2023 (1) TMI 926 - AT - Income Tax

Rate of TDS - Non-availability of PAN - Benefit of treaty - Non-Resident - recipients satisfied conditions of the treaty and can be treated as resident of respective countries as per the DTAA - whether section 206AA of the Income Tax Act, 1961 do not override the provisions of Double Taxation Avoidance Agreement entered into by the Government of India under section 90? - HELD THAT - Issue was discussed at length by the ITAT in the case of Serum Institute of India Ltd. 2015 (6) TMI 26 - ITAT PUNE wherein the ITAT held that TDS on payments made to non-residents who did not furnish their PAN can be deducted as per rate prescribed in DTAA and section 206AA cannot be invoked to insist on tax deduction at rate of 20 per cent. In the case of Danisco India (P.) Ltd. 2018 (2) TMI 1289 - DELHI HIGH COURT the Delhi High Court held that where assessee, an Indian remits payments to company located in Singapore which is not a tax assessee in India, and tax relationship between two countries is regulated in terms of Indo-Singapore DTAA, rate of taxation would be as dictated by provisions of treaty and not under section 206AA. In the case of Jyoti Ltd. 2021 (3) TMI 1001 - ITAT AHMEDABAD held that section 206AA does not override provision of section 90 and, thus, TDS had been rightly deducted by assessee on payment made to non-resident by applying tax rate prescribed under DTAA and not as per section 206AA. CIT(Appeals) has not erred in facts and in law in holding that in case of payments made to non-residents, the assessee was entitled to deduct taxes at source at the rates applicable in the respective Tax Treaties in case PAN of non-resident payee is not available. In the instant facts, it is not the allegation of the Department that taxes have not been deducted at source by taking recourse to relevant clauses of the Tax Treaty enabling the assessee not to deduct tax at source in respect of payments made to non-resident payees. In the instant facts, the assessee has deducted taxes at the beneficial rate of 10% as applicable in the respective Tax Treaties in respect of all payments made to non-resident payees. In light of the above observations, the appeal of the Department is hereby dismissed.

Issues Involved:
1. Whether Section 206AA of the Income Tax Act overrides the provisions of Section 90(2) of the Act.
2. Applicability of Section 206AA to non-residents in the absence of PAN.
3. Reliance on judicial precedents prior to the introduction of Section 206AA.

Detailed Analysis:

Issue 1: Whether Section 206AA of the Income Tax Act overrides the provisions of Section 90(2) of the Act.

The Department argued that Section 206AA, which mandates a higher rate of TDS in the absence of PAN, should override Section 90(2) of the Act. Section 90(2) allows assessees to benefit from the provisions of the Double Taxation Avoidance Agreement (DTAA) if they are more beneficial. The CIT(A) and ITAT consistently held that Section 90(2) prevails over Section 206AA, supporting the assessee's stance that the beneficial provisions of DTAA should apply. The ITAT cited several judicial precedents, including the Supreme Court's decision in Union of India v. Azadi Bachao Andolan, which upheld that DTAA provisions prevail over domestic law if more beneficial to the assessee.

Issue 2: Applicability of Section 206AA to non-residents in the absence of PAN.

The Department contended that Section 206AA applies to non-residents and mandates a 20% TDS rate if PAN is not provided. The assessee argued that TDS should be deducted as per the DTAA rates, which are often lower. The ITAT referenced multiple cases, including Serum Institute of India Ltd. and Danisco India (P.) Ltd., where it was held that Section 206AA does not override the beneficial DTAA provisions. The ITAT concluded that the assessee could deduct TDS at the DTAA rates even if the non-resident payees did not furnish their PAN.

Issue 3: Reliance on judicial precedents prior to the introduction of Section 206AA.

The Department criticized the CIT(A) for relying on decisions rendered before the introduction of Section 206AA. However, the ITAT found that the CIT(A) had appropriately relied on relevant and binding judicial precedents, including those post-Section 206AA, which consistently held that DTAA provisions prevail over Section 206AA.

Combined Result:

The ITAT dismissed all eighteen appeals filed by the Department, affirming the CIT(A)'s decision that the assessee was entitled to deduct TDS at the rates specified in the respective DTAAs, and not at the higher rate under Section 206AA. The ITAT emphasized that the beneficial provisions of DTAA should apply, and Section 206AA does not override Section 90(2). The ITAT also condoned a minor delay of 2 days in the Department's filing of the appeals.

Conclusion:

The ITAT upheld the CIT(A)'s decision in favor of the assessee, allowing the application of DTAA rates for TDS deduction in the absence of PAN, and dismissed the Department's appeals. The judgment reiterated the precedence of DTAA provisions over Section 206AA when they are more beneficial to the assessee.

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