Section 206AA of the Act cannot have overriding effect on DTAA: TDS on payment made to NRI who did not furnish PAN can be made as per rate in DTAA

[Vivek Jalan]

The issue is that in case of payments made by the assessee to non-residents, whether in the absence of PAN of the non-resident payees, the assessee is permitted  to deduct taxes at the rate mentioned in the Tax Treaty with the respective countries  or is still under an obligation to deduct taxes under section 206AA of the Act at a higher rate of 20%. In this regard, the Hon'ble Supreme Court in the case of UNION OF INDIA AND ANOTHER VERSUS AZADI BACHAO ANDOLAN AND ANOTHER - 2003 (10) TMI 5 - SUPREME COURT  has upheld    the proposition that the provisions made in the DTAAs will prevail over the general    provisions contained in the Act to the extent they are beneficial to the assessee. Even the charging section 4 as well as section 5 of the Act which deals with the principle of ascertainment of total income under the Act are also subordinate to the    principle enshrined in section 90(2). Hence it would be incorrect to say that though   the charging section 4 of the Act and section 5 of the Act dealing with ascertainment    of total income are subordinate to the principle enshrined in section 90(2) of the Act  but the provisions of Chapter XVII-B governing tax deduction at source are not subordinate to section 90(2) of the Act. In the context of section 195 of the Act also, the Hon'ble Supreme Court in the case of COMMISSIONER OF INCOME-TAX, NEW DELHI VERSUS ELI LILLY & COMPANY (INDIA) PVT. LTD. - 2009 (3) TMI 33 - SUPREME COURT observed that the provisions of tax withholding i.e. section 195 of the Act would apply only to sums which are otherwise chargeable to tax under the Act. The Hon'ble Supreme Court in the case of GE INDIA TECHNOLOGY CENTRE PRIVATE LTD. VERSUS COMMISSIONER OF INCOME TAX & ANR. - 2010 (9) TMI 7 - SUPREME COURT  held that  the provisions of DTAAs along with the sections 4, 5, 9, 90 & 91 of the Act are relevant while applying the provisions of tax deduction at source. Thus, section 206AA of the Act cannot be understood to override the charging sections 4 and 5 of  the Act.

There are a catena of other judgements in this aspect. This issue was also discussed   at length by the ITAT in the case of DY. DIRECTOR OF INCOME TAX (IT-II) , PUNE. VERSUS SERUM INSTITUTE OF INDIA LIMITED - 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.

Thus also it was decided in the case of THE DCIT, (INTA. TAXA) -I, AHMEDABAD VERSUS ADANI WILMAR LTD. AHMEDABAD - 2023 (1) TMI 926 - ITAT AHMEDABAD that the provision of TDS are to be read along with DTAA for computing the TDS liability and when the recipient is eligible for benefit to DTAA, the addition on the ground of short deduction of TDS applying the provision of 206AA is not correct.

In the case of DANISCO INDIA PRIVATE LIMITED VERSUS UNION OF INDIA AND ORS. - 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 M/S. INFOSYS LIMITED ELECTRONIC CITY, HOSUR ROAD BANGALORE VERSUS THE DEPUTY COMMISSIONER OF INCOME-TAX, INTERNATIONAL TAXATION, CIRCLE 1 (1) BANGALORE. - 2022 (4) TMI 1489 - ITAT BANGALORE ,   the ITAT held that if rate of tax applicable under DTAA is lower than 20 per cent tax  rate as prescribed under section 206AA, TDS has to be deducted at such lower rate even if non-resident deductee fails to furnish its PAN.

The Special Bench of the Tribunal in the case of M/S. NAGARJUNA FERTILIZERS AND CHEMICALS LIMITED VERSUS ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE-15 (1) , HYDERABAD AND VICE-VERSA - 2017 (3) TMI 81 - ITAT HYDERABAD had held if rate of tax applicable under DTAA is lower than 20 per cent tax rate prescribed under section 206AA, TDS has to be deducted at such lower rate even if non-resident deductee fails to furnish its PAN.

In the case of M/S. WIPRO LTD. VERSUS. INCOME TAX OFFICER - 2016 (2) TMI 896 - ITAT BANGALORE , the ITAT    held that provisions of TDS should be read along with provisions of DTAA for computing tax liability of non-resident; when nonresident is eligible for benefit of DTAA on sum in question, there is no scope for deduction of tax at source at 20 per   cent as provided under provisions of section 206AA.

In the case of UNIPHOS ENVIRONTRONIC PVT. LTD. VERSUS THE DCIT CPC-TDS, GHAZIABAD - 2017 (2) TMI 642 - ITAT AHMEDABAD, the jurisdictional Ahmedabad ITAT held that where tax had been deducted on fee for legal services to a German company on strength of beneficial provisions of DTAA, provisions of section 206AA could not be invoked because section 90(2) provides that provisions of Act shall apply to the extent they  are more beneficial to assessee.

In the case of JYOTI LIMITED VERSUS DCIT (INTERNATIONAL TAXATION) , VADODARA - 2021 (3) TMI 1001 - ITAT AHMEDABAD, the Ahmedabad ITAT 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.