2022 (8) TMI 40 - HC - Income Tax

Rate of deduction of tax in the case of a non-resident who does not have a PAN - provisions of Section 206AA overrides the provisions of the Double Tax Avoidance Agreement or not? - DTAA between India and Netherlands - Whether case does not lie in the exceptions laid down in Sub-Section 7 of Section 206AA of the Act shall be the rate prescribed in the DTAA if such rate is lower than the rate specified in the relevant provisions of the Act and not as per the provisions of Section 206AA? - HELD THAT - A perusal of the paper book reveals that in the present case the ITAT has held that it is not in dispute that the engine is a part of aircraft and cannot be said to be an aircraft and the payment being made for rent of engine can be covered under equipment as per Article 12(4) of the DTAA between India and Netherlands. The ITAT has also held that the ELFC, the lessor, is a foreign company having no permanent establishment and was a tax resident of Netherland. It is not in dispute that assessee has not deducted this TDS from the payment but has deposited from their own account and has absorbed it as cost. It is also not in dispute that since payee, ELFC, being a foreign company having no PAN, the assessee reported the transaction without PAN in the quarterly TDS statements. This Court is in agreement with the view of the Tribunal that the issues of law sought to be raised in the present appeal are squarely covered by the judgment of this Court in Danisco India (P.) Ltd. 2018 (2) TMI 1289 - DELHI HIGH COURT . as held 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 - no substantial question of law arises.

Summary

Issues:
1. Challenge to the order of the Income Tax Appellate Tribunal (ITAT) regarding the provisions of Section 206AA of the Income Tax Act, 1961 and the Double Tax Avoidance Agreement (DTAA).
2. Interpretation of Section 206AA in relation to deduction of tax at source for non-residents without PAN.
3. Application of DTAA provisions in determining tax rates for payments made to foreign companies.

Analysis:
1. The appellant contested the ITAT's decision, arguing that Section 206AA can override DTAA provisions due to its non obstante nature. The counsel emphasized that Section 206AA applies to tax deduction at source, not the charge of tax, and the highest rate specified in Section 206AA should apply even if the DTAA rate is lower. The ITAT held that the payment for renting an engine falls under the DTAA's equipment category, benefiting from the more favorable DTAA provisions.

2. The ITAT's judgment highlighted that the foreign lessor had no Permanent Establishment in India and was a tax resident of the Netherlands. The ITAT ruled that the DTAA's terms regarding equipment rental applied, leading to a lower tax rate of 10% under the DTAA instead of the 20.12% rate. The ITAT's decision was influenced by precedents and the DTAA's beneficial provisions overriding Section 206AA's tax deduction requirements.

3. The Court concurred with the ITAT's interpretation, citing previous case law emphasizing the primacy of DTAA provisions over domestic laws like Section 206AA. The Court dismissed the appeal, stating that no substantial question of law was raised, and the appellant correctly applied the DTAA tax rate instead of the higher rate under Section 206AA. The judgment reaffirmed that in cases covered by a DTAA, the tax rate should align with the treaty's provisions, superseding conflicting domestic laws.

This comprehensive analysis outlines the key legal issues raised in the judgment, the arguments presented by the parties, and the court's reasoning based on relevant legal principles and precedents.