2025 (6) TMI 1645 - HC - Income Tax

DTAA rates override domestic TDS provisions when beneficial to assessee under section 90(2)

The Gujarat HC ruled in favor of the assessee regarding TDS deduction rates under section 206AA. The assessee deducted TDS on payments to non-residents ... Short deduction of TDS - raising demand by invoking provisions of section 206AA - CIT (Appeals) held that the assessee is not liable to deduct the tax at a higher rate in view of the provisions of section 90(2) - HELD THAT:- As in case of Wipro Ltd. [2023 (1) TMI 173 - KARNATAKA HIGH COURT] has also followed the decision in case of Danisco India (P) Ltd [2018 (2) TMI 1289 - DELHI HIGH COURT] and held that that as per DTAA, maximum deduction shall not exceed 10% which the assessee has deducted and any other interpretation to permit the taxing authority to raise a demand beyond 10% would be incongruous. Assessee has deducted the tax at source on payment made to non residents on account of royalty and/or fees for technical services at the rates prescribed in respective DTAAs between India and respective countries of non residents and such rate of tax being lower than rate of 20% as provided u/s 206AA CIT (Appeals) and the Tribunal have rightly arrived at concurrent findings to the effect that as per section 90(2) of the Act, the provisions of DTAA would override the provisions of the Domestic Act where the provisions of the DTAA are more beneficial to the assessee. Tribunal therefore, has rightly affirmed the conclusion arrived at by CIT(Appeals) in deleting the tax demand relatable to difference between 20% and the actual tax rate on which tax was deducted by the respondent assessee in terms of the relevant DTAAS. Questions of law are answered in favour of the assessee The core legal questions considered in this judgment revolve around the interplay between Section 206AA and Section 90(2) of the Income Tax Act, 1961, particularly in the context of tax deduction at source (TDS) on payments made to non-residents. The issues are:i) Whether Section 206AA, which begins with a non obstante clause and mandates higher TDS rates in absence of PAN, overrides the provisions of Section 90(2) that give precedence to Double Taxation Avoidance Agreements (DTAAs) when more beneficial to the assessee;ii) Whether the Tribunal erred in disregarding legislative intent and official explanations (Finance Bill memorandum and CBDT press release) that Section 206AA applies to non-residents;iii) Whether Section 206AA can be used to impose an obligation on non-residents to obtain PAN and thereby justify TDS at 20% in absence of PAN, despite beneficial DTAA rates.Issue-wise Detailed Analysis:1. Whether Section 206AA overrides Section 90(2) of the Income Tax Act:The legal framework involves Section 206AA, inserted as a procedural provision mandating higher TDS rates (20%) where PAN is not furnished, and Section 90(2), which provides that provisions of DTAAs prevail over domestic law if more beneficial to the assessee. The dispute arises because Section 206AA contains a non obstante clause, typically indicating overriding effect.The Court examined authoritative precedents, notably the Supreme Court's decision in Union of India v. Azadi Bachao Andolan, which firmly establishes that DTAA provisions override domestic tax law to the extent they are beneficial. Further, the Court relied on rulings in CIT v. Eli Lilly & Co. and GE India Technology Center Pvt. Ltd. v. CIT, which clarify that TDS provisions (including Section 195) are procedural and apply only to sums chargeable to tax under the Act or DTAA.The Court reasoned that Section 206AA is a procedural provision dealing with tax collection and cannot override the charging provisions (Sections 4 and 5) or the overriding effect of Section 90(2). The charging provisions and DTAA principles govern the tax liability itself, while Section 206AA regulates the manner of collection. Therefore, Section 90(2) maintains primacy, and where DTAA rates are more beneficial, they prevail over the higher TDS rate mandated by Section 206AA.The Tribunal's interpretation that Section 206AA does not override Section 90(2) was upheld as consistent with statutory scheme and judicial precedent. The non obstante clause in Section 206AA does not extend to overriding the overriding effect of Section 90(2) on charging provisions.2. Consideration of legislative intent and official pronouncements regarding applicability of Section 206AA to non-residents:The appellant Revenue contended that the Finance (No. 2) Bill, 2009 memorandum and CBDT Press Release explicitly state that Section 206AA applies to non-residents and mandates higher TDS rates in absence of PAN. The Court acknowledged these materials but held that legislative intent cannot override the clear statutory hierarchy established by Section 90(2) and judicial interpretation.The Court observed that these explanatory notes and press releases cannot alter the fundamental principle that DTAA provisions prevail over domestic law when more beneficial. The procedural provisions in Section 206AA cannot impose a higher tax collection burden inconsistent with the beneficial rates under DTAA.3. Whether Section 206AA imposes an obligation on non-residents to obtain PAN to avoid higher TDS:The Revenue argued that non-residents must obtain PAN to avoid TDS at 20%. The Court rejected this, reasoning that since the tax liability itself is governed by DTAA and charging provisions, the procedural requirement of PAN cannot be used to override beneficial treaty rates. The obligation to deduct tax at source at the higher rate cannot be imposed if the DTAA prescribes a lower rate.The Court relied on the principle that TDS provisions (including Section 195 and 206AA) apply only to sums chargeable to tax under the Act or DTAA. Thus, if the DTAA provides a lower rate, the TDS must be deducted accordingly, regardless of PAN furnishing status. This interpretation aligns with the objective of avoiding double taxation and respecting international treaties.Application of Law to Facts and Treatment of Competing Arguments:The facts revealed that the assessee deducted TDS on payments to non-residents (royalty and fees for technical services) at rates prescribed by relevant DTAAs, which were lower than the 20% rate mandated by Section 206AA in absence of PAN. The Revenue sought to impose TDS at 20% under Section 206AA, ignoring the DTAA rates.The Court found no fault with the assessee's approach, as the DTAA rates were more beneficial and Section 90(2) mandates that such treaty provisions prevail over domestic law, including Section 206AA. The Court treated the Revenue's argument as inconsistent with statutory scheme and judicial precedents.Precedents from various High Courts (Delhi, Bombay, Karnataka) and the ITAT were cited, uniformly supporting the proposition that Section 206AA cannot override Section 90(2) and DTAAs. The Court also noted that the Supreme Court dismissed special leave petitions challenging these decisions, reinforcing their binding nature.Significant Holdings:'Section 206AA of the Act does not override the provisions of section 90(2) of the Act and that in the impugned cases of payments made to non-residents, assessee correctly applied the rate of tax prescribed under the DTAAs and not as per section 206AA of the Act because the provisions of the DTAAs was more beneficial.''Section 206AA is not a charging section but is a part of procedural provisions dealing with collection and deduction of tax at source and cannot be understood to override the charging sections 4 and 5 of the Act or the overriding effect of section 90(2).''Where section 90(2) of the Act provides that DTAAs override domestic law in cases where the provisions of DTAAs are more beneficial to the assessee, the provisions of section 206AA cannot be invoked by the Assessing Officer to insist on the tax deduction @ 20%, having regard to the overriding nature of the provisions of section 90(2) of the Act.''The provisions of tax withholding under section 195 of the Act apply only to sums which are otherwise chargeable to tax under the Act or DTAA.'The Court conclusively held that the Revenue's appeals fail, affirming the deletion of tax demands raised on the difference between 20% and the lower DTAA rates at which TDS was actually deducted. The questions of law were answered in favor of the assessee and against the Revenue.