2018 (11) TMI 120 - AT - Income Tax

Short deduction of tax at source - intimation u/s 200A - Provisions of the DTAA - assessee have deducted the TDS at the rates applicable under the double taxation avoidance agreement (DTAA) with respective countries whereas the AO mechanically applied the rate of deduction in such cases to be 20% as prescribed under section 206AA - section 206AA overridring the provisions of Section 90(2) - Held that - Section 206AA of the Act does not override the provisions of Section 90(2) of the Act and that in the 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 were more beneficial. In view of the settled position of law, we find it difficult to sustain the orders of the authorities below. With this view of the matter, we find that the orders of the authorities below are liable to be quashed and accordingly they are quashed. Thus, we hereby direct the deletion of 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. Appeals are allowed accordingly.

Summary

Issues involved:
Whether Section 206AA of the Act overrides Section 90(2) of the Act in cases of payments to non-residents, and whether the tax should be charged as per Section 206AA or the DTAA.

Analysis:
The appellant challenged the order passed by the Commissioner of Income-tax (Appeals) for the Assessment Year 2011-12, regarding short deduction of tax at source. The Income-tax Officer issued demands for short deductions and interest, which the appellant contested, claiming correct deduction based on rates under the double taxation avoidance agreement (DTAA). The appellant argued that Section 206AA of the Income Tax Act, mandating a 20% deduction in the absence of PAN, should not override Section 90(2) of the Act. The appellant relied on legal precedents supporting the primacy of DTAA provisions over domestic law.

The Commissioner of Income-tax (Appeals) rejected the appellant's contentions, citing Section 206AA which requires a 20% deduction in the absence of PAN. The appellant appealed, emphasizing that DTAA provisions should prevail over Section 206AA. The appellant referred to a High Court decision approving a tribunal's ruling that Section 206AA does not supersede Section 90(2) of the Act in cases involving non-residents, supporting the applicability of DTAA rates.

The Tribunal analyzed the arguments and legal framework, affirming that Section 206AA does not override Section 90(2) of the Act. The Tribunal referenced previous cases and High Court decisions to support the view that DTAA provisions take precedence over Section 206AA in determining tax rates for non-residents. The Tribunal held that the appellant correctly applied rates under the DTAA, and the demands based on Section 206AA were unjustified. Citing established legal principles, the Tribunal allowed the appeals, directing the deletion of tax demands related to the variance between the 20% rate and the actual tax rate deducted in accordance with the DTAA.

In conclusion, the Tribunal's judgment clarified that Section 206AA does not supersede Section 90(2) of the Act in cases involving payments to non-residents. The decision reinforced the precedence of DTAA provisions over domestic law, specifically Section 206AA, when determining tax rates for non-residents. The Tribunal's ruling aligned with established legal interpretations and previous court decisions, ultimately allowing the appeals and quashing the tax demands based on incorrect application of Section 206AA.