DTAA overrides Section 206AA TDS rate

CIT Vs Wipro Ltd (Karnataka High Court)

Facts of the Case:

Assessee had paid fee for technical services to various entities in the four quarters during the AY 2011-12 and contended that the Tax Deducted at Source will be in terms of the relevant Article in respective agreements for Avoidance of Double Taxation in various countries.

Assessee’s Contention:

• Placing reliance in the case of Danisco India Pvt. Ltd., Vs. Union of India, the assessee submitted that DTAA has an overriding effect and any subsequent amendment to nullify the effect of provision prior to the amendment has been read down by the Delhi High Court.
• Whereas the Assessing Officer has applied provision of Section 200-A of the Income Tax Act and has raised a demand for the remaining 10%.

Revenue’s Contention:

• Section 206-AA of the ITA says that every payee is required to furnish a Permanent Account Number and in the absence of the same, the rate of tax applicable shall be 20% in terms of Section 206-AA(1)(iii).

Judgement:

• Section 206AA cannot be understood to override the charging Sections 4 and 5 of the Act. It has further held that the provision in Section 206-AA has to be read down to mean that where the deductee i.e., the overseas resident business concern conduct sits operation from a territory, whose Government has entered into a DTAA with India, the rate of taxation would be as dictated by the provisions of the treaty.
• Respectful agreement with the view taken by the Delhi high Court. Therefore, as per the DTAA, the maximum deduction shall not exceed 10% Any other interpretation to permit the taxing authority to raise a demand beyond 10% would be incongruous.
• It was also held that if the law laid down in Danisco is to be applied, Section 206-AA of the Act would be rendered redundant.

FULL TEXT OF THE JUDGMENT/ORDER OF KARNATAKA HIGH COURT

These appeals by the Revenue challenging the common order dated 12.02.2016 passed in S.P.Nos. 175 to 178/Bang/2013 (in I.T.(I.T.)A.Nos. 1544 to 1547/Bang/2013) (Assessment year: 2011-12), have been admitted to consider following substantial question of law:

“Whether on the facts and in the circumstances of the case and in law, the Tribunal is right in law holding that the TDS provisions in the Act has to be read along with DTAA for computing the tax liability on the sum in question and therefore when the recipient is eligible for benefit of DTAA then there is no scope for deduction of tax @ 20% under Section 206AA of the Act when the assessing authority has rightly invoked said provision as conditions set out in said provisions are satisfied in case of assessee?

3. At the outset, Shri. R.B.Krishna, learned advocate for the respondent submitted that the assessee has paid fee for technical services to various entities in the four quarters during the assessment year 2011-12. He contended that the Tax Deducted at Source shall be in terms of the relevant Article in respective agreements for Avoidance of Double Taxation in various countries. Adverting to one such agreement with Germany, annexed with the written submission, he pointed out that the rate of tax shall not exceed 10% in the case of Germany.

4. Placing reliance on the case of Danisco India Pvt. Ltd., Vs. Union of India and Others¹, Shri. Krishna, submitted that Double Taxation Avoidance Agreement (for short ‘DTAA’) has overriding effect and any subsequent amendment to nullify the effect of provision prior to the amendment has been read down by the Delhi High Court, whereas the Assessing Officer has applied provision of Section 200-A of the Income Tax Act (for short ‘the Act’) and has raised a demand for the remaining 10%. In substance, he submitted that the issue is covered by the decision in the case of Danisco (Supra) against the revenue.

5. Aravind, learned Standing Counsel for the Revenue adverting to Section 206-AA of the Act submitted that every payee is required to furnish a Permanent Account Number and in the absence of the same, the rate of tax applicable shall be 20% in terms of Section 206-AA(1)(iii). He argued that admittedly PAN numbers have not been furnished. Therefore, the authority in Danisco is not applicable to the facts of this case.

6. We have carefully perused the rival contentions and perused the records.

7. It is not in dispute that the assessee has made payment towards technical services to various recipients in different countries as per DTAA with different countries. In the case of Danisco, the Delhi High Court has held that Section 206AA cannot be understood to override the charging Sections 4 and 5 of the Act. It has further held that the provision in Section 206-AA 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.

8. Thus, we are in respectful agreement with the view taken by the Delhi high Court. As per the DTAA, the maximum deduction shall not exceed 10% which the assessee has deducted. Any other interpretation to permit the taxing authority to raise a demand beyond 10% would be incongruous.

9. Shri Aravind, also contended that if the law laid down in Danisco is to be applied, Section 206-AA of the Act would be rendered redundant.

10. In our view, such contention is untenable in the facts of this case because there exists DTAA and tax deduction has been made at source as mandated by the said agreement.

11. In view of the above, these appeals fail and they are accordingly, dismissed. The question of law is answered in favour of the assessee and against the revenue.

No costs.

In view of the disposal of the appeals, all pending interlocutory applications stand disposed of.

Notes:

¹ (2018) 404 ITR 539 (Delhi)