Section 206AA does not apply to beneficial rates provided in tax treaty – Pune ITAT


DDIT v Serum Institute of India Limited ITA No.792/PN/2013 dated 30.03.2015) – Pune ITAT

Background:

Assessee during the financial year 2010- 11 made payments to non-residents on account of interest, royalty and fee for technical services. The assessee deducted tax at source on such payment in accordance with the tax rates provided in the Double Taxation Avoidance Agreements (DTAAs) with the respective countries. The tax rate so provided in the DTAAs was lower than the rate provided under the Income-tax Act, 1961. In case of some of the non-residents, the recipients did not have Permanent Account Numbers (PANs). The AO treated such payments, as cases of ‘short deduction’ of tax in terms of the provisions of section 206AA of the Act. Section 206AA prescribes that if the recipient of any sum or income fails to furnish his PAN to the person responsible for deduction tax at source, the tax shall be deductible at the rate specified in the relevant provisions of the Act or at the rates in force or at the rate of 20%. The AO treated it as short deduction being difference between 20% and the actual tax rate on which tax was deducted in terms of the relevant DTAAs. As a consequence, demands were raised on the assessee for the short deduction of tax and also for interest u/s 201(1A) of the Act. CIT(A) granted relief holding 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. 

Assessee’s contentions:

  • Provisions of section 139A(8) of the Act r.w. rule 114C(1) of the Income Tax Rules, 1962 prescribe that non-residents are not required to apply for PAN
  • Section 206AA of the Act prescribed that the recipient shall furnish the PAN and such furnishing would be possible only where the recipient is required to obtain PAN under the relevant provisions. Thus, where the non-residents are not obliged to obtain a PAN, the requirement of furnishing the same in terms of section 206AA of the Act are not applicable.
  • Further reliance was placed on the provisions of section 90(2) of the Act, which prescribe that provisions of the Act are applicable to the extent that they are more beneficial to the assessee and since section 206AA of the Act prescribed higher rate of withholding tax, it would not be beneficial to the assessee vis-à-vis the rates prescribed in the DTAAs.
Tax Authorities’ arguments:
  • Section 206AA of the Act would override section 90(2) of the Act and therefore the tax deduction was liable to be made @ 20% in absence of furnishing of PANs by the recipient non-residents.
HELD:
  • 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, at the rate prescribed in the relevant provisions of this Act; or at the rate/rates in force; or at the rate of 20%.
  • The dispute before us relates to the payments made by the assessee to such non-residents who had not furnished their PANs to the assessee. The assessee had deducted the tax at source at the rates prescribed in the respective DTAAs between India and the relevant country of the non-residents; and, such rate of tax being lower than the rate of 20% mandated by section 206AA of the Act.
  • 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.
  • It would be relevant to observe that even the charging section 4 as well as section 5 of the Act which deals with the principle of ascertainment of total income under the Act are 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). 
  • Thus, in so far as the applicability of the scope/rate of taxation with respect to the impugned payments make to the non-residents is concerned, 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. 
  • Provisions of deduction of tax at source laid down under Chapter XVII-B are not subordinate to section 90(2) of the Act
  • Section 206AA of the Act which is the centre of controversy before us is not a charging section but is a part of a procedural provisions dealing with collection and deduction of tax at source. 
  • Where the tax has been deducted on the strength of the beneficial provisions of DTAAs, the provisions of section 206AA of the Act cannot be invoked by the Assessing Officer to insist on the tax deduction @ 20%, having regard to the overriding nature of the provisions of section 90(2) of the Act.

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