2020 (10) TMI 1078 - AT - Income Tax

TDS u/s 195 - Rates specified in Section 206AA - plea of the Assessee that the payments made to non-resident were not chargeable to tax and therefore the Assessee was not under any obligation to deduct TDS - Requirement to furnish Permanent Account Number - rate at which tax has to be deducted is not at higher rate as prescribed by Sec. 206AA at the rate applicable as per the Treaty for Double Taxation Avoidance (DTAA) between India and the country of which the payees were tax residents - whether Sec. 206AA of the Act has a non obstante clause and therefore it overrides the rates prescribed in DTAA? - 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 treat? HELD THAT - As in the case of Sanofi Pasteur 2013 (2) TMI 589 - ANDHRA PRADESH HIGH COURT as observed that DTAA being a sovereign matter, the machinery provisions cannot override or control that. Reliance was also placed on the decision of the Hon'ble Karnataka High Court in the case of Kaushallaya Bai 2012 (6) TMI 451 - KARNATAKA HIGH COURT wherein it has held that the provisions of section 206AA are to be read down. The 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. As in the case of Danisco India Private Limited 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. No merit in the appeals of the Revenue

Summary

Issues:
- Whether the Assessee was obligated to deduct tax at source on payments made to non-residents.
- Whether the rate at which tax should be deducted is as per the Double Taxation Avoidance Agreement (DTAA) or as per Section 206AA of the Income Tax Act.
- Whether Section 206AA of the Act overrides the rates prescribed in DTAA.

Issue 1: Obligation to Deduct Tax at Source
The Assessee contended that payments made to non-residents were not taxable, thus no tax deduction at source was required. The revenue authorities rejected this plea, stating the Assessee was obligated to deduct tax at source on these payments. The Assessee also argued that if tax deduction was necessary, it should be at the rate specified in the DTAA, not at the higher rate under Section 206AA of the Act.

Issue 2: Rate of Tax Deduction
The Assessing Officer (AO) rejected the Assessee's claim that the DTAA rates should apply for tax liability determination, asserting that Section 206AA of the Act, with its non-obstante clause, overrides the DTAA provisions. However, the CIT(A) ruled in favor of the Assessee, stating that the DTAA prevails over Section 206AA, and the tax rate for grossing up should align with the DTAA.

Issue 3: Section 206AA vs. DTAA
The revenue appealed to the Tribunal, arguing that Section 206AA's non obstante clause supersedes DTAA rates. The Tribunal noted a Special Bench decision that addressed a similar issue, emphasizing whether Section 206AA applies when payees cannot provide PANs for tax liability under the DTAA. The Special Bench concluded that the DTAA overrides the Act, even if inconsistent, as DTAAs are agreements between nations in good faith.

Judicial Precedents and Decisions
Various legal precedents were cited during the case, including the Supreme Court's ruling in Azadi Bachao Andolan, the Andhra Pradesh High Court's decision in Sanofi Pasteur, and the Karnataka High Court's judgment in Kaushallaya Bai. These cases emphasized the supremacy of DTAA over domestic laws and the need to interpret DTAAs in good faith to avoid breaching international agreements.

Conclusion
Considering the legal precedents and the Special Bench decision, the Tribunal upheld that the DTAA prevails over Section 206AA of the Act. The Tribunal concurred with previous judgments that emphasized the importance of honoring international agreements and mutual principles for tax treatment. Consequently, the Tribunal dismissed the revenue's appeals, affirming that there was no merit in challenging the applicability of DTAA rates over Section 206AA.

This comprehensive analysis of the judgment highlights the key issues, legal arguments, relevant decisions, and the final conclusion reached by the Tribunal, ensuring a detailed understanding of the case.