2020 (6) TMI 669 - AT - Income Tax

Applicability of section 206AA - payments made to non-resident entities - there is no scope for deduction of tax at the rate of 30%, as provided under the provisions of Section 206AA when the benefit of DTAA - HELD THAT - Applicability of provisions of section 206AA of the Act, in cases of tax to be deducted at source, when the income is exigible to tax under DTAA and the payees are unable to provide valid Permanent Account Numbers, came up for consideration before the Special Bench, ITAT Hyderabad in the case of Nagarjuna Fertilizers Chemicals Ltd. Vs. AC IT 2017 (3) TMI 81 - ITAT HYDERABAD . The question before the special bench was whether the provisions of section 206AA had overriding effect for all other provisions of the Act, whether the assessee has to deduct tax at source at the rates prescribed in section 206AA in case the payees are unable to furnish their PANs, even in cases where tax liability arises out of the treaty. DTAA provides for a rate of 10% whereas as per the provisions of Sec.206AA of the Act, the rate of tax deduction at source is 20%. Whether section 206AA starts with a non-obstante clause and therefore it overrides all other provisions of the Act including 90(2), 115A and 139A? - Special Bench held that DTAA overrides the Act, even if it is inconsistent with the Act. DTAAs are entered into between two nations in good faith and are supposed to be interpreted in good faith. Otherwise it would amount to the breach of Article 253 of the constitution. 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. - Decided against revenue.

Summary

Issues:
- Applicability of section 206AA of the Income-tax Act, 1961 on payments made to non-resident entities.
- Scope for deduction of tax at the rate of 30% under Section 206AA when DTAA benefit is available.
- Reliance on previous decisions by the Commissioner of Income Tax (Appeals) and the ITAT Bangalore.
- Interpretation of section 206AA in the context of DTAA provisions.
- Override of DTAA by section 206AA of the Income-tax Act.
- Decision of the Special Bench of ITAT Hyderabad on the overriding effect of section 206AA.

Analysis:
1. The appeal by the revenue challenged the order of the CIT(Appeals) concerning the applicability of section 206AA of the Income-tax Act, 1961 on payments made to non-resident entities. The revenue contended that the CIT(A) erred in allowing the appeal of the assessee and not applying the higher tax rate of 30% under section 206AA despite the presence of a non-obstante clause in the section. The revenue also argued that the CIT(A) wrongly relied on previous decisions by the ITAT Bangalore, leading to an incorrect interpretation of the law.

2. The assessee, engaged in manufacturing, argued before the CIT(A) that tax deduction should be at 10% as per the DTAA between India and Germany, rather than the higher rate of 20% under section 206AA. The CIT(A) accepted this argument based on a decision by the Pune Bench of the ITAT. The revenue, dissatisfied with this decision, appealed to the Tribunal for a review of the CIT(A)'s order.

3. The Tribunal noted that the issue raised had been addressed by a Special Bench of ITAT Hyderabad, which considered the overriding effect of section 206AA on tax deductions under DTAA provisions. The Special Bench clarified that DTAA prevails over the Act, even if inconsistent, to uphold the principles of international agreements entered in good faith between nations.

4. The revenue argued that section 206AA, starting with a non-obstante clause, should override all other provisions, while the assessee emphasized the supremacy of DTAA based on legal precedents. The Special Bench upheld the primacy of DTAA over the Act, ensuring that international agreements are respected and interpreted in good faith to avoid breaching constitutional obligations.

5. Citing decisions such as the Hon'ble Delhi High Court's ruling in the case of Danisco India Private Limited, the Tribunal reaffirmed that where DTAA provisions dictate tax treatment, section 206AA must be read down accordingly. In light of these legal principles, the Tribunal found no merit in the revenue's appeals and dismissed them, upholding the decision of the CIT(A).

6. Ultimately, the Tribunal's judgment on the overriding effect of section 206AA in the context of DTAA provisions clarified the hierarchy of legal norms and the importance of honoring international agreements in tax matters, leading to the dismissal of the revenue's appeal.