2021 (3) TMI 1001 - AT - Income Tax

Tribunal rules DTAA prevails over Income Tax Act in TDS rate dispute

Jyoti Limited Versus DCIT (International Taxation), Vadodara

The Tribunal held that Section 206AA of the Income Tax Act does not override the Double Taxation Avoidance Agreement (DTAA) provisions. As per the DTAA ... TDS @ 20% on the foreign remittance u/s 206AA - absence of furnishing of Permanent Account Number (PAN) by the recipient non-residents, having regard to the Section 206AA - provisions of DTAAs - HELD THAT:- Entire aspect of the matter the provisions of Art 12 of DTAA entered into by and between two Sovereign States - India and Czech Republic, the Circular No. 333 dated 02.04.1982 issued by CBDT, the specific recommendation made by the Justice Easwar’s Committee, the ratio laid down in the judgment of Azadi Bachao Andolan [2003 (10) TMI 5 - SUPREME COURT], in our considered opinion the provision of Section 206AA of the Act cannot be invoked by the Revenue to insist the tax deduction @ 20% having regard to the overriding nature of the provision of Section 92 of the Act in the present facts and circumstances of the case. In fact, Section 206AA of the Act does not override the provision of Section 92 of the Act and in that view of the matter in the case in hand the TDS has been deducted to the non-resident rightly applying the tax rate prescribed under the DTAAs and not as per Section 206AA of the Act, having regard to the more beneficial provision in the rate of tax made in the DTAA. Hence, we find no justification in making the assessee liable to pay TDS @ 20% on the foreign remittance as held by the Revenue by the order impugned. Such decision, in our considered opinion, is of no merit and thus, rejected. The appeal preferred by the assessee is, therefore, allowed. Issues Involved:1. Applicability of Section 206AA of the Income Tax Act, 1961.2. Relevance and precedence of Double Taxation Avoidance Agreement (DTAA) between India and Czech Republic.3. Validity of tax deduction at source (TDS) rate applied by the assessee.Issue-wise Detailed Analysis:1. Applicability of Section 206AA of the Income Tax Act, 1961:The core issue revolves around whether the provisions of Section 206AA, which mandates a higher TDS rate of 20% in the absence of a Permanent Account Number (PAN) by the recipient, override the provisions of the DTAA. Section 206AA stipulates that any person entitled to receive any sum on which tax is deductible must furnish their PAN, failing which tax shall be deducted at the higher of the specified rates or 20%. However, the Tribunal noted that Section 206AA does not override Section 90(2) of the Act, which allows the provisions of a DTAA to prevail if they are more beneficial to the assessee.2. Relevance and precedence of Double Taxation Avoidance Agreement (DTAA) between India and Czech Republic:The assessee argued that the TDS was deducted at 10% as per Article 12 of the DTAA between India and the Czech Republic, which prescribes a beneficial rate of tax deduction. The Tribunal acknowledged that the DTAA provisions, being more beneficial to the assessee, should prevail over the general provisions of the Income Tax Act, including Section 206AA. The Tribunal referred to Circular No. 333 issued by the CBDT, which clarifies that the specific provisions made in DTAAs would prevail over the general provisions of the Income Tax Act.3. Validity of tax deduction at source (TDS) rate applied by the assessee:The Tribunal examined the assessee's compliance with the DTAA and found that the TDS rate of 10% was in accordance with Article 12 of the DTAA. The Tribunal also considered the recommendations of the Justice Easwar Committee, which suggested that the higher TDS rate under Section 206AA should not apply if the non-resident furnishes their tax identification number from their country of residence. The Tribunal further relied on the judgment of the Hon'ble Supreme Court in the case of Union of India & Anr. vs. Azadi Bachao Andolan & Anr., which upheld that the provisions of the DTAA would prevail over the general provisions of the Act if they are more beneficial to the assessee.Conclusion:The Tribunal concluded that the provisions of Section 206AA cannot be invoked by the Revenue to insist on a TDS rate of 20% when the DTAA prescribes a lower rate of 10%. The Tribunal held that the assessee had rightly applied the tax rate prescribed under the DTAA, and there was no justification for making the assessee liable to pay TDS at 20%. Consequently, the appeal filed by the assessee was allowed, and the decision of the Revenue was rejected.Order:The appeal filed by the assessee is allowed. This Order was pronounced in Open Court on 22/03/2021.