2019 (5) TMI 1161 - AT - Income Tax

TDS rate u/s 206AA(1) - Treaty rate (DTAA) OR rate as per Act - whether provisions of DTAA shall prevail over the provisions of' section 206AA(1), even when the provision of section 206AA(1) are overriding in nature containing a clear non-obstante clause? - 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 206 AA 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. SEE M/S EMMSONS INTERNATIONAL LTD. VERSUS DCIT CPC -TDS, GHAZIABAD 2018 (4) TMI 1272 - ITAT DELHI Whether the treaty overrides the Act ? - Having regard to the position of law explained in Azadi Bachao Andolan 2003 (10) TMI 5 - SUPREME COURT and later followed in numerous decisions that a Double Taxation Avoidance Agreement acquires primacy in such cases, where reciprocating states mutually agree upon acceptable principles for tax treatment, the provision in Section 206AA (as it existed) has to be read down to mean that where the deductee i.e the overseas resident business concern conducts its operation from a territory, whose Government has entered into a Double Taxation Avoidance Agreement with India, the rate of taxation would be as dictated by the provisions of the treaty. See DANISCO INDIA PRIVATE LIMITED VERSUS UNION OF INDIA AND ORS. 2018 (2) TMI 1289 - DELHI HIGH COURT - Decided against revenue.

Summary

Issues Involved:
1. Whether the provisions of the Double Taxation Avoidance Agreement (DTAA) prevail over the provisions of Section 206AA(1) of the Income Tax Act, 1961.
2. Whether the intention of Section 206AA is to strengthen the PAN and TDS mechanism without affecting the ultimate tax liability of the assessee.
3. Whether the DTAA takes precedence over Section 206AA(1) even though the DTAA does not specifically deal with the rates of TDS.

Detailed Analysis:

Issue 1: Precedence of DTAA over Section 206AA(1)
The Appellate Tribunal ITAT Delhi addressed the question of whether the DTAA provisions override Section 206AA(1) of the Income Tax Act, 1961. The Tribunal referenced the decision in Emmsons International Ltd Vs. DCIT and the Hon’ble jurisdictional High Court's ruling in Danisco India Private Limited Vs. Union Of India. Both decisions affirmed that Section 206AA does not override Section 90(2) of the Act. The Tribunal reiterated that in cases of payments made to non-residents, the rate of tax to be applied is as per the DTAA provisions, which are more beneficial to the assessee, rather than the 20% rate mandated by Section 206AA in the absence of a PAN.

Issue 2: Intention of Section 206AA
The Tribunal considered the Revenue's argument that Section 206AA was intended to strengthen the PAN and TDS mechanism. However, it was noted that this provision does not impact the ultimate tax liability of the assessee. The Tribunal emphasized that the DTAA provisions, being more beneficial, should prevail, referencing the Supreme Court's decision in Azadi Bachao Andolan which upheld that DTAA provisions override the general provisions of the Act when they are more beneficial to the assessee.

Issue 3: DTAA and Rates of TDS
The Tribunal addressed the Revenue's contention that the DTAA does not specifically deal with TDS rates, whereas Section 206AA does. The Tribunal clarified that the DTAA provisions, which provide for a beneficial rate of taxation, should be applied over the general provisions of the Act, including Section 206AA. This position was supported by the Hon’ble High Court in the Danisco India Pvt Ltd case, which emphasized that the DTAA provisions acquire primacy and should be applied where they are more beneficial to the assessee.

Conclusion:
The Tribunal concluded that Section 206AA does not override the provisions of Section 90(2) of the Act and that in cases of payments made to non-residents, the rate of tax prescribed under the DTAA should be applied. Consequently, the appeals filed by the Revenue were dismissed, and the tax demand related to the difference between the 20% rate under Section 206AA and the actual tax rate under the DTAA was directed to be deleted. The Tribunal’s order was pronounced in open court on 17.05.2019.