TaxTMI 
TaxTMI 
2017 (3) TMI 81
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....come in India, including non-residents, who do not furnish their Permanent Account Numbers". 2. The relevant facts of the case giving rise to the question referred to this Special Bench, which incorporates the solitary common issue involved in these appeals of the assessee are as fol lows. The assessee is a Public Limited Company. During both the years under consideration, it made certain payments in the nature of fees for technical services to non-residents. Some of such non-residents were the residents of other countries with which India did not have any Double Taxation Avoidance Agreement (DTAA) and in their cases, tax at the higher rate of 20% was stated to be deducted by the assessee where the payees failed to furnish valid Permanent Account Numbers as per the provisions of sect ion 206AA of the Act . In case of other nonresidents, who were the residents of those countries, with which India did have DTAAs, tax at the lower rate as prescribed in the relevant Articles of the DTAA was deducted by the assessee even in case of payees, who did not furnish val id Permanent Account Numbers. While processing the TDS returns filed by the assessee for both the years under consideratio....
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....3 20 Interest worked out by AO.. .... .... .... .... .... .... ..... .... .Rs.1,17,120/- Demand raised.. .... .... ..... .... .... .... .... .... ... . .... ... ..... ...Rs.13,73,440/-" 3. Against the intimations issued under section 200A of the Act for both the years under consideration, appeals were preferred by the assessee before the ld. CIT(Appeals). During the course of appellate proceedings before the ld. CIT(Appeals), various submissions were made by the assessee in support of its case, which as summarized by the ld. CIT(Appeals) in his impugned order, were as under: - "(a) Being non-resident, he need not obtain PAN number as he is specifically exempt as per Rule 114C. (b) Wherever the non-residents belong to countries with which India has Double Taxation Avoidance Agreement , he should be given beneficial treatment u/s. 90(2). (c)I f lesser tax rate is prescribed in Double Taxation Avoidance Agreement, the TDS should be made at that rate prescribed u/s. 206AA. (d) In cases where the non-resident belong to countries with which India does not have Double Taxation Avoidance Agreement, highest TDS rate as per sect ion 206AA should be applied. ....
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....e was made by the Division Bench to the Hon'ble President to constitute a Special Bench to decide the issue and resolve the controversy. Accordingly, the Hon'ble President has constituted this Special Bench and we have heard the arguments of both the sides on the issue including the arguments of the ld. representatives of the Interveners. 6. Initiating the arguments on behalf of the assessee, Shri C.S. Subrahmanyam submitted that the issue involved in the present context for the consideration of this Special Bench is whether the provision of section 206AA overrides all other provisions of the Act including especially the provision of section 90(2) and are applicable in the case of payments made to non-residents, who are the residents of the countries with which India has entered into DTAAs. He contended that the limited purpose of inserting the provisions of section 206AA in the Statute is to strengthen the PAN mechanism by encouraging the use of PAN to enable the Department to give credit for the corresponding TDS. In this regard, he relied on the relevant extracts of Board Circular No. 5 of 2010 clarifying that the new Section 206AA has been inserted in the Income Tax Act in o....
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....ecision of the Hon'ble Andhra Pradesh High Court in the case of Sanofi Pasteur Holding SA - vs. - Department of Revenue and Others [354 ITR 316], wherein i t was held that the DTAA is a Treaty and the provisions contained therein are expressions of sovereign pol icy of more than one sovereign State. He contended that the DTAA thus is supreme and it being a sovereign pol icy, the machinery provision of section 206AA of the Act cannot be so interpreted to override the Treaty Law. He contended that if such a meaning is assigned to the provision of section 206AA of the Act, the entire treaty network and section 90(2) read with section 195 would become redundant. Mr. C.S. Subrahmanyam also relied on the decision of the Hon'ble Supreme Court in the case of CIT -vs. - Eli Lilly And Co. (India) P. Limited [312 ITR 225], wherein it was held that TDS provisions are in the nature of machinery provisions and the same cannot be read independent of charging provision which determine the assessability of income chargeable under the Income Tax Act. 8. As regards the decision of the Bangalore Bench of ITAT in the case of Bosch Limited (supra), Mr. C.S. Subrahmanyam contended that the overriding ....
