ITAT Special Bench on Section 206AA– dissenting view on tax rate

Objective

a) A reader should be able to come to his / her own conclusion by applying the legislative enactments and judicial pronouncements to the facts of the case. While re-producing any portion of legislative enactment or judicial pronouncement, it is para phrased and emphasis is supplied by way of underline.

Structure-:

b) The article gives authors own analysis. This article is based on a judicial pronouncement and is divided into following parts.

Background

c) Recently ITAT-SB [Income Tax Appellate Tribunal, Special Bench at Hyderabad] in Nagarjuna’s case [1] dated 13-Feb-2017 has held that even if a non resident does not obtain a PAN, the tax deductor need not deduct TDS at higher rate of 20%.

d) The decision is based on facts for FY 2010-11 and 2011-12.

e) It has not considered rule 37BC [5] which has further diluted section 206AA which has come on rule book w.e.f. 24-6-2016. It has also not considered dilution of section 206AA by amendment by the Finance Act, 2013 making it not applicable to section 194LC.

f) These legislative amendments were not applicable to above financial years. But it is relevant for those handling these matters as of today.

PART – I Case in brief

Undisputed facts

g) The payee or recipient of the payment is a Foreign Entity [the Fco]. The payer is an indian entity [the Ico]. There exists DTAA with the country of which Fco is resident.

h) The rates of income tax payable by such non-residents on the amounts in question paid by the Ico in the nature of fees for technical services were specified in the said DTAAs at 10%, 10.56%, 10.30% and 15%.

i) In short, the favourable tax rates are given by DTAA and are binding. The above mentioned income of Fco is chargeable to tax in India.

j) Case of Fco does not fall within sub sections (4) and (5) of section 115A which gives an exemption from not filing return of Income u/s 139

k) We have to deal with the question only from view point of Ico and that too for TDS liability

l) Fco is at liberty to apply u/s 195 for reduction in tax rate(s) for with-holding tax liability.

m) The liability to pay income tax is primary and absolute for Fco.

n) The liability for with-holding tax is secondary and conditional for Ico.

Relevant provisions of Law

o) When an assessee [non-resident or otherwise] has taxable income or in simple terms, total income with tax liability, he has to file return of Income.

p) There are very few exceptions to above rule like the one provided in sub sections (4) and (5) of section 115A where a non-resident having income only from dividend / interest may not file return of income u/s 139(1) provided he complies with conditions specified in sub sections (4) and (5) of section 115A.

q) One can-not file / upload return of Income without PAN. Section. 139A(8) read with Rule 114C prescribe requirement for obtaining PAN. Section 139A reads as follows

Permanent account number.

‘139A. (1) Every person,—

(i) if his total income or the total income of any other person in respect of which he is assessable under this Act during any previous year exceeded the maximum amount which is not chargeable to income-tax; or

(ii) carrying on any business or profession whose total sales, turnover or gross receipts are or is likely to exceed fifty thousand rupees in any previous year; or

(iii) who is required to furnish a return of income under sub-section (4A) of section 139,

and who has not been allotted a permanent account number shall, within such time, as may be prescribed, apply to the Assessing Officer for the allotment of a permanent account number.

r) Thus rest all HAVE TO file return of Income and obviously obtain a PAN.

s) Obtaining PAN for the payee is not the legal responsibility of the payer.

t) Section 206AA is a section under chapter XVII which is chapter dealing with with-holding tax deduction / collection of tax at source. Refer [6] for text of section, notes on clauses and relevant circulars on the said subject.

u) Though ITAT-SB has deliberated on the issue of whether section 206AA overrides DTAA, it is a pre-pondering view that, section 206AA does not over-ride section 90(2) to eclipse charging section 4.

Question posted before ITAT-SB

Whether on facts and circumstances of the case, provisions of the section 206AA of the Act will have an over-riding effect for all other provisions of the Act, and that being the case, assessee is required to deduct tax at the rate prescribed therein in case of persons having taxable income in India, including non- residents, who do not furnish their permanent Account Numbers

v) To understand the context and background, I have re-produced hereinbelow, para 3 to 5 of the judgement in Nagarjuna’s case[1].

