2017 (2) TMI 68 - AT - Income Tax

Refund of TDS - Rate of Withholding tax (TDS) - assessee deducting tax at 20% instead of 15% - payment of royalty - contention of the ld. AR for refunding 5% to the assessee-deductor (difference between 20% and 15%) - Held that - The assessee has suo motu deducted tax at source on behalf of the payee and the payee, in turn, is entitled to claim credit for such tax deduction at source in its return of income. Ergo, it is manifest that Article 265 of the Constitution does not come into play in the circumstances as are extantly prevailing before us inasmuch as we are not determining the rightful amount of tax due on the income of the payee. The instant proceedings are in the hands of the deductor-payer and are not in any manner going to affect the tax liability of the payee as has been specifically provided for under section 190(2) of the Act that that deduction of tax at source does not prejudice the charge of tax on such income. In view of the foregoing discussion, we are of the considered opinion that the assessee s claim for refund of tax deducted at source @ 5% on payments made to its parent company is devoid of any merits. The same is hereby jettisoned. Levy of surcharge and education cess - Held that - In the context of compulsory requirement to furnish PAN of employees u/s 206AA, it becomes crystal clear that the CBDT has provided that Education cess @ 2% and secondary and higher education cess @1% is not to be deducted in case the tax is deducted at 20% u/s 206AA of the Act. Albeit, this part of the Circular is not relevant for the purposes of deduction of tax at source in terms of section 195, yet it throws some guidance on the non-levy of education cess and surcharge etc. in case tax is deducted in terms of section 206AA on the payments made to nonresidents. No contrary provision mandating the levy of surcharge and education cess on the rate of 20% u/s 206AA(1)(iii) has been brought to our notice by the ld. DR. In view of the foregoing discussion, we are satisfied that the ld. CIT(A) was not justified in upholding the action of the AO in levying the surcharge and education cess on the amount of tax deducted at source u/s 206AA(1)((iii) of the Act. The same is, therefore, directed to be deleted.

Issues Involved:
1. The correct rate of tax withholding under Section 206AA.
2. The applicability of surcharge and education cess on the tax deducted at source.

Issue-wise Detailed Analysis:

1. The Correct Rate of Tax Withholding under Section 206AA:

The primary issue in this case revolves around the interpretation of Section 206AA of the Income-tax Act, particularly the rate at which tax should be deducted at source when the payee does not furnish a Permanent Account Number (PAN). The assessee, a public limited company engaged in software development and outsourcing services, paid its parent company in the USA for management services and deducted tax at source at 20%, treating the payment as royalty and fees for technical services under the Indo-US Tax Treaty (DTAA).

The Assessing Officer (AO) contended that the tax should have been deducted at a higher rate of 25% plus surcharge and education cess, as per Section 206AA, due to the absence of PAN. However, the CIT(A) held that the tax was rightly deducted at 20% but surcharge and education cess should also be levied. The assessee argued that the tax rate should be 15% as per the DTAA and no surcharge or education cess should be levied.

Upon review, the Tribunal found that the assessee deducted tax at 20% in accordance with Section 206AA(1)(iii), which prescribes a flat rate of 20% in the absence of PAN. The Tribunal noted that the CIT(A) had accepted the 20% rate, and there was no appeal from the Revenue challenging this decision. The Tribunal also distinguished this case from the Pune Tribunal's decision in the Serum Institute case, where the issue was whether the tax should be deducted at 15% as per the DTAA or 20% as per Section 206AA. In the present case, the assessee had already deducted tax at 20%, and the Tribunal held that the assessee could not now claim a refund for the excess 5% deducted.

The Tribunal emphasized that once tax is deducted at source and a certificate is issued to the deductee, only the deductee can claim credit or refund of the tax deducted. The deductor, having deducted tax on behalf of the deductee, cannot claim a refund of the excess tax deducted. The Tribunal concluded that the assessee's claim for a refund of the excess 5% tax deducted was devoid of merit and rejected it.

2. The Applicability of Surcharge and Education Cess on the Tax Deducted at Source:

The second issue was whether surcharge and education cess should be levied on the tax deducted at source. The AO had opined that surcharge and education cess should be levied in addition to the 20% tax rate. The CIT(A) upheld this view, but the assessee contested it, arguing that Section 206AA(1)(iii) prescribes a flat rate of 20% without any mention of surcharge or education cess.

The Tribunal agreed with the assessee, noting that Section 206AA(1)(iii) specifies a flat rate of 20% without any provision for additional surcharge or education cess. The Tribunal referred to the Supreme Court's judgment in CIT vs. Vatika Township Pvt. Ltd., which held that the levy of surcharge is prospective unless expressly stated otherwise. The Tribunal also cited Circular No. 17/2014, which clarified that education cess and secondary and higher education cess are not to be deducted when tax is deducted at 20% under Section 206AA.

In light of these considerations, the Tribunal concluded that surcharge and education cess should not be levied on the tax deducted at source at the rate of 20% under Section 206AA(1)(iii). The Tribunal directed the deletion of the surcharge and education cess levied by the AO and upheld by the CIT(A).

Conclusion:

The appeal was partly allowed. The Tribunal rejected the assessee's claim for a refund of the excess 5% tax deducted but upheld the assessee's contention that surcharge and education cess should not be levied on the tax deducted at source at the rate of 20% under Section 206AA(1)(iii).

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