2018 (4) TMI 516 - AT - Income Tax

Short deduction of TDS and Interest - Adoption of rates of TDS when PAN is not furnished by the deductee - DTAA benefits - Held that - It is fact that Assessee Company is a foreign company and section 206AA, which provides to decade TDS at a higher rate because non availability of PAN are no attracted here because respondent/non-resident cannot be compelled to obtain PAN no. when they are allowable to tax in India. 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 Involved:
1. Deletion of demand raised under Section 206AA of the Income Tax Act, 1961 for mentioning wrong PAN.
2. Application of beneficial provisions of Double Taxation Avoidance Agreement (DTAA) over domestic law.

Issue-wise Detailed Analysis:

1. Deletion of Demand Raised Under Section 206AA for Mentioning Wrong PAN:

The primary issue revolves around the deletion of the demand raised under Section 206AA of the Income Tax Act, 1961, due to the incorrect PAN mentioned by the assessee. The assessee, a foreign company, had made payments to Shanghai Electric Group Company, China (SEC) and deducted TDS at the rate of 10% as per the India-China DTAA. The Central Processing Centre (CPC)-TDS raised a demand for short deduction of TDS at 20% as per Section 206AA, which mandates a higher TDS rate in the absence of PAN. The assessee argued that the provisions of Section 90(2) of the Act, which allow the application of DTAA provisions if they are more beneficial, should prevail.

The Tribunal noted that Section 206AA, introduced to ensure compliance with the PAN mechanism, cannot override the beneficial provisions of DTAA under Section 90(2). The Tribunal emphasized that non-residents cannot be compelled to obtain PAN when they are taxable in India under DTAA provisions. The Tribunal relied on the coordinate bench's decision in the case of DDIT Vs Serum Institute of India Pvt. Ltd., which held that Section 206AA does not override Section 90(2) and that DTAA provisions would prevail if they are more beneficial to the assessee.

2. Application of Beneficial Provisions of DTAA Over Domestic Law:

The Tribunal reiterated that the provisions of DTAA, being more beneficial, would override the domestic law under Section 90(2) of the Act. The Tribunal cited the Supreme Court's ruling in Azadi Bachao Andolan, which upheld that DTAA provisions prevail over general provisions of the Income Tax Act if they are more beneficial to the assessee. The Tribunal also referred to the Delhi High Court's judgment in the case of Dansico India Pvt. Ltd., which affirmed that Section 206AA does not override the beneficial provisions of DTAA.

The Tribunal concluded that the CIT(A) had correctly applied the DTAA provisions and directed the deletion of the demand raised under Section 206AA. The Tribunal found no infirmity in the CIT(A)'s order and dismissed the revenue's appeals.

Conclusion:

The Tribunal upheld the CIT(A)'s order, confirming that the beneficial provisions of DTAA override the domestic law under Section 90(2) and that Section 206AA does not apply to non-residents who are taxable under DTAA provisions. The Tribunal dismissed the revenue's appeals, affirming the deletion of the demand raised under Section 206AA.