2017 (5) TMI 1309 - AT - Income Tax

Short deduction of TDS - Non residents not having PAN - TDS @10% or 20% - invoking the provisions of Section 206AA - Held that - The provisions of DTAA prevail over the provisions of the Income Tax Act, 1961. In the case on hand, the appellant deducted tax at source at 10% of the payments made u/s 195 to the non residents relying on DTAAs prevailing with the countries in which the deductees are residing. While processing these returns, as the PAN of such deductees was not mentioned in the returns, higher rate of tax, i.e., 20% was applied, as per provisions of section 206AA. At the same time, there cannot be any doubt over the claim of the appellant that provisions of DTAA override the provisions of Income Tax Act, 1961. However, it appears that there is no channel available to the appellant to put this stand before the Assessing Officer while processing the TDS return. As seen from the list of deductees and the PANs now made available for both the assessment years, the deductees are mostly from USA, China, Korea, Finland and Italy. DTAAs are available with all these five countries. Hon ble Supreme Court in the case of CIT Vs. P.V.A.L. Kulandagan Chettiar (Dead) Through LRs 2004 (5) TMI 8 - SUPREME Court where it is clearly reiterated that the provisions of DTAA prevail over the provisions of I.T. Act, 1961. - Decided against revenue

Issues Involved:
1. Short deduction of TDS.
2. Application of Section 206AA of the Income Tax Act.
3. Prevalence of Double Taxation Avoidance Agreement (DTAA) provisions over the Income Tax Act.
4. Validity of PAN requirement for non-residents.
5. Conflicting decisions of ITAT benches.
6. Acceptance of PAN numbers furnished post-facto.

Issue-wise Detailed Analysis:

1. Short deduction of TDS:
The appeals by the Revenue concern the short deduction of TDS by the assessee, who had deducted tax at source from payments made to non-residents at 10% under the provisions of DTAA. The AO applied a 20% deduction rate under Section 195 due to the absence of PANs, resulting in a shortfall of ?1,04,94,160 for AY 2011-12 and ?68,18,600 for AY 2012-13. The assessee later filed revised forms with available PANs, reducing the shortfall to ?10,94,301 and ?28,33,577, respectively.

2. Application of Section 206AA of the Income Tax Act:
The AO invoked Section 206AA, which mandates a 20% TDS rate if the deductee's PAN is not provided. The CIT(A) ruled that DTAA provisions prevail over Section 206AA, reducing the shortfall when PANs were provided in revised returns.

3. Prevalence of DTAA provisions over the Income Tax Act:
The CIT(A) and ITAT upheld that DTAA provisions override the Income Tax Act, referencing the Supreme Court decision in CIT Vs. P.V.A.L. Kulandagan Chettiar and AP High Court judgment in CIT Vs. Visakhapatnam Port Trust. The Special Bench in Nagarjuna Fertilizers and Chemicals Ltd. confirmed that DTAA rates apply even without PANs, as DTAAs are more beneficial to the assessee.

4. Validity of PAN requirement for non-residents:
The Special Bench held that non-resident payees are not obliged to obtain PANs under Section 139A(8) read with Rule 114C. Therefore, Section 206AA's requirement for PANs contradicts these provisions, and it should be read down to exclude non-residents.

5. Conflicting decisions of ITAT benches:
The Revenue cited the ITAT Bangalore decision in Bosch Ltd. Vs. ITO, which upheld Section 206AA's overriding nature. However, the ITAT Pune in DDIT Vs. Serum Institute of India Ltd. held otherwise. The Special Bench in Nagarjuna Fertilizers resolved this by ruling in favor of DTAA provisions prevailing over Section 206AA.

6. Acceptance of PAN numbers furnished post-facto:
The CIT(A) and ITAT noted that the AO accepted PANs provided in revised returns, reducing the shortfall. The ITAT dismissed the Revenue's ground that PANs should be available at the time of deduction, affirming the CIT(A)'s decision.

Conclusion:
The ITAT dismissed the Revenue's appeals, affirming that DTAA provisions override Section 206AA, and accepted PANs provided in revised returns. The judgment aligns with the Special Bench's ruling in Nagarjuna Fertilizers, ensuring the application of more beneficial DTAA rates over the Income Tax Act's provisions.

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