions propounded by the Hon’ble Supreme Court in the case of Azadi Bachao Andolan & Another (supra), Eli Lilly And Co. (India) P. Limited (supra) and G.E. Technology Centre (P) Limited (supra), it was held by the Tribunal, and in our opinion, rightly so, that section 206AA of the Act cannot override the provisions of section 90(2) of the Act.

7. In view of the above discussion, we are of the view that the provisions of section 206AA of the Act will not have a overriding effect for all other provisions of the Act and the provisions of the Treaty to the extent they are beneficial to the assessee will override section 206AA by virtue of section 90(2). In our opinion, the assessee therefore cannot be held liable to deduct tax at higher of the rates prescribed in section 206AA in case of payments made to non-resident persons having taxable income in India in spite of their failure to furnish the Permanent Account Numbers. We, accordingly, answer the question referred to this Special Bench in the negative and in favour of the assessee and allow both the appeals of the assessee for A.Ys. 2011-12 and 2012-13.

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