DTAA overrides the Act, even if it is Inconsistent with the Act

DCIT Vs Bharath Fritz Werner Ltd. (ITAT Bangalore)

The issue under consideration is whether the assessee has to deduct tax at source at the rates prescribed in section 206AA in case the payees are unable to furnish their PANs, even if tax liability arises out of the treaty?

In the present case, the rate of tax at which TDS should be made by the assessee is 10% in accordance with the Treaty for Avoidance of Double Taxation between India and Germany (DTAA) and not at the higher rate of tax @ 20% by invoking the provisions of section 206AA of the Act. This submission was accepted by the CIT(A). Aggrieved by the aforesaid order the revenue has preferred the present appeal before the Tribunal.

ITAT states that, the issue regarding the applicability of provisions of section 206AA of the Act, in cases of tax to be deducted at source, when the income is exigible to tax under DTAA and the payees are unable to provide valid Permanent Account Numbers. The Special Bench held that DTAA overrides the Act, even if it is inconsistent with the Act. DTAAs are entered into between two nations in good faith and are supposed to be interpreted in good faith. Otherwise it would amount to the breach of Article 253 of the constitution. Where reciprocating states mutually agree upon acceptable principles for tax treatment, the provision in Section 206AA (as it existed) has to be read down to mean that where the deductee i.e., the overseas resident business concern conducts its operation from a territory, whose Government has entered into a Double Taxation Avoidance Agreement with India, the rate of taxation would be as dictated by the provisions of the treaty.

Hence the appeal by the revenue is dismissed.

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