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Special bench of ITAT dealt with the issue “whether section 206AA of the Income-tax Act, 1961 (‘the Act’) overrides the Double Taxation Avoidance Agreement (‘tax treaty’)” and held that section 206AA does not override the provisions of the tax treaty

Facts of the case

  • Nagarjuna Fertilizers and Chemicals Limited (‘the Assessee’) is a public limited company incorporated in India and during the relevant assessment year, the Assessee had made payments in the nature of fees for technical services to certain non-residents.

  • In case of non-residents, resident of countries with whom India did not have a tax treaty, the Assessee withheld taxes at higher rate of twenty percent as per the provisions of section 206AA of the Act. In case of other non-residents, resident of countries with which India has a tax treaty, the Assessee withheld taxes at lower rates as prescribed in the relevant tax treaty, even for non-resident who did not have/ furnish a permanent account number (‘PAN’).

  • While processing the TDS return filed by the Assessee under consideration by Automatic System, the Assessee received an intimation and was held to be liable to withhold taxes at higher rate of twenty percent under section 206AA of the Act in cases where PAN was not furnished.

  • Against the said intimation, the Assessee filed an appeal before the CIT(Appeals). However, the CIT(Appeals) dismissed the case contending that section 206AA of the Act overrides other provisions of the Act and accordingly, the Assessee was liable to withhold taxes at higher rate of twenty percent in case where PAN is not furnished.

  • Aggrieved by the order of the CIT(Appeals), the Assessee filed an appeal before the Tribunal. Keeping in view, the conflicting judgments in similar cases a reference was made to the Special bench for adjudicating on this matter.

Contention of Assessee  

  • The Assessee contented that the limited purpose of inserting provisions of section 206AA of the Act was to strengthen the PAN mechanism by encouraging the use of PAN to enable the tax department give credit for the corresponding TDS. Further, the effect of an overriding provision is to be considered keeping in view the intent or objective of the relevant provisions.

  • Section 4, 5 and 9 of the Act provides for the chargeability of the income to tax in India. If income of a non-resident is not chargeable to tax in India then the said non-residents are not required to obtain PAN and accordingly, they cannot furnish PAN merely to comply with the provisions of section 206AA of the Act.

  • As per section 90(2) of the Act, provisions of the Act are applicable to the extent they are more beneficial to the Assessee. Since section 206AA of the Act are machinery provisions and the tax treaty being a sovereign policy, section 206AA of the Act cannot override the beneficial provision of the tax treaty.

Contention of the Revenue

  • The beneficial provisions of the tax treaty are applied while determining the tax liability in a particular case and does not provide for the rate at which taxes are required to be withheld. The determination of tax liability is a function of the assessment, which is within the domain of assessing officer and withholding of taxes has nothing to do with the eventual tax liability.

  • Further, section 206AA of the Act overrides other provisions of the Act and in the absence of a lower withholding certificate under section 195(2) or section 197 of the Act, the Assessee is liable to withhold taxes at higher rate prescribed in section 206AA of the Act where income is chargeable to tax in India and no PAN is furnished by the payee.

 

Ruling of the Tribunal

  • As provided in Section 195(1) of the Act, any person responsible for paying to a non-resident is required to withhold taxes thereon at the rates in force. The meaning of the term “rates in force” used in Section 195(1), is given in section 2(37A) of the Act, which provides for determining tax rates based on the beneficial provisions of the DTAA.

  • Section 90 of the Act enable the government to formulate its policies through the tax treaties entered into by it and such tax treaties determine the fiscal domicile in one state or the other and this determination in the tax treaty prevails over the other provisions of the Act. Further, the provisions of the tax treaty must receive a good faith interpretation.

  • It cannot be stated as a broad proposition that the withholding provisions, which are in the nature of machinery provisions to enable collection and recovery of tax, are independent of charging provisions, which determine the accessibility in the hands of the payee. Charging provisions control and override the machinery provisions dealing with the provisions of withholding tax.

  • Chapter X-A containing the provision relating to GAAR is specifically given overriding effect in section 90 of the Act by virtue of newly inserted subsection (2A). No such exception is craved out in case of section 206AA of the Act.

  • Accordingly, the Tribunal concluded that the provisions of section 206AA of the Act will not have an overriding effect on the provisions of the tax treaty and allowed the appeal of the Assessee.