CIT (International Taxation) Vs Air India Ltd. (Supreme Court of India)
Supreme Court dismissed the special leave petition filed by the tax department in the matter involving the applicability of Section 206AA of the Income Tax Act vis-à-vis the Double Tax Avoidance Agreement (DTAA). The Court condoned the delay and held that the impugned order required no interference, disposing of all pending applications.
Read HC Judgment: TDS Rate for Non-Residents Governed by DTAA, Not Section 206AA: Delhi HC
The Delhi High Court judgment relates to an appeal filed by the tax department challenging the Income Tax Appellate Tribunal (ITAT) order for Assessment Year 2013-14. The core dispute concerned whether Section 206AA, which prescribes a higher tax deduction rate where the non-resident payee does not have a Permanent Account Number (PAN), overrides the beneficial tax rate available under the DTAA between India and the Netherlands.
The department argued that the ITAT had erred in holding that Section 206AA could not override the DTAA. According to the department, Section 206AA contains a non obstante clause and therefore prevails over other provisions, including Section 90(2), which allows an assessee to claim the more beneficial provisions of the DTAA. The department further submitted that Section 206AA applies specifically to deduction of tax at source and not to the charging of tax, and that under Section 2(37A)(iii), the highest rate among those specified in Section 206AA(1) should apply even if the DTAA prescribes a lower rate.
The ITAT, however, had held that the payments made by the assessee for leasing an aircraft engine from ELFC, a foreign company resident in the Netherlands with no permanent establishment in India, were covered under “equipment” in Article 12(4) of the DTAA. The engine was accepted as a part of the aircraft, and the payment for its use did not constitute “royalty” under the DTAA. It was also not covered under “fees for technical services” as per Article 12(6), which excludes payments ancillary and subsidiary to the rental of ships, aircraft, containers, or equipment used in international traffic.
It was undisputed that the assessee had not deducted tax from the payments but had deposited the tax from its own account, absorbing it as cost. Since ELFC did not have a PAN, the assessee reported the transactions without PAN in its quarterly TDS statements. The dispute was whether the TDS rate should be 20.12% as per Section 206AA, or 10% as prescribed in the DTAA.
The ITAT concluded that the assessee was entitled to the beneficial DTAA rate. Relying on earlier tribunal decisions and the Delhi High Court’s ruling in Danisco India Pvt. Ltd. v. Union of India, the ITAT held that Section 206AA could not override Section 90(2) or the provisions of the DTAA. Accordingly, the additions made by the Assessing Officer and confirmed by the CIT(A) for the relevant quarters, amounting to Rs. 73,00,719.77, Rs. 80,82,662.74, and Rs. 57,05,582.11, were deleted.
The Delhi High Court, after reviewing the matter, found that the issues raised by the department were covered by its own decision in Danisco India Pvt. Ltd. In Danisco, the Court had held that the earlier version of Section 206AA imposed an additional burden where a non-resident payee did not possess PAN, leading to higher tax collection above the DTAA-mandated rate. The Court noted that the subsequent amendment to Section 206AA(7) mitigated these rigours. The High Court also endorsed the ITAT’s reasoning that DTAA provisions, being more beneficial, prevail over domestic law under Section 90(2). Further, Section 206AA, being a procedural provision relating to TDS, could not override substantive charging provisions in Sections 4 and 5, or the DTAA.
Citing the Supreme Court’s decision in Azadi Bachao Andolan, the High Court reiterated that DTAA provisions acquire primacy where mutually agreed tax principles apply between contracting states. Thus, Section 206AA must be read down where the deductee is a tax resident of a country with which India has a DTAA. Following this reasoning, the Court held that no substantial question of law arose in the department’s appeal. The appeal was accordingly dismissed.
The Supreme Court condoned the delay and held that the impugned order required no interference. The special leave petition filed by the tax department was dismissed, and all pending applications were disposed of.
FULL TEXT OF THE SUPREME COURT JUDGMENT/ORDER
