CA Mayank Parekh
Facts of the Case:
The assessee had made payments to non-residents on account of interest, royalties and fees for technical services and the same were subject to withholding under Section 195 of the Act. The assessee in accordance with provisions of Section 90(2) deducted tax on such payments as per the beneficial rates prescribed in the DTAA with respective countries.
As the recipient being non-residents did not have Permanent Account Number (‘PAN’), the Assessing Officer treated such payments as ‘short deduction’ of tax in terms of the provisions of Section 206AA of the Act. Accordingly demands were raised on the assessee for the short deduction of tax and also for interest u/s 201(1A) of the Act.
The matter carried before the Commissioner of Income-tax (Appeals) [‘CIT(A)’] and then before the Income-tax Appellate Tribunal (‘ITAT’)
1. As per provisions of Section 139A(8) of the Act read with rule 114C(1) of the Income-tax Rules, 1962 (‘the Rules’) prescribe that non-residents are not required to apply for PAN. Accordingly, the non-residents are not obliged to obtain a PAN and the requirement of furnishing the same in terms of Section 206AA of the Act does not arise.
2. The tax rate applicable in terms of Section 206AA of the Act cannot prevail over the tax rate prescribed in the relevant Double Taxation Avoidance Agreements (‘DTAAs’), as the rates prescribed in the DTAAs were beneficial.
The CIT(A) rejected the former contention of the assessee, however, accepted the latter contention and held that where the DTAAs provide for a tax rate lower than that prescribed in 206AA of the Act, the provisions of the DTAAs shall prevail and the provisions of Section 206AA of the Act would not be applicable.
Against the order of the CIT(A) revenue preferred an appeal before the Hon’ble ITAT
Revenue’s contentions before the Hon’ble ITAT:
1. The CIT(A) erred in holding that Section 206AA of the Act was not applicable in cases which are governed by the DTAAs.
2. Section 206AA of the Act would override Section 90(2) of the Act and therefore the tax deduction was liable to be made at the rate of 20% in absence of furnishing of PANs by the recipient non-residents.
3. The CIT(A) had concluded that Section 206AA of the Act required even the non-resident recipients of income to obtain and furnish PAN to the deductor of the tax at source.
After hearing both the counsels the Hon’ble ITAT held that:
1. Section 206AA of the Act prescribes that where PAN is not furnished to the person responsible for deducting tax at source then the tax deductor would be required to deduct tax at the higher of the following rates, namely,
a. at the rate prescribed in the relevant provisions of this Act; or
b. at the rate/rates in force; or
c. at the rate of 20%.
2. Section 90(2) provides that the provisions of the DTAAs would override the provisions of the domestic Act in cases where the provisions of DTAAs are more beneficial to the assessee.
3. The CIT(A) has correctly observed that the Hon’ble Supreme Court in the case of Azadi Bachao Andolan and Others vs. UOI, (2003) 263 ITR 706 (SC) has upheld the proposition that the provisions made in the DTAAs will prevail over the general provisions contained in the Act to the extent they are beneficial to the assessee.
4. Even the charging Sections 4 as well as Section 5 of the Act which deals with the principle of ascertainment of total income under the Act is also subordinate to the principle enshrined in Section 90(2) as held by the Hon’ble Supreme Court in the case of Azadi Bachao Andolan and Others (supra). Accordingly, no fault can be found with the rate of taxation invoked by the assessee based on the DTAAs, which prescribed for a beneficial rate of taxation.
5. However, it would be quite incorrect to say that though the charging Section 4 of the Act and Section 5 of the Act dealing with ascertainment of total income are subordinate to the principle enshrined in Section 90(2) of the Act but the provisions of Chapter XVII-B governing tax deduction at source are not subordinate to Section 90(2) of the Act.
6. Section 206AA of the Act which is not a charging Section but is a part of a procedural provisions dealing with collection and deduction of tax at source. Further, the provisions of Section 195 of the Act which casts a duty on the assessee to deduct tax at source on payments to a non-resident cannot be looked upon as a charging provisions either.
7. The Hon’ble Supreme Court in the case of GE India Technology Centre Pvt. Ltd. vs. CIT, (2010) 327 ITR 456 (SC) held that the provisions of DTAAs along with the Sections 4, 5, 9, 90 & 91 of the Act are relevant while applying the provisions of tax deduction at source.
8. Therefore, Section 206AA of the Act cannot be understood to override the charging Sections 4 and 5 of the Act. Thus, where Section 90(2) of the Act provides that DTAAs override domestic law in cases where the provisions of DTAAs are more beneficial to the assessee and the same also overrides the charging Sections 4 and 5 of the Act which, in turn, override provisions of Section 206AA of the Act
9. Therefore, where the tax has been deducted on the strength of the beneficial provisions of Section DTAAs, the provisions of Section 206AA of the Act cannot be invoked by the AO to insist on the tax deduction at the rate of 20%, having regard to the overriding nature of the provisions of Section 90(2) of the Act.
10. Accordingly, The CIT(A) correctly inferred that Section 206AA of the Act does not override the provisions of Section 90(2) of the Act and the assessee correctly applied the rate of tax prescribed under the DTAAs and not as per section 206AA of the Act as the provisions of the DTAAs were more beneficial. As consequence, the appeals of the revenue were dismissed.