3. Against the intimations issued under section 200A of the Act for both the years under consideration, appeals were preferred by the assessee before the ld. CIT(Appeals). During the course of appellate proceedings before the ld. CIT(Appeals), various submissions were made by the assessee in support of its case, which as summarized by the ld. CIT(Appeals) in his impugned order, were as under:-

(a)Being non-resident, he need not obtain PAN number as he is specifically exempt as per Rule 114C.

(b)Wherever the non-residents belong to countries with which India has Double Taxation Avoidance Agreement, he should be given beneficial treatment u/s. 90(2).

(c)If lesser tax rate is prescribed in Double Taxation Avoidance Agreement, the TDS should be made at that rate prescribed u/s, 206AA.

(d)In cases where the non-resident belong to countries with which India does not have Double Taxation Avoidance Agreement, highest TDS rate as per section 206AA should be applied.

(e)As per section USA, the Income tax rate on fees for technical services is 10.56%. Therefore, TDS rates cannot be more than the tax at which the income is liable to be taxed.

(f)Wherever Double Taxation Avoidance Agreement provisions are applicable, the TDS is deducted at the rates prescribed u/s USA, therefore, the TDS should not be deducted @ 20% even though PAN number of the deductees is not

4. The ld. CIT(Appeals) did not find merit in the submissions made on if of the assessee. According to him, section 206AA inserted in the Income Tax Act w.e.f. 01.04.2010 was an overriding provision and there was no escape for the assessee except to quote deductee Permanent Account Numbers or to deduct tax at source at 20%. He held that PAN was required to be quoted for making declaration under section 197A of the Act for claiming exemption from TDS to be valid. He also held that section 206AA starting with non-obstante clause overrides all other sections including Section 90(2), Section 115A and section 139A. Reliance was placed by him in this regard on the decision of Bangalore Bench of ITAT in the case of Bosch Limited v. ITO [2013] 115 TTJ 354, wherein it was held that non-residents having income exceeding the taxable limit were bound to obtain and furnish the permanent Account Numbers and if there was a failure to do so, the assessee was liable to withhold tax at higher of the rates prescribed under section 206AA of the Income Tax Act, i.e. 20%. The intimations issued under section 200A by the Assessing Officer treating the assessee to be in default for short-deduction of tax at source, accordingly, were upheld and confirmed by the ld. CIT(Appeals) by her common appellate order dated 25.03.2014 passed for both the years under consideration i.e. A.Y. 2011-12 and 2012-13. Aggrieved by the order of the ld. CIT(Appeals), the assessee has preferred these appeals before the Tribunal.5. Both these appeals filed by the assesese were initially fixed for hearing before the Division Bench of this Tribunal and keeping in view the conflicting decisions of ITAT, Bangalore Bench in the case of Bosch Limited v. ITO [2013] 115 TTJ 354 and ITAT, Pune Bench in the case of Deputy Director of Income Tax v. Serum Institute of India Limited [56 Taxman.com 1 (Pune) as well as for other reasons given in its Referral Order, a reference was made by the Division Bench to the Hon'ble President to constitute a Special Bench to decide the issue and resolve the controversy. Accordingly, the Hon'ble President has constituted this Special Bench and we have heard the arguments of both the sides on the issue including the arguments of the ld. representatives of the Interveners.

Answer

33. In view of the above discussion, we are of the view that the provisions of section 206AA of the Act will not have an 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.

34. In the result, both the appeals of the assessee are allowed. I will take up the arguments before the bench in part II. Following is the analysis / conclusion of the Bench.

Observation of the Bench from para 20 of the order.