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....override the Domestic Law as provided in section 90(2). He contended that section 90(2) makes it manifest that the provisions of Treaty will prevail over the provisions of Income Tax Act to the extent they are more beneficial to the assessee. He contended that TDS provisions including section 206AA are machinery provisions and since the relevant provisions of the Treaty governing the tax rate in case of nonresident are more beneficial , the latter shall apply and prevail being more beneficial and not section 206AA. As regards the decision of Bangalore Bench of ITAT in the case of Bosch Limited (supra), he submitted that the observations made by the Tribunal in paragraphs no. 22 and 23 of its order are actually in favour of the assessee on the issue under consideration. In this regard, he referred to the decision of Bangalore Bench of ITAT rendered subsequently in the case of Infosys BPO Limited (supra) to point out that the observations recorded in the case of Bosch Limited (supra) were relied upon by the Tribunal , besides the decision of the Pune Bench of ITAT in the case of Serum Institute of India Limited (supra) to decide the issue in favour of the assessee. He contended that ....
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....er are contained in section 139A of the Act and there are two obligations cast on the assessee under the said provision- one to obtain the PAN and other to furnish the PAN so obtained. He submitted that as per the provisions of sub-section (8) of section 139A read with Rule 114C, non-resident at the relevant time was not required to obtain PAN. He contended that when there was no obligation to obtain PAN, how there can be requirement to furnish the same as envisaged in section 206AA of the Act. In this regard, he relied on the decision of the Hon'ble Andhra Pradesh High Court in the case of Mullapudi Venkatarayudu -vs. - Union of India reported in 99 ITR 448 to contend that any failure to perform pre-supposes an obligation to perform. He also contended that as per section 90(2), the provisions of DTAA to the extent more beneficial to the assessee shall prevail over the Domestic Law and if legislature wants to make any provision of Domestic Law to override the Treaty, a specific provision is required to be made in the Statute to that effect as made in sub-section (2A) of section 90 to give overriding effect to GAAR provisions. He contended that when the nonresident assessee is not r....
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....ld be applied if the later is more beneficial to the non-resident tax payer concerned. He contended that sect ion 90(2) thus lays down the principle by which the Treaty does not override the provisions of the Income Tax Act but gets overridden by the later. He contended that section 90(2) would kick in only in a situation where a regular provision of the Income Tax Act would be more beneficial than the corresponding provision contained in the Treaty and the reliance placed on the same in support of the assessee's case is clearly misplaced as the same is not relevant in the present context in the absence of any specific provision contained in the relevant Treaty regarding the lower rate of TDS than the one applied by the Assessing Officer. 14. As regards the contention raised on behalf of the assessee that there being no obligation on a non-resident to have PAN as per the provisions of section 139A(8)(d) read with Rule 114C(1)(b), section 206AA casts the impossible obligation of furnishing the PAN of such persons, the ld. CIT (D.R.) contended that sect ion 206AA does not cast any mandatory obligation on such person to obtain PAN. He contended that such person can still choose not....
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....lete domain of the Assessing Officer and the deduction of tax at source has nothing to do with the eventual tax liability in the hands of the payee. In this regard, reliance was placed by him on the decision of the Hon'ble Supreme Court in the case of Transmission Corporation of A.P. Limited -vs. - CIT [239 ITR 587], wherein it was held that the relevant provisions of TDS are for tentative deduction of income-tax subject to regular assessment and by the deduction of income-tax, rights of the parties are not , in any matter, adversely affected. He contended that the role of the assessee as a payer of the sum is limited to deducting tax as per law and if at all anyone is said to be aggrieved by the fact of TDS exceeding the eventualli ability, it is the payee. He contended that the assessee, being the payer, has no locus-standi even for raising this issue. He contended that section 195, no doubt, does talk about determination of sum chargeable to tax but such determination is only a rough estimate for the limited purpose of TDS on that particular sum and it is neither possible nor desirable to try determining the total income of the payee at the stage of deduction of tax at source. ....
