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2019 (11) TMI 1341 - AT - Income Tax


Issues Involved:
1. Whether the payments made by the Assessee to its Associated Enterprises (AE) constitute "Fees for Technical Services" (FTS) and require tax deduction at source under Sec.195 of the Income Tax Act, 1961.
2. Applicability of Sec.195A regarding grossing up of payments made to AE.
3. Applicability of Sec.206AA concerning the requirement of PAN and higher tax deduction rates for non-residents.
4. Overriding effect of Double Taxation Avoidance Agreement (DTAA) over the provisions of the Income Tax Act, specifically Sec.206AA.

Detailed Analysis:

1. Fees for Technical Services (FTS) and Tax Deduction at Source:
The Assessee, engaged in providing Information Technology solutions and services, made payments to its non-resident AE for Onsite Service Charges and Selling and Marketing Charges. The Revenue contended that these payments were in the nature of "Fees for Technical Services" (FTS) and thus required tax deduction at source under Sec.195 of the Income Tax Act, 1961. The Assessee argued that the payments were not FTS and were not taxable in India, hence no tax deduction was necessary. The orders passed under Sec.201(1) and 201(1A) held the Assessee liable for not deducting tax and imposed interest on the unpaid taxes.

2. Applicability of Sec.195A:
The Revenue audit objected that the Assessee should have grossed up the payments made to AE under Sec.195A, as the taxes were to be borne by the Assessee. The Assessee successfully argued that for Onsite Service Charges, the agreement did not stipulate that taxes were to be borne by the Assessee, thus Sec.195A was not applicable. For Selling and Marketing Charges, the Assessee contended that the grossing up should be as per the DTAA, with a maximum tax rate of 10%.

3. Applicability of Sec.206AA:
For AY 2011-12 and 2012-13, the AO applied a higher tax rate of 21.02% under Sec.206AA, which mandates a higher tax deduction rate if the recipient does not furnish a PAN. The Assessee argued that the tax rates should be as per the DTAA, overriding Sec.206AA. The CIT(A) upheld the Assessee's plea, stating that DTAA rates should apply, and Sec.206AA should not override the DTAA.

4. Overriding Effect of DTAA:
The CIT(A) and various judicial precedents, including the Special Bench of ITAT, Hyderabad, and the Delhi High Court, held that DTAA provisions override the Income Tax Act, including Sec.206AA. The Special Bench in Nagarjuna Fertilizers & Chemicals Ltd. case and the Delhi High Court in Danisco India Private Limited case affirmed that DTAA rates should prevail over Sec.206AA, even if the non-resident does not provide a PAN.

Conclusion:
The Tribunal dismissed the Revenue's appeals, affirming that DTAA provisions override the Income Tax Act, including Sec.206AA. The Assessee's cross-objections were left open without adjudication, as the decision on the Revenue's appeals rendered them unnecessary.

Order Pronouncement:
The order was pronounced in the open court on November 27, 2019.

 

 

 

 

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