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22. The agreement entered into by the Central Government under section 90 as referred to in section 2(37A)(iii) is the DTAA. In the present case, there were such agreements entered into by India with the respective countries of which the concerned non-resident entities are residents and the rates of income tax payable by such non-residents on the amounts in question paid by the assessee in the nature of fees for technical services were specified in the said DTAAs at 10%, 10.56%, 10.30% and 15%. The assessee accordingly deducted tax at source at the said rates from the corresponding amounts paid to the respective non-residents as required by the provisions of section 195 read with section 2(37A). It is thus clear that deduction of tax under section 195 from the payments made to the non-residents in the nature of fees for technical services was made by the assessee at the rate or rates of income tax specified in the relevant Double Taxation Avoidance Agreement, which were adopted as rates in force for the purpose of deduction of tax under section 195 in view of the specific provisions contained in sub-section (37A) of section 2. We, therefore, find no merit in the arguments raised by the ld. CIT(D.R.) that the relevant treaties do not provide for deduction of tax at source at the rate which is lower than the rate applied by the Assessing Officer by invoking the provisions of section 206AA and that there is no question of abrogation of the relevant provisions of treaty in this regard. We also do not find the arguments raised by the ld. CIT(D.R.) that the role of the assessee as a payer of the sum is limited to deducting tax at source as per law and he has nothing to do with the determination of tax liability eventually in the hands of the payee, which is within the complete domain of the Assessing Officer to be relevant in this context as the tax at source was deducted by the assessee from the sums paid to the non-residents as per the provisions of section 195(1) read with section 2(37A] of the Act.24. Having come to the conclusion that the concerned non-resident persons to whom the amount on account of fees for technical services was paid by the assessee were liable to tax in India at the rates prescribed in the relevant DTAAs and the assessee as payer of the said amounts had deducted tax at source from the said payments as per section 195(1) at the said rates, which were adopted as the rates for TDS being the rates in force within the meaning of section 2(37A), the issue boils down to whether the assessee can still be held to be liable to deduct tax at source at higher rate by virtue of section 206AA of the Act as a result of failure of said payees to furnish their PANs. The provisions of the said section read as under:-

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26…..… Although the facts involved in the present case are slightly different, in as much as, the non-resident payees in the present case were having taxable income in India, the facts remain to be seen is that they were not obliged to obtain the Permanent Account Numbers in view of section 139A(8) read with Rule 114C. There is thus a clear contradiction between section 206AA and section. 139A(8) read with Rule 114C, as was prevailed in the case of Kaushallaya Bai & Others (supra) and by applying the analogy of the said decision, we find merit in  the contention raised on behalf of the asses see that the provisions of section 206AA are required to be read down so as to make it inapplicable in the cases of concerned non residents payees who were not under an obligation to obtain the permanent Account Numbers.[Para-phrased and emphasis supplied by underline.]In substance, the ITAT-SB answers the question in para 26 of the judgement.

PART – II – Author’s analysis

Comparison with Smt. Kaushallaya Bai & Others

1. Let’s see what Honourable High Court of Karnataka in the case of Kaushallaya Bai & Others have observed in this regard. The observations are para phrased and emphasis is supplied by underline.

8. The very intent of S.206AA is to make it conditional for every person who wish to have a transaction in the bank or financial institution including small investors/depositors, invariably to have a PAN. This runs contrary to what has been contemplated under S. 139A of the Act which was introduced by the Legislature in its wisdom. What is not in dispute is, persons whose income is below the taxable limit need not have a PAN and also they need not furnish income tax declaration/returns. Of course, under the Finance Act, it is made clear that a person whose income is less than the taxable limit is not taxable. Such of the small investors who come forward to invest their savings from earnings as security for their future, by virture of the present S.206AA of the Act, necessarily have to give their PAN. The poor and illiterate/uneducated persons are finding it difficult rather to approach the various government departments particularly the Income Tax Department go get their PAN. At the cost of repetition, I may observe it may not be necessary for such persons whose income is below the taxable limit to obtain PAN. Such investments – savings from their earnings or by way of agriculture or any other source, in banking and financial institutions would also further the financial position from the point of the country’s economy. But imposing condition to invariably go for a PAN on such small depositors would cause hindrance and discourage such small investors to come forward to invest their money for secured returns and as security for their future.

9. The difficulty expressed by the petitioners and similarly placed persons is, imposing condition to invariably go for PAN as per S.206AA would run contrary to S. 139A of the Act. It is also their grievance that filing Form 15G to seek exemption from deduction of income tax at source, also is not accepted by the 3rd and 4th respondents and acted upon unless the PAN is produced.

10. S.139A which is introduced way back in April 1991 is in vogue and this provision stands the scrutiny of Art. 14 of the Constitution for reasonableness. But, S.206AA which is contrary to S.139A appears to be discriminatory as if it is over riding S.139A introduced earlier. Though the intention of the Legislature is to bring the maximum persons under the net of income tax, when necessarily it provides for exemption up to taxable limit, it may not insist such persons whose income is below the taxable limit to compulsorily go for PAN. If any mischief of avoiding of tax or any other act of concealing the income is detected, that could be taken care of by penal provisions.

11. In that view of the matter, in view of the specific provision – S.139A of the Act, S.206AA of the Act is made inapplicable to persons and read down from the Statute for whose income is less than the taxable limit as per the Finance Act, 1991. However, it is made clear, S.206AA of the Act would of course, be made applicable to persons whose income is above the taxable limit. The banking and financial institutions shall not invariably insist upon PAN from such small investors like the petitioners as well as from persons who intend to open an account in the bank or financial institution.

12. With the above observations, petitions are allowed.

2. Honourable High Court of Karnataka itself is making it clear that “However, it is made clear, S.206AA of the Act would of course, be made applicable to persons whose income is above the taxable limit.

Reducing the compass

3. I propose to start by elimination i.e. to address issues where there is no difference of opinion.

4. From para 27 to 32, ITAT-SB has discussed the matter as to whether section 206AA over-rides rate of tax i.e. rate in force defined in sec 2(37A) which in turn will become the tax rate for charging section 4.

5. ITAT-SB has correctly concluded that section 206AA does not change the rate at which the tax should be levied on total Income.

6. A matter as to what should be the impact of section 206AA when the recipient does not have taxable income also is not a matter of debate and I am in sync with ITAT-SB by following Kaushallaya Bai [4] case.

7. Apparently there is a conflict between section 206AA and Section 139A(8) read with Rule 114C.

Author’s Arguments

8. The determination of tax liability is a function of assessment, which is within the complete domain of the Assessing Officer and the deduction of tax at source has nothing to do with the eventual tax liability in the hands of the payee.

9. SC has in the case of Transmission Corporation [10] has held that the relevant provisions of TDS are for tentative deduction of income-tax subject to regular assessment and by the deduction of income-tax, rights of the parties are not, in any matter, adversely affected.

10. The role of the assessee as a payer of the sum is limited to deducting tax as per law and if at all anyone is said to be aggrieved by the fact of TDS exceeding the eventual liability, it is the payee. He contended that the assessee, being the payer, has no locus-standi even for raising this issue.

11. It was contended that section 195, no doubt, does talk about determination of sum chargeable to tax but such determination is only a rough estimate for the limited purpose of TDS on that particular sum and it is neither possible nor desirable to try determining the total income of the payee at the stage of deduction of tax at source.

12. Provisions of chapter XVII are for tax collection and tax evasion. Refer United Breweries Ltd.[7]

Application of provisions of law to the facts of the case.

13. ’The final rate at which the income of the payee will be chargeable to tax [10%, 10.56%, 10.30% and 15%] and the quantum of income as well can-not be decided by the knowledge of payer or documentation made available by Fco to Ico.

14. The primary and absolute responsibility to pay the taxes and file the return of Income is on Fco.

15. Though, there is a conflict between section 206AA and Section 139A(8) read with Rule 114C. But a harmonious interpretation is possible. It can very well be concluded that Fco is required to obtain PAN when it has taxable income.

16. Thus Fco was / is under obligation to obtain PAN irrespective of whether it makes it available to Ico or not. Whether it obtains PAN before or after the receipt of sum from Ico or not.

17. Even if there happens TDS at 20%, on filing an appropriate TDS return, Fco will get credit for the TDS made in India.

18. Regarding the assessment of Fco, it can take any twists and turns whereby

a. there may be a permanent establishment in India, the income may get taxed as business income.

b. It may eventually get proved that Fco is not eligible for DTAA benefits in such case, the tax liability may be 30% or more.

19. Fco is under obligation to do the following being primary and absolute responsibility.

a) Obtain PAN

b) Pay correct taxes

c) File correct return of income

20. United Breweries [7] and Brij Lal [12] has held that chapter XVII is for collection of tax and for curbing tax evasion.

21. If Fco is not doing its duties, why it should be spared from the cannon of TDS of 20% Of course the chapter XVII is to curb tax evasion.

22. Of course once it obtains PAN, it will get the credit for 20% i.e. actual TDS.

23. With utmost respect and humiliation, I am unable to pursued myself to agree with the proposition that the withholding tax rate should be reduced because to the best of the knowledge of payer, the effective tax rate of payee is lower than 20%.

Doctrine of Reading down the law [9]

24. Regarding reading down the provisions of law, Maxwell on the Interpretation of Statutes under the caption, Restriction of Operation, has observed as follows:—

Sometimes to keep the Act within the limits of its scope, and not to disturb the existing law beyond what the object requires, it is construed as operative between certain persons, or in certain circumstances, or for certain purposes only, even though the language expresses no such circumscription of the field of operation

25. This doctrine has been used in the case of M/S Hindustan Lever Ltd [8] to eliminate the need for TDS on lottery when whole of the payment was in kind. The High Court had held that, the assesse can-not be held as assesse in default for failure of deducting and paying the TDS.

26. On this count, it is possible very much possible that one comes to the same conclusion as that reached by ITAT-SB. But requisite conditions for reading down the law as envisaged by Supreme Court in the case of Arun Kumar v. Union of India [2006] 155 Taxman 659. The relevant portion is re-produced hereinbelow

In this context, the Court has observed on the doctrine ‘reading down’ as under :—

“51. In several cases, Courts have invoked and applied the doctrine of ‘reading down’ and upheld the constitutional validity of the Act.

52. In Olga Tellis v. Bombay Municipal Corpn. [1985] 3 SCC 545, the Supreme Court was called upon to decide constitutional validity of section 314 of the Bombay Municipal Corporation Act, 1888, which empowered the Commissioner to demolish illegal construction without notice. It was contended that the provision was arbitrary, unreasonable and violation of natural justice.

53. Holding the provision intra vires and ‘reading’ the doctrine of audi alteram partem therein, the Court stated :

‘Considered in its proper perspective, section 314 is in the nature of an enabling provision and not of a compulsive character. It enables the Commissioner, in appropriate cases, to dispense with previous notice to persons, who are likely to be affected by the proposed action. It does not require and, cannot be read to mean that, in total disregard of the relevant circumstances pertaining to a given situation, the Commissioner must cause the removal of an encroachment without issuing previous notice. The primary rule of construction is that the language of the law must receive its plain and natural meaning. What section 314 provides is that the Commissioner may, without notice, cause an encroachment to be removed. It does not command that the Commissioner shall, without notice, cause an encroachment to be removed. Putting it differently, section 314 confers on the Commissioner the discretion to cause an encroachment to be removed with or without notice. That discretion has to be exercised in a reasonable manner so as to comply with the constitutional mandate that the procedure accompanying the performance of a public act must be fair and reasonable. We must lean in favour of this interpretation because it helps sustain the validity of the law. Reading section 314 as containing a command not to issue notice before the removal of an encroachment will make the law invalid.’” (p. 681)

However, in paras 55 and 58, the Court has mentioned about the limitations of the rule of reading down thus :

“55. But it is equally well-settled that if the provision of law is explicitly clear, language unambiguous and interpretation leaves no room for more than one construction, it has to be read as it is. In that case, the provision of law has to be tested on the touchstone of the relevant provisions of law or of the Constitution and it is not open to a Court to invoke the doctrine of ‘reading down’ with a view to save the statute from declaring it ultra vires by carrying it to the point of ‘perverting the purposes of the statute’.” (p. 682)

27. It will be useful here to quote rule 37BC which has reduced the rigger of section 206AA and has eliminated the requirement of PAN.

28. But in this case, the doctrine of reading down has not been scrutinised.

Precedence of Harsh Provisions

29. It is also not un-known that legislation has intentionally made harsh and brough curative provisions after some period. The interim period is to inculcate expected discipline. In such a case, those curative provisions may be treated as prospective and not necessarily retrospective.

30. Refer Decision of Calcutta HC in Crescent [11] decisions whereby it has observed as follows about second proviso to section 40(a)(ia) as follows

A few words are now necessary to deal with the submission of Mr. Bagchi and Ms. Roychowdhuri. There can be no denial that the provision in question is harsh. But that is no ground to read the same in a manner which was not intended by the legislature. This is our answer to the submission of Mr. Bagchi. The submission of Ms. Roychowdhuri that the second proviso sought to become effective from 1st April, 2013 should be held to have already become operative prior to the appointed date cannot also be acceded to for the same reason indicated above. The law was deliberately made harsh to secure compliance of the provisions requiring deductions of tax at source. It is not the case of an inadvertent error.

Bibliography and Material relied upon – : A mark (M) indicate that relevant portion is re-produced for ready reference

EXTRACT OF MATERIAL RELIED UPON IN OUR ABOVE ANALYSIS