2018 (2) TMI 106 - AT - Income Tax

Default u/s 201(1) and 201(1A) - Withholding of tax at higher of the rates prescribed under section 206AA - applicability of section 115A on the payments made by the assessee to non-resident payees who did not have PAN - DTAA benefits - deduct income-tax at source at the rate of 25.75% as provided u/s. 115A OR @ 20% as specified u/s 206AA - Held that - The issue is no more res-integra and in the case of Nagarjuna Fertilizers and Chemicals Ltd. v. ACIT (2017 (3) TMI 81 - ITAT HYDERABAD) has taken a view that provision of section 206AA will not have an overriding effect over the provisions of the 1961 Act and if the provision of DTAA are beneficial to the assessee they will override provisions of Section 206AA by virtue of provisions of Section 90(2). No infirmity in the order of learned CIT(A) in directing AO to verify whether the payees are entitled for benefits of DTAA and also whether they hold the tax-residency certificate as is required by the provisions of the 1961 Act, which directions of learned CIT(A) we affirm/sustain . It is also on record that the assessee has in-fact deducted income-tax @22.66% on all these foreign remittances while rate prescribed under the provisions of DTAA with France is lower @10% than the rate prescribed under provisions of Section 115A for making payments in the nature of technical fee. Thus assessee cannot be held to be an assessee in default within meaning of Section 201(1) and 201(1A) - Decided against revenue

Summary

Issues Involved:
1. Applicability of Section 115A of the Income-tax Act on payments made to non-resident payees without PAN.
2. Rejection of the TDS rate (25%) applied by the AO as per Section 115A for entities in DTAA countries.
3. Reliance on the ITAT Pune decision in Serum Institute case over the Bangalore ITAT decision in Bosch Ltd case.
4. Verification of tax residency certificates and entitlement to DTAA benefits.

Detailed Analysis:

1. Applicability of Section 115A of the Income-tax Act on payments made to non-resident payees without PAN:
The AO observed that the assessee had deducted income-tax at source at 20% on foreign remittances to non-residents without PAN, whereas Section 206AA mandates a 25% rate in such cases. The AO issued a demand for the differential tax rate and interest under Sections 201(1) and 201(1A) of the Income-tax Act, 1961.

2. Rejection of the TDS rate (25%) applied by the AO as per Section 115A for entities in DTAA countries:
The CIT(A) directed the AO to verify whether the non-resident payees were entitled to DTAA benefits and whether they were tax residents of the respective countries. The assessee contended that the maximum rate of taxation should be 20% under DTAA provisions, which supersede the 25% rate specified under Section 115A due to Section 90 of the Act. The CIT(A) held that the AO should verify the tax residency certificates and apply the lower DTAA rate if applicable.

3. Reliance on the ITAT Pune decision in Serum Institute case over the Bangalore ITAT decision in Bosch Ltd case:
The CIT(A) relied on the ITAT Pune decision in the Serum Institute case, which supported the assessee's contention that DTAA provisions should apply if they are more beneficial than domestic law. This was in contrast to the Bangalore ITAT decision in Bosch Ltd, which was not followed. The tribunal affirmed that the provisions of DTAA override Section 206AA as per Section 90(2) of the Act.

4. Verification of tax residency certificates and entitlement to DTAA benefits:
The CIT(A) observed that the assessee had not provided tax residency certificates during the assessment proceedings. However, some certificates were submitted during the appellate proceedings. The CIT(A) directed the AO to verify these certificates and apply the DTAA rate if the non-residents were entitled to such benefits. The tribunal upheld this direction, emphasizing that the lower DTAA rate should apply if the non-residents held valid tax residency certificates.

Conclusion:
The tribunal dismissed the Revenue's appeal, affirming the CIT(A)'s order to verify the tax residency certificates and apply the DTAA rate if applicable. The tribunal reiterated that DTAA provisions override Section 206AA, and the assessee cannot be held in default under Sections 201(1) and 201(1A) if the lower DTAA rate is applicable. The appeal was dismissed, and the CIT(A)'s directions were sustained.