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....able under the provisions of the Act" and if it is so, to deduct the tax at the rate applicable as provided in the Domestic Law, if there is no order obtained by him from the concerned Assessing Officer under section 195(2) or certificate obtained by the payee under section 197 for no deduction of tax or deduction of tax at lower rate than prescribed in the Domestic Law. He contended that the assessee in the present case has made payments of sums chargeable to tax to non-residents and since there was failure on the part of the said non-residents to furnish their PANs, he was required to deduct tax at a higher rate of 20% as per the provisions of section 206AA, which are overriding, especially when the mitigating provisions of sections 195(2) and 197 were not availed either by the assessee as a payer or by the recipient as deductee or payee. 19. In the rejoinder, Shri C.S. Subrahmanyam, ld. counsel for the assessee submitted that the interpretation placed by the ld. D.R. on section 90(2) to contend that the Treaty does not override the provision of the Income Tax Act, but gets overridden by the later is contrary to the legal position, which is well settled by the various Courts i....
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....bmissions and also perused the relevant material available on record. We have also deliberated upon the various judicial pronouncements cited by the ld. representatives of both the sides in support of their respective stands on the issue under consideration in the light of the relevant provisions of law. The issue involved in this case for the consideration of Special Bench is relating to the determination of rate at which tax at source is deductible by the assessee from the payments made to non-residents in the nature of fees for technical services where the said non-resident persons are residents of the countries with which India has entered into Double Taxation Avoidance Agreements and they have failed to furnish their Permanent Account Numbers to the assessee. Chapter-XVI I of the Income Tax Act, 1961 contains the provisions relating to collection and recovery of tax and it starts with sect ion 190 which provides that notwithstanding that the regular assessment in respect of any income is to be made in a later assessment year, the tax on such income shall be payable, inter alia, by deduction at source in accordance with the relevant provisions. The relevant provisions dealing w....
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....sident entities are residents and the rates of income tax payable by such non-residents on the amounts in question paid by the assessee in the nature of fees for technical services were specified in the said DTAAs at 10%, 10.56%, 10.30% and 15%. The assessee accordingly deducted tax at source at the said rates from the corresponding amounts paid to the respective non-residents as required by the provisions of section 195 read with sect ion 2(37A). It is thus clear that deduction of tax under sect ion 195 from the payments made to the non-residents in the nature of fees for technical services was made by the assessee at the rate or rates of income tax specified in the relevant Double Taxation Avoidance Agreement, which were adopted as rates in force for the purpose of deduction of tax under section 195 in view of the specific provisions contained in sub-section (37A) of section 2. We, therefore, find no merit in the arguments raised by the ld. CIT(D.R.) that the relevant treaties do not provide for deduction of tax at source at the rate which is lower than the rate applied by the Assessing Officer by invoking the provisions of section 206AA and that there is no question of abrogatio....
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....duct tax at source at higher rate by virtue of section 206AA of the Act as a result of failure of said payees to furnish their PANs. The provisions of the said section read as under:- "206AA. Requirement to furnish Permanent Account Number.-(1) Notwithstanding anything contained in any other provisions of this Act, any person entitled to receive any sum or income or amount, on which tax is deductible under Chapter XVIIB (hereafter referred to as deductee) shall furnish his Permanent Account Number to the person responsible for deducting such tax (hereafter referred to as deductor), failing which tax shall be deducted at the higher of the following rates, namely:- (i ) at the rate specified in the relevant provision of this Act; or (ii ) at the rate or rates in force; or (iii ) at the rate of twenty per cent. (2) No declaration under sub-section (1) or sub-section (1A) or sub-section (1C) of section 197A shall be valid unless the person furnishes his Permanent Account Number in such declaration. (3) In case any declaration becomes invalid under sub-section (2), the deductor shall deduct the tax at source in accordance with the provisions of sub-section (1). (4) ....
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....interest income paid to them as a result of their failure to furnish the Permanent Account Numbers to the payers/deductors. Taking note of this contradiction between the provisions of section 139A and 206AA, Hon'ble Karnataka High Court read down the overriding provisions of section 206AA and made them inapplicable to the persons, who were not even required to obtain the permanent Account Numbers by virtue of section 139A. Although the facts involved in the present case are slightly different, inasmuch as, the non-resident payees in the present case were having taxable income in India, the facts remain to be seen is that they were not obliged to obtain the Permanent Account Numbers in view of section 139A(8) read with Rule 114C. There is thus a clear contradiction between section 206AA and section 139A(8) read with Rule 114C, as was prevailed in the case of Kaushallaya Bai & Others (supra) and by applying the analogy of the said decision, we find merit in the contention raised on behalf of the assessee that the provisions of section 206AA are required to be read down so as to make it inapplicable in the cases of concerned nonresidents payees who were not under an obligation to obta....
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....n 5 of the Act are subject to the provisions of the Act, the provisions of the Treaty would automatically override the provisions of the Act in the matter of ascertainment of chargeability to income tax and ascertainment of the total income, to the extent of inconsistency with Treaty terms. 28. Hon'ble Andhra Pradesh High Court in the case of Sanofi Pasteur Holding S.A. -vs. - Department of Revenue & Others (supra) also relied on the decision of the Hon'ble Supreme Court in the case of CIT -vs. - P.V.A.L. Kulandagan Chettiar (supra), wherein i t was held that the taxation pol ity is within the power of the Government and sect ion 90 of the Act enables the Government to formulate its policies through treaties entered into by it and such treaties determine the fiscal domicile in one State or the other and this determinat ion in the treaty prevails over the other provisions of the Act. After taking into consideration, inter alia, the decisions of the Hon'ble Supreme Court in the case of Azadi Bachao Andolan & Another (supra) and P.V.A.L. Kulandagon Chettiar (supra), the origins and evolution of Tax Treaties and other relevant aspects, it was held by the Hon'ble Andhra Pradesh High ....
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....e same being completely contrary to the proposi tion propounded inter alia by the Hon'ble Apex Court. 29. The ld. D.R. in support of the Revenue's case on the issue under consideration has raised an argument that the role of the assessee as a payer of the sum is limited to deducting tax at source as per the relevant provisions of Chapter-XVI I -B and he has nothing to do with the determination of tax liability eventually in the hands of the payee, which is to be done by the Assessing Officer alone as per the relevant charging provisions of the Act. To counter this argument of the ld. D.R. , reliance has been placed on behalf of the assesese on the decision of the Hon'ble Supreme Court in the case of Eli Lilly And Co. (India) P. Limited, wherein it was held that it cannot be stated as a broad proposition that the TDS provisions, which are in the nature of machinery provisions to enable collection and recovery of tax, are independent of charging provisions, which determine the assessabi l ity in the hands of the payee. Rel iance is also placed on behalf of the assessee on the decision of the Hon'ble Supreme Court in the case of G.E. Technology Centre (P) Limited. In the said case,....
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.... 31. There is one more basis to support the above conclusion. As right ly pointed out on behalf of the assessee, Chapter-XA containing the provision relating to General Anti -Avoidance Rule (GAAR) has been inserted in the Statute by the Finance Act, 2013 with effect from 1s t Apri l , 2016 and although the provisions contained in the said Chapter are given overriding effect by virtue of non-obstante clause contained in section 95, a separate provision has been inserted simultaneously in the form of sub-section (2A) in section 90 providing specifically that notwithstanding anything contained in sub-section (2), the provisions of Chapter XA of the Act shall apply to the assessee even if such provisions are not beneficial to him. As right ly pointed out on behalf of the assessee, no such provision, however, is made separately and specifically in section 90 to give overriding effect to section 206AA over sect ion 90(2), which clearly shows that the intention of the legislature is not to give overriding effect to section 206AA over the provisions of the relevant DTAA which are beneficial to the assessee. In the case of Sanofi Pasteur Holding SA -vs. - Department of Revenue & Others (su....
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....ection 195 of the Act and the assessee was not under an obligation to withhold tax even as per the provisions of section 206AA at higher rate of 20%. In other context, the amount paid to the non-resident was found by the Tribunal to be in the nature of fees for technical services chargeable to tax in the hands of the non-resident in India and since there was a failure on the part of the concerned non-resident to furnish PAN to the assessee, the assessee was held to be liable to withhold tax at higher of rates prescribed in section 206AA by the Tribunal . It, however, appears that all the relevant aspects as discussed above, such as overriding effect of the Treaty provisions as per section 90(2), the l imi ted effect of nonobstante clause contained in the machinery provision of section 206AA etc. were not argued before the Tribunal on behalf of the assessee and the Tribunal , therefore, had no occasion to consider the same while deciding this issue. