2019 (9) TMI 261 - AT - Income Tax

Tribunal Upholds DTAA Rate Over Section 206AA: 10% Prevails for Non-Resident Payments

The Asst. Commissioner of Income Tax (International Taxation) - Circle I, Pune. Versus Koso India Pvt. Ltd.

The Asst. Commissioner of Income Tax (International Taxation) - Circle I, Pune. Versus Koso India Pvt. Ltd. - TMI Issues Involved:1. Applicability of Section 206AA to non-residents in light of DTAA provisions.2. Interpretation of Section 90(2) of the Income-tax Act, 1961, vis-à-vis Section 206AA.3. Determination of tax rate on payments made to non-resident entities.Issue-wise Detailed Analysis:1. Applicability of Section 206AA to Non-Residents in Light of DTAA Provisions:The primary issue is whether Section 206AA of the Income-tax Act, 1961, which mandates a higher rate of tax deduction at source (TDS) in the absence of a Permanent Account Number (PAN), is applicable to non-residents, especially when a Double Taxation Avoidance Agreement (DTAA) provides for a lower tax rate. The CIT(A) concluded that Section 206AA does not override the provisions of Section 90(2) of the Act, which allows the beneficial provisions of the DTAA to prevail. This was supported by several judgments, including those from the Pune Bench of the Tribunal in the case of Serum Institute of India Ltd., and the Special Bench of ITAT Hyderabad in Nagarjuna Fertilizers, which held that DTAA provisions override Section 206AA.2. Interpretation of Section 90(2) of the Income-tax Act, 1961, vis-à-vis Section 206AA:Section 90(2) of the Act states that the provisions of the DTAA will override the domestic provisions if they are more beneficial to the assessee. The CIT(A) and the Tribunal emphasized that the beneficial provisions of the DTAA should prevail over Section 206AA. The Tribunal cited the Supreme Court's decision in Union of India v. Azadi Bachao Andolan, which upheld that DTAA provisions prevail over the general provisions of the Act to the extent they are beneficial to the assessee. The Tribunal also noted that Section 206AA is a procedural provision and not a charging section, and thus, it cannot override the beneficial provisions of the DTAA.3. Determination of Tax Rate on Payments Made to Non-Resident Entities:The assessee had deducted tax at 10% on payments made to KEC Japan Company Ltd. as per the DTAA between India and Japan. The Assessing Officer argued that tax should have been deducted at 20% as per Section 206AA due to the absence of a PAN. However, the Tribunal upheld the CIT(A)'s decision that the DTAA rate of 10% should apply, as it is more beneficial to the assessee. The Tribunal reiterated that Section 206AA cannot override the beneficial provisions of the DTAA, and thus, the tax demand based on a 20% rate was deleted.Conclusion:The Tribunal dismissed the Revenue's appeal, affirming that the provisions of the DTAA, being more beneficial to the assessee, override Section 206AA. Consequently, the tax rate of 10% as per the DTAA between India and Japan was upheld, and the higher rate of 20% mandated by Section 206AA was not applicable. The Tribunal's decision was consistent with previous judgments, reinforcing the precedence of DTAA provisions over domestic tax laws when beneficial to the assessee. The appeal of the Revenue was dismissed, and the order pronounced on September 4, 2019, upheld the CIT(A)'s direction to tax the receipts at 10% as per the DTAA.