Home Case Index All Cases Income Tax Income Tax + AT Income Tax - 2019 (11) TMI AT This
Forgot password New User/ Regiser ⇒ Register to get Live Demo
2019 (11) TMI 1341 - AT - Income TaxTax rate for grossing up u/s.195A - applicability of provisions of section 206AA - Determining the tax liability u/s.201(1) - TDS U/S 195 - payments to its Associated Enterprises (AE) who were non-residents as Onsite Service Charges and Selling and marketing charges - CIT(A) accepted the plea of the Assessee that the DTAA will override the provisions of the Act including Sec.206AA of the Act and that the rate of tax to be applied for grossing up should be as per the DTAA - HELD THAT - Referring to Circular No. 17/2014 dated 10.12.2004 in the context of compulsory requirement to furnish PAN of employees u/s 206AA, it becomes crystal clear that the CBDT has provided that 'Education cess @ 2% and secondary and higher education cess @1% is not to be deducted in case the tax is deducted at 20% u/s 206AA of the Act.' Albeit, this part of the Circular is not relevant for the purposes of deduction of tax at source in terms of section 195, yet it throws some guidance on the non-levy of education cess and surcharge etc. in case tax is deducted in terms of section 206AA on the payments made to non residents. No contrary provision mandating the levy of surcharge and education cess on the rate of 20% u/s 206AA(1)(iii) has been brought to our notice by the DR. CIT(A) was not justified in upholding the action of the AO in levying the surcharge and education cess on the amount of tax deducted at source u/s 206AA(1)(iii) of the Act. The same is, therefore, directed to be deleted AY 2012-13 - The Hon ble Delhi High Court in the case of Danisco India Private Limited Vs. Union Of India Ors. 2018 (2) TMI 1289 - DELHI HIGH COURT held that 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. There is no merit in the appeals of the Revenue. The grounds raised in the Cross-objections of the Assessee do not require any consideration in view of the decision in the revenue s appeals and those issues are left open without any adjudication.
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.
|