2017 (1) TMI 635 - AT - Income Tax

Tribunal rules Section 206AA inapplicable for non-residents under Section 115A(1)(b) or DTAA

Alembic Ltd., Alembic Pharmaceuticals Ltd., Paushak Limited Versus ITO – International Baroda.

The Tribunal ruled in favor of the assessee, holding that Section 206AA does not apply to non-residents covered under Section 115A(1)(b) or DTAA. The ... Payments made to non-residents towards various services - tax deducted at source at the rates provided u/s 115A or as per the rates provided u/s 90(2) r.w.s. Double Taxation Avoidance Agreement (DTAA) with respective countries of the non-residents - payments have been made to non-residents persons having no permanent establishment in India - assessee contended that tax has been rightly deducted at source at the rates provided u/s 115A of the Act or as per the rates with reference to DTAA r.w.s. 90C(2) of the Act, whereas Revenue created demand against the assessee by observing that as the deductees do not hold PAN provisions of section 206AA of the Act comes into effect as per which tax was required to be deducted @ 20% Held that:- In case where payments have been made to the deductees on the strength of the beneficial provisions of section 115A(1)(b) of the Act or as per DTAA rates r.w.s. 90(2) of the Act, then provisions of section 206AA cannot be invoked by the Assessing Officer insisting to deduct tax @ 20% for non-availability of PAN. Portions of demand sustained for want of verification of agreement relating to industrial policy as well as in case of some payment for verifying the treaty rates - Held that:- We observe that during the course of hearing ld. AR has affirmed that such type of payments by assessee are being regularly made to the deductees which have been dealt by ld. CIT(A) in appeal before the Tribunal. Ld. AR has also submitted that all the payments have been made through banking channels and automatic route of RBI with due certification of the nature of payment, details of payees, rates of taxes deducted at source. We are, therefore, of the view that as assessee is making such payments consistently to the payees for various types of services relating to produce registration, marketing and professional royalty and other technical services, and looking to the fact that there is no dispute to the residential status of payees, assessees have rightly deducted TDS as per rates provided in section 115A(1)(b) of the Act as well as per rates provided in DTAA with respect to countries to which the payees belong to. Issues Involved:1. Applicability of Section 206AA on payments made to non-residents covered under Section 115A(1)(b) or DTAA.2. Verification of agreements relating to industrial policy and treaty rates.Issue-Wise Detailed Analysis:1. Applicability of Section 206AA on Payments Made to Non-Residents Covered Under Section 115A(1)(b) or DTAA:The primary issue is whether Section 206AA of the Income Tax Act, which mandates a higher TDS rate of 20% in the absence of a PAN, applies to payments made to non-residents covered under Section 115A(1)(b) or DTAA rates.The Tribunal referenced several provisions, including Section 115A, Section 206AA, and Section 90(2), to determine the applicability of TDS rates. Section 115A(b) pertains to tax on royalties and fees for technical services to non-residents, while Section 90(2) allows for the application of DTAA rates if they are more beneficial to the assessee.The Tribunal observed that Section 206AA, a procedural provision, cannot override the beneficial provisions of DTAA or the specific rates prescribed under Section 115A. This interpretation aligns with the decisions of the Co-ordinate Benches in Pune and Ahmedabad, which held that the provisions of DTAA override domestic law where they are more beneficial to the assessee. Specifically, the Pune Bench in the case of DCIT vs. Serum Institute of India Ltd. concluded that Section 206AA does not override Section 90(2), and the CIT(A) correctly applied the DTAA rates instead of the 20% rate under Section 206AA.Similarly, the Ahmedabad Bench in the case of Uniphos Envirotronic Private Ltd. vs. DCIT confirmed that the beneficial DTAA rates apply even if the non-resident does not have a PAN, thus quashing the short deduction of tax at source demand.The Tribunal concluded that in cases where payments are made under the beneficial provisions of Section 115A(1)(b) or DTAA, the provisions of Section 206AA cannot be invoked to insist on a 20% TDS rate due to the non-availability of PAN.2. Verification of Agreements Relating to Industrial Policy and Treaty Rates:The second issue pertains to the CIT(A) Gandhinagar's decision to sustain some portions of the demand for want of verification of agreements relating to industrial policy and treaty rates.The Tribunal noted that the CIT(A) Gandhinagar did not object to the TDS rates applied by the assessee but required verification of the agreements and treaty rates. The Tribunal observed that the assessee consistently made such payments through banking channels and the RBI's automatic route, with due certification of the nature of payment, details of payees, and TDS rates.Given the regularity and consistency of these payments, the Tribunal concluded that the assessee had rightly deducted TDS as per Section 115A(1)(b) and DTAA rates, negating the need for further verification. Consequently, the Tribunal allowed the assessee's appeal on this ground.Conclusion:The Tribunal ruled in favor of the assessee on both issues, concluding that Section 206AA does not apply to non-residents covered under Section 115A(1)(b) or DTAA, and that the assessee had correctly deducted TDS at the applicable rates without the need for further verification. All seven appeals were allowed, and the demand raised by the Assessing Officer for the differential amount was deleted. The Tribunal's decision ensures that the beneficial provisions of DTAA and specific rates under Section 115A take precedence over the procedural requirements of Section 206AA.