2017 (1) TMI 669 - AT - Income Tax

Appeal granted, CIT decision overturned due to Double Taxation Avoidance Agreement, Section 115A prevails.

Quick Flight Limited Versus ITO (International Taxation), Baroda

The Tribunal allowed the appeal, overturning the CIT(A)'s decision and dismissing the demand for short deduction of Rs. 30,250 and consequential interest ... Deduction of withholding tax u/s 195 - non-resident not having PAN - lower rate on payment made to non-resident for quarter 1st of Asst. Year 2001-12 - CIT(A) confirming the action of AO for applying TDS deduction @ 20% as per provisions of section 206A as against TDS deducted by assessee @ 11.33% covered u/s 115A(10(b) - Held that:- Respectfully following the decision of Co-ordinate Bench in the case of Alembic Ltd. vs. ITO (2017 (1) TMI 635 - ITAT AHMEDABAD) and we find that in the case of assessee also payment was made towards fees for technical services to non-resident M/s Honeywell, USA not having PAN through banking channel as approved by RBI and the payment is well covered under the provisions of section 115A(1)(b) of the Act and therefore, special rate of TDS i.e. 11.33% was applicable and was rightly deducted and deposited by the assessee and the provisions of section 206AA of the Act cannot be made applicable to this payment. We, therefore, set aside the order of ld. CIT(A), delete the claim towards short deduction and allow ground no.1 of assessee. Levying of interest u/s 201(1A) of the Act is consequential in nature. Issues Involved:1. Deduction of withholding tax under Section 195 on payments to non-residents.2. Levy of interest under Section 201(1A) for short deduction of tax.Issue-wise Detailed Analysis:1. Deduction of withholding tax under Section 195 on payments to non-residents:The primary issue revolves around the appropriate rate of tax deduction at source (TDS) on payments made to a non-resident entity, M/s Honeywell, USA, for technical services. The appellant deducted TDS at 11.33% as per Section 115A of the Income Tax Act, 1961, which includes surcharge and cess. However, the Assessing Officer (AO) contended that in the absence of a Permanent Account Number (PAN) for the non-resident, the provisions of Section 206AA mandated a higher TDS rate of 20%. Consequently, the AO raised a demand for short deduction of Rs. 30,250.The Commissioner of Income Tax (Appeals) [CIT(A)] upheld the AO's decision, stating that Section 206AA, which prescribes a higher TDS rate in the absence of PAN, overrides the specific rates mentioned in Section 115A unless the agreement falls under the industrial policy, which the appellant failed to substantiate.Upon appeal to the Tribunal, the appellant cited a precedent from the case of Alembic Ltd. vs. ITO, where it was held that the provisions of Section 206AA do not override the beneficial provisions of Section 115A or the Double Taxation Avoidance Agreement (DTAA) under Section 90(2). The Tribunal agreed with this precedent, noting that Section 206AA is procedural and should not override the beneficial rates provided under Section 115A or DTAA.The Tribunal concluded that the payment to Honeywell was appropriately covered under Section 115A(1)(b) and the special rate of 11.33% was applicable. Therefore, the provisions of Section 206AA could not be invoked, and the demand for short deduction was deleted.2. Levy of interest under Section 201(1A) for short deduction of tax:The second issue pertains to the levy of interest amounting to Rs. 5,750 under Section 201(1A) due to the alleged short deduction of tax. Given the Tribunal's decision to delete the demand for short deduction, the interest levy under Section 201(1A) was deemed consequential and thus not applicable.Conclusion:The Tribunal allowed the appeal, setting aside the CIT(A)'s order and deleting the demand for short deduction of Rs. 30,250 and the consequential interest of Rs. 5,750. The Tribunal affirmed that the beneficial provisions of Section 115A and the DTAA prevail over the procedural requirements of Section 206AA, ensuring that the appellant's deduction at the rate of 11.33% was correct and lawful.