2015 (9) TMI 792 - AT - Income Tax

Tribunal favors DTAA benefits over high TDS rate, upholds deletion of interest. Assessing Officer's jurisdiction exceeded.

The Tribunal affirmed that the benefit of Double Taxation Avoidance Agreement (DTAA) should prevail over the higher Tax Deducted at Source (TDS) rate ... Higher rate of TDS @20% for non-furnishing of PAN - whether cannot be at a rate prescribed u/s 206AA which is higher than the rate at which the relevant income is chargeable to tax under Act or DTAA - CIT(A) held that the section 206AA(1) does not apply to those cases whose alight tax liability u/s 115AA and under DTAA - Held that:- In the case in hand, the assessee made payment to the non-resident on account of royalty in some cases and on account of fee for technical services in some other cases. The assesee deducted TDS at the rate of 10% in some cases and at the rate of 10.56% in some other cases as per the provisions of Sec.115A(1)(b) of the IT Act. There is no dispute that the benefit of DTAA is available to the recipients of the payments in question. Therefore, the tax liability of the recipients could not be more than the rate prescribed under the DTAA or the income tax Act, whichever is lower. In the case in hand, the AO while issuing the intimation u/s 200A has computed the tax liability at the rate of 20%, as provided/s 206AA of the Act. Since the benefit of DTAA is available to recipient. Therefore, in any case, the scope of deduction of tax at source cannot be more than the tax liability under DTAA. Following the decisions of M/s Bharti Airtel Ltd [2014 (12) TMI 642 - KARNATAKA HIGH COURT] we do not find any error or illegality in the order of the CIT(A) that there is no scope for deduction of tax at the rate of 20% as provided under the provisions of Section 206AA of the IT Act when the benefit of DTAA is available. In the case in hand, it is not a simple case of deduction of tax at source by applying the rate only as per the provisions of Act, when the benefit of DTAA is available to the recipient of the amount in question. Therefore, the question of applying the rate of 20% as provided u/s 206AA of the IT Act is a issue which requires a long drawn reasoning and finding. Hence, we are of the considered opinion, that applying the rate of 20% without considering the provisions of DTAA and consequent adjustment while framing the intimation u/s 200A is beyond the scope of the said provision. Thus, the AO has travelled beyond the jurisdiction of making the adjustment as per the provisions of Section 200A of the IT Act, 1961. - Decided in favour of the assessee Issues Involved:1. Applicability of Section 206AA to cases with tax liability under Section 115AA and DTAA.2. Rate of tax deduction at source under Section 206AA versus rates under the Act or DTAA.3. Deletion of interest under Section 200A(1)(b) for short deduction of tax.4. Jurisdiction of AO under Section 200A for making adjustments and raising demands.Issue-wise Detailed Analysis:1. Applicability of Section 206AA to Cases with Tax Liability under Section 115AA and DTAA:The revenue contended that Section 206AA, which mandates a higher TDS rate of 20% in the absence of PAN, applies irrespective of the tax liability under Section 115AA or DTAA due to its non-obstante clause. However, the CIT(A) held that the benefit of DTAA should prevail, limiting the TDS to the rate prescribed under DTAA. The Tribunal affirmed this view, referencing the jurisdictional High Court's decision that DTAA provisions, being more beneficial, override Section 206AA. Thus, the non-resident recipients eligible for DTAA benefits should not face a higher TDS rate under Section 206AA.2. Rate of Tax Deduction at Source under Section 206AA versus Rates under the Act or DTAA:The Tribunal considered the case of payments made to non-residents without PAN. The AO applied a 20% TDS rate as per Section 206AA, while the assessee applied the lower DTAA rates. The Tribunal upheld the CIT(A)'s decision, emphasizing that DTAA provisions, being more beneficial, override the domestic law, including Section 206AA. This interpretation aligns with the Supreme Court's stance in the Azadi Bachao Andolan case, which supports the precedence of DTAA over domestic provisions when beneficial to the assessee.3. Deletion of Interest under Section 200A(1)(b) for Short Deduction of Tax:The AO levied interest under Section 200A(1)(b) for short deduction of tax due to the application of lower DTAA rates instead of the 20% rate under Section 206AA. The CIT(A) deleted this interest, and the Tribunal upheld this deletion, reiterating that the correct TDS rate should be as per the DTAA, not the higher rate under Section 206AA, thus negating the basis for the interest levy.4. Jurisdiction of AO under Section 200A for Making Adjustments and Raising Demands:The assessee challenged the AO's jurisdiction under Section 200A for making adjustments and raising demands based on the 20% TDS rate. The Tribunal observed that the AO's adjustment ignored the DTAA provisions applicable to non-residents, making it a debatable issue rather than an arithmetical error or incorrect claim apparent from the statement. Consequently, the Tribunal ruled that the AO exceeded his jurisdiction under Section 200A, which is limited to correcting apparent errors or incorrect claims. Therefore, the AO's adjustment and the resulting demand were beyond the scope of Section 200A.Conclusion:The appeals by the revenue were dismissed, affirming that the benefit of DTAA should prevail over the higher TDS rate under Section 206AA. The Tribunal also upheld the deletion of interest levied under Section 200A(1)(b) and ruled that the AO exceeded his jurisdiction under Section 200A by making adjustments based on the 20% TDS rate without considering the DTAA provisions. The cross objections of the assessee were allowed, reinforcing the applicability of DTAA benefits and limiting the AO's scope under Section 200A.