2015 (6) TMI 26 - AT - Income Tax

Applicability of sec 206AA - Requirement to furnish Permanent Account Number - TDS @20% - whether not applicable in case of non-residents as the DTAA overrides the Act as per section 90(2)as per CIT(A)? - Held that - 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 the DTAAs provisions especially section 206AA of the Act which is the controversy before us. Therefore, in our view, 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 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. The CIT(A), in our view, correctly inferred that section 206AA of the Act does not override the provisions of section 90(2) of the Act and that in the impugned cases of payments made to non-residents, assessee correctly applied the rate of tax prescribed under the DTAAs and not as per section 206AA of the Act because the provisions of the DTAAs was more beneficial. Thus, we hereby affirm the ultimate conclusion of the CIT(A) in deleting the tax demand relatable to difference between 20% and the actual tax rate on which tax was deducted by the assessee in terms of the relevant DTAAs - Decided against revenue.

Summary

Issues:
Appeal against the order of CIT(A) regarding the applicability of section 206AA of the Income-tax Act, 1961 to non-residents and the impact of Double Taxation Avoidance Agreements (DTAAs) on tax deduction rates.

Analysis:

Issue 1: Applicability of Section 206AA to Non-Residents
The Revenue contended that section 206AA of the Act, which mandates tax deduction at a higher rate if PAN is not furnished, should apply to non-residents. The CIT(A) held that section 206AA does not override section 90(2) of the Act, which states that DTAAs prevail if more beneficial to the assessee. The CIT(A) concluded that where DTAAs provide lower tax rates, section 206AA does not apply. The Tribunal agreed with the CIT(A), emphasizing that DTAAs take precedence over section 206AA, ensuring tax deduction at beneficial rates for non-residents.

Issue 2: Impact of DTAAs on Tax Deduction Rates
The assessee argued that tax rates under DTAAs should prevail over section 206AA rates as per section 90(2) of the Act. The Tribunal concurred, stating that DTAAs providing lower tax rates supersede section 206AA. The Tribunal highlighted that DTAAs and sections 4, 5, 9, 90, and 91 of the Act are relevant for tax deduction at source. It emphasized that section 206AA is procedural and does not override charging sections 4 and 5 or DTAAs under section 90(2). Therefore, the Tribunal upheld the CIT(A)'s decision to delete the tax demand based on DTAAs' beneficial rates, dismissing the Revenue's appeals.

In conclusion, the Tribunal affirmed that section 206AA does not override the beneficial provisions of DTAAs for non-residents. The judgment clarifies that DTAAs prevail over section 206AA, ensuring tax deduction at rates more favorable to the assessee. The decision highlights the hierarchy of provisions under the Act, emphasizing the primacy of DTAAs in determining tax rates for non-residents.