2017 (3) TMI 81 - AT - Income Tax

Withholding of tax at higher of the rates prescribed under section 206AA - determination of rate at which tax at source is deductible by the assessee from the payments made to non-residents in the nature of fees for technical services - non obtaining and furnishing of the permanent Account Numbers by non-residents having income exceeding the taxable limit - DTAA - non-obstante clause - Held that - No merit in the arguments raised by the ld. CIT(D.R.) that the relevant treaties do not provide for deduction of tax at source at the rate which is lower than the rate applied by the Assessing Officer by invoking the provisions of section 206AA and that there is no question of abrogation of the relevant provisions of treaty in this regard. We also do not find the arguments raised by the ld. CIT(D.R.) that the role of the assessee as a payer of the sum is limited to deducting tax at source as per law and he has nothing to do with the determination of tax liability eventually in the hands of the payee, which is within the complete domain of the Assessing Officer to be relevant in this context as the tax at source was deducted by the assessee from the sums paid to the non-residents as per the provisions of section 195(1) read with section 2(37A) of the Act. As, the non-resident payees in the present case were having taxable income in India, the facts remain to be seen is that they were not obliged to obtain the Permanent Account Numbers in view of section 139A(8) read with Rule 114C. There is thus a clear contradiction between section 206AA and section 139A(8) read with Rule 114C, as was prevailed in the case of Kaushallaya Bai & Others (2012 (6) TMI 451 - KARNATAKA HIGH COURT) and by applying the analogy of the said decision, we find merit in the contention raised on behalf of the assessee that the provisions of section 206AA are required to be read down so as to make it inapplicable in the cases of concerned nonresidents payees who were not under an obligation to obtain the permanent Account Numbers. As explained by CBDT while inserting the provision of section 206AA vide Circular No. 5 of 2010, the intention of the said provision is mainly to strengthen PAN mechanism and keeping in view this limited function and purpose, we are of the view that non-obstante clause contained in the machinery provision of section 206AA is required to be assigned a restrict ive meaning and the same cannot be read so as to override even the relevant beneficial provisions of the Treaties, which override even the charging provisions of the Income Tax Act by virtue of section 90(2). In our opinion, it, therefore, cannot be said that the provisions of section 206AA, despite the non-obstante clause contained therein, would override the provisions of DTAA to the extent they are more beneficial to the assessee and it is the beneficial provision of treaty that will override the machinery provisions of section 206AA. In view of the above discussion, we are of the view that the 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 sect ion 206AA by virtue of section 90(2). In our opinion, the assessee therefore 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. We, accordingly, answer the question referred to this Special Bench in the negative and in favour of the assessee

Summary

Issues Involved:
1. Whether the provisions of section 206AA of the Income Tax Act, 1961 override the Double Taxation Avoidance Agreements (DTAAs) and other provisions of the Act.
2. Whether the assessee is required to deduct tax at the higher rate of 20% as prescribed under section 206AA in case of non-residents who do not furnish their Permanent Account Numbers (PAN).

Issue-Wise Detailed Analysis:

1. Overriding Effect of Section 206AA:
The core issue was whether section 206AA, which mandates a higher tax deduction rate of 20% for non-residents not furnishing PAN, overrides the provisions of DTAAs and other sections of the Income Tax Act. The Tribunal concluded that the provisions of section 206AA do not override the beneficial provisions of DTAAs. The Tribunal reasoned that DTAAs, being expressions of sovereign policy, prevail over domestic laws, including section 206AA, as per section 90(2) of the Act. This principle is supported by various judicial pronouncements, including the Supreme Court's decisions in Union of India & Another vs. Azadi Bachao Andolan & Another and CIT vs. P.V.A.L. Kulandagan Chettiar, which held that treaty provisions override domestic law provisions to the extent they are more beneficial to the assessee.

2. Requirement to Deduct Tax at Higher Rate:
The Tribunal examined whether the assessee was required to deduct tax at the higher rate of 20% under section 206AA for non-residents not furnishing PAN. The Tribunal noted that the non-residents in question were residents of countries with which India had DTAAs, and the tax was deducted at the rates specified in the relevant DTAAs. The Tribunal held that the beneficial provisions of the DTAAs, which prescribe lower tax rates, should be applied. The Tribunal emphasized that section 206AA is a machinery provision meant to strengthen the PAN mechanism and cannot override the beneficial provisions of DTAAs. The Tribunal also referred to the Karnataka High Court's decision in the case of Smt. Kaushallaya Bai & Others, which read down the overriding provisions of section 206AA in cases where the assessees were not required to obtain PAN under section 139A.

Conclusion:
The Tribunal concluded that the provisions of section 206AA do not override the beneficial provisions of DTAAs. Therefore, the assessee is not required to deduct tax at the higher rate of 20% under section 206AA in case of non-residents who do not furnish their PAN but are residents of countries with which India has DTAAs. The Tribunal allowed the appeals of the assessee for the assessment years 2011-12 and 2012-13.