Case Law Details
Provisions of section 206AA of the Act will not have a 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). Assessee 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.
1. The issue that requires our consideration in this context is whether the rate of tax as provided in the relevant DTAAs and adopted for the purpose of tax deduction at source being rate in force by virtue of section 2(37A) would be applicable or the higher rate as provided in section 206 by virtue of the overriding effect given to the said provision, for the purpose of deduction of tax at source. Here it is necessary to understand the scope and applicability of the provisions of Tax Treaty, vis-a-vis, the provisions of Domestic Law and the norms governing the co-existence of Tax Treaties and Domestic Law Legislation. A useful reference in this regard can be made to the landmark decision of the Hon’ble Andhra Pradesh High Court in the case of Sanofi Pasteur Holding SA –vs.- Department of Revenue & Others (supra). In the said case, the core issue was required to be decided on appreciation of synergies between the DTAA provisions and those of the Domestic Law and while deciding the same, the origins and evolution of tax treaties and how those conflate, cooperate with domestic tax legislation and converge to signal a unified raft of applicable norms, were taken into consideration by the Hon’ble Andhra Pradesh High Court in the light of relevant judicial pronouncements including the decision of the Hon’ble Supreme Court in the case of Azadi Bachao Andolan (supra) and P.V.A.L. Kulandagan Chettiar (supra). In this regard, a reference was made to the decision of the Hon’ble Supreme Court in the case of Azadi Bachao Andolan (supra), wherein it was held that when Double Taxation Avoidance Treaty, Convention or Agreement (for short, ‘Treaty’) becomes operational and is notified by the Central Government for implementation of its terms under section 90 of the Act, provisions of the Treaty, with respect to cases to which they would apply, would operate even if inconsistent with provisions of the Act. As a consequence, if a tax liability is imposed by the Act, the treaty may be referred to for negativing or reducing it and in case of conflict between the provisions of the Act and of the Treaty, the provisions of the Treaty would prevail and are liable to be enforced. It was also held that since the general principle of chargeability of tax under section 4 and the general principle of ascertainment of total income under section 5 of the Act are subject to the provisions of the Act, the provisions of the Treaty would automatically override the provisions of the Act in the matter of ascertainment of chargeability to income tax and ascertainment of the total income, to the extent of inconsistency with Treaty terms.
2. Hon’ble Andhra Pradesh High Court in the case of Sanofi Pasteur Holding S.A. –vs.- Department of Revenue & Others (supra) also relied on the decision of the Hon’ble Supreme Court in the case of CIT –vs.- P.V.A.L. Kulandagan Chettiar (supra), wherein it was held that the taxation polity is within the power of the Government and section 90 of the Act enables the Government to formulate its policies through treaties entered into by it and such treaties determine the fiscal domicile in one State or the other and this determination in the treaty prevails over the other provisions of the Act. After taking into consideration, inter alia, the decisions of the Hon’ble Supreme Court in the case of Azadi Bachao Andolan & Another (supra) and P.V.A.L. Kulandagon Chettiar (supra), the origins and evolution of Tax Treaties and other relevant aspects, it was held by the Hon’ble Andhra Pradesh High Court that Treaty provisions are expressions of sovereign policy of more than one sovereign State, negotiated and entered into at a political or diplomatic level and have several explicit, subliminal and unarticulated considerations as their basis. Principles relevant to treaty interpretation are not the same as those pertaining to interpretation of municipal legislation. A strained construction which subverts the policy underlying India entering into a Double Taxation Avoidance Treaty with another State, by enabling dual taxation through artificial interpretation of treaty provisions, either by the tax administrator or by the judicial branch at the invitation of the Revenue of one of the Contracting States to a treaty would transgress the inherent and vital constitutional scheme, of separation of powers. It was held that the provisions of the treaty must receive a good faith interpretation and where the operative treaty’s provisions are unambiguous and their legal meaning clearly discernible and lend to an un-contestable comprehension on good faith interpretation, no further interpretive exertion is authorized for that would tantamount to unlawful encroachment into the domain of treaty-making under Article 253. It was further held that where the provisions of the Act and of the DTAA are overlapping and competing legal magisteria, the proper interpretive role requires, on harmonious construction and in accordance with the relative weight and priority, to give effect to both competing provisions, as per the inter se weightage mandate by the overreaching legal norms, set out in section 90(2) of the Act. The ratio laid down by the Hon’ble Supreme Court in the cases of Azadi Bachao Andolan and Another (supra) and P.V.A.L. Kulandagan Chettiar (supra) as further explained and clarified by the Hon’ble Andhra Pradesh High Court in the case of Sanofi Pasteur Holding SA –vs.- Department of Revenue & Others (supra) makes it abundantly clear that whenever there is a conflict between the provisions of the Treaty and the provisions of the Domestic Law, the provisions of Treaty will prevail and override even the charging provisions of the Domestic Law. Keeping in view this legal position, we do not find merit in the contention raised by the ld. CIT(D.R.) that as per section 9 0(2) of the Act, treaty does not override the Act but gets overridden and reject the same being completely contrary to the proposition propounded inter alia by the Hon’ble Apex Court.
3. The ld. D.R. in support of the Revenue’s case on the issue under consideration has raised an argument that the role of the assessee as a payer of the sum is limited to deducting tax at source as per the relevant provisions of Chapter-XVII-B and he has nothing to do with the determination of tax liability eventually in the hands of the payee, which is to be done by the Assessing Officer alone as per the relevant charging provisions of the Act. To counter this argument of the ld. D.R., reliance has been placed on behalf of the assesese on the decision of the Hon’ble Supreme Court in the case of Eli Lilly And Co. (India) P. Limited, wherein it was held that it cannot be stated as a broad proposition that the TDS provisions, which are in the nature of machinery provisions to enable collection and recovery of tax, are independent of charging provisions, which determine the assessability in the hands of the payee. Reliance is also placed on behalf of the assessee on the decision of the Hon’ble Supreme Court in the case of G.E. Technology Centre (P) Limited. In the said case, the contention was raised on behalf of the Department that the moment there is remittance, the obligation to deduct tax at source arises and the same was rejected by the Hon’ble Supreme Court by observing that the obligation to deduct tax at source arises only when there is a sum chargeable under the Act. It was held that the relevant TDS provisions as contained in section 195 have to be read in conformity with the charging provisions of sections 4, 5 & 9 and while interpreting the provisions of the Income Tax Act, one cannot read the charging section of that Act de hors the machinery section. It was held that the Act is to be read as an integrated code. It was held that the provisions for deduction of tax at source as contained in Chapter-XVII and the charging provisions of the Income Tax Act form one single integral inseparable code and, therefore, the provisions relating to TDS cannot be applied independent of the charging provisions. It is pertinent to note here that this decision in the case of G.E. Technology Centre (P) Limited is rendered by the Hon’ble Supreme Court after taking into consideration the earlier decision rendered in the case of Transportation Corporation of A.P. Limited (supra) on which reliance has been placed by the ld. CIT, D.R.
4. The ratio of the two decisions of the Hon’ble Supreme Court in the case of Ili Lilly And Co. (India) P. Limited (supra) and G.E. Technology Centre (P) Limited (supra) as discussed above clearly shows that the charging provisions control and override the machinery provisions dealing with tax deduction at source. Similarly, the provisions of DTAAs by virtue of section 90(2) to the extent more beneficial to the assessee override the provisions of Domestic Law as held, inter alia, by the Hon’ble Supreme Court in the case of Azadi Bachao Andolan & Another (supra) and P.V.A.L. Kulandagan Chettiar (supra). Since section 206AA falls in Chapter XVII-B dealing with tax deduction at source, it follows that the treaty provisions which override even the charging provision of the Domestic Law by virtue of section 90(2) would also override the machinery provisions of section 206AA irrespective of non-obstante clause contained therein and the same is required to be restricted to that extent and read down to give effect to the relevant provisions of DTAAs, which are overriding being beneficial to the assessee.
Please become a Premium member. If you are already a Premium member, login here to access the full content.
