2020 (3) TMI 1198 - AT - Income Tax

Rate of tax deductible on the payments made to the non-resident USA company in respect of Fee for Technical Services (FTS) - @25% under section 260AA (1) (i) OR @15% - order passed under section 201(1) and 201(1-A) - India - USA DTAA - CIT-A held that the action of the Assessing Officer in treating the assessee as assessee in default on the ground that instead of 20% it should have deducted tax at the rate of 25% was not justified and granted relief on that count, since the assessee had withheld tax at source at the rate of 20% as per clause (iii) of section 206AA (1) - HELD THAT - Hon ble jurisdictional High Court in the case of Danisco India Private Limited 2018 (2) TMI 1289 - DELHI HIGH COURT dealt with this aspect and while approving the decision of the Tribunal in the case of Serum Institute of India Ltd. 2015 (6) TMI 26 - ITAT PUNE held that 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. Issue being covered squarely by the order of the Tribunal in the case of Serum Institute of India Ltd. (supra) and the decision of the Hon ble High Court in the case of Danisco India Private Limited (supra), in the absence of any decision to the contrary, while respectfully following the same, we do not see anything illegality or irregularity in the findings of the Ld. CIT(A).

Summary

Issues:
1. Whether the rate of tax deductible on payments made to a non-resident USA company for Fee for Technical Services was correctly determined.
2. Whether the provisions of section 206AA of the Income Tax Act prevail over Double Taxation Avoidance Agreements (DTAA).
3. Whether the non-resident has the right to claim a refund of excess taxes withheld.

Analysis:

Issue 1:
The case involved a dispute regarding the rate of tax deductible on payments made by a company for Fee for Technical Services to its parent company in the USA. The Assessing Officer contended that the rate should be 25% as per section 206AA of the Income Tax Act. However, the company argued that the rate should be 15% as per the India-USA DTAA. The Commissioner of Income Tax (Appeals) held that the DTAA prevails over the Act, and the tax could have been deducted at the lower rate of 15%. The Tribunal affirmed this decision, emphasizing that the DTAAs override domestic law when more beneficial to the assessee.

Issue 2:
The Revenue challenged the decision of the Ld. CIT(A), arguing that the provisions of section 206AA of the Act should prevail over any other provisions, including section 90(2) which relates to DTAA applicability. The Tribunal referred to precedents where it was established that DTAAs take precedence in determining tax rates for non-residents. The Tribunal upheld the Ld. CIT(A)'s decision, stating that section 206AA does not override section 90(2) in cases where the DTAA provides a more beneficial rate.

Issue 3:
The non-resident company contended that the decision in Danisco India Private Limited case supported their position that the rate of taxation should be as per the DTAA. The Tribunal agreed, citing the primacy of DTAAs in such cases. The Tribunal, following previous decisions, upheld the Ld. CIT(A)'s findings, concluding that the non-resident correctly applied the tax rate prescribed under the DTAA, and dismissed the Revenue's appeals.

In conclusion, the Tribunal affirmed that the DTAA prevails over the provisions of the Income Tax Act in determining the tax rate applicable to payments made to non-residents for services. The decision emphasized the importance of honoring international agreements for tax treatment and upheld the lower tax rate determined under the DTAA.