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2018 (2) TMI 1289 - HC - Income TaxPayments made to non-resident entities - TDS liability @20% - payment to non-residents not having PAN - Provisions of section 206AA applicability - Levy of 20% in the case of outward remittances in the hands of the payer the deductor - applicability to assessee that are non-residents of India - Held that - Having regard to the position of law explained in Azadi Bachao Andolan (2003 (10) TMI 5 - SUPREME Court) and later followed in numerous decisions that a 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.
Issues Involved:
1. Constitutionality and applicability of Section 206AA of the Income Tax Act, 1961. 2. Conflict between Section 206AA and the Indo-Singapore Double Taxation Avoidance Agreement (DTAA). 3. Impact of legislative amendments and judicial interpretations on Section 206AA. Issue-Wise Detailed Analysis: 1. Constitutionality and Applicability of Section 206AA: The petitioner challenged the constitutionality of Section 206AA of the Income Tax Act, 1961, which mandates a 20% tax deduction at source for non-residents who do not furnish a Permanent Account Number (PAN). The petitioner argued that this provision is unsustainable given the facts of the case, particularly when payments are made to non-residents like M/s DuPont Singapore, which is not a tax assessee in India. The petitioner contended that Section 206AA violates Article 265 of the Constitution of India, which mandates that no tax shall be levied or collected except by the authority of law. 2. Conflict between Section 206AA and the Indo-Singapore DTAA: The petitioner emphasized that the tax relationship between India and Singapore is governed by the Indo-Singapore DTAA, which caps the tax rate at 10% for royalties and fees for technical services (Article 12 of the DTAA). The petitioner argued that Section 206AA, by imposing a 20% tax rate in the absence of a PAN, effectively overrides the DTAA provisions, which are intended to provide relief from double taxation and facilitate international business. The court noted that the services rendered by DuPont fall under "fees for technical services" as defined in the DTAA. Citing the Supreme Court's decision in Azadi Bachao Andolan vs. Union of India, the court reiterated that the provisions of a DTAA prevail over domestic law when they are more beneficial to the assessee. Therefore, the petitioner argued that the imposition of a 20% tax rate under Section 206AA is contrary to the DTAA, which mandates a maximum tax rate of 10%. 3. Impact of Legislative Amendments and Judicial Interpretations on Section 206AA: The petitioner referred to the recommendations of the Justice Easwar Committee's report of 2016, which suggested that the higher tax rate under Section 206AA should not apply to non-residents in view of the specific provisions of Section 115A and the respective DTAAs. The committee recommended that non-residents should be allowed to furnish their tax identification number from their country of residence instead of a PAN. The court acknowledged that the Central Government acted upon these recommendations, leading to an amendment through the Finance Act of 2016. The newly added Sub-section 206AA(7) exempts non-residents from the provisions of Section 206AA if they furnish a specific identification number or code. Rule 37BC of the Income Tax Rules further supports this by eliminating the mandatory requirement for overseas companies to possess an Indian PAN. The court also referred to the Income Tax Appellate Tribunal's (ITAT) decision in Dy. Director of Income Tax vs. Serum Institute of India Ltd., which held that the provisions of Section 90(2) of the Income Tax Act, which give primacy to DTAAs over domestic law, override Section 206AA. The ITAT concluded that the tax rate prescribed under the DTAA should prevail over the higher rate mandated by Section 206AA. Conclusion: The court concluded that the issue raised by the petitioner has been largely addressed by the legislative amendment to Section 206AA and the judicial interpretation provided by the ITAT. The amendment mitigates the rigors of the pre-existing law, aligning it with the DTAA provisions that cap the tax rate at 10%. The court held that Section 206AA, as it existed before the amendment, should be read down to mean that the tax rate for non-residents from countries with which India has a DTAA should be as per the treaty provisions. Judgment: The writ petition was partly allowed, with the court affirming that the DTAA provisions should prevail over the domestic law in cases where they are more beneficial to the assessee. The court emphasized that Section 206AA must be interpreted in a manner that does not conflict with the DTAA, thereby ensuring that the tax rate does not exceed the 10% cap stipulated in the treaty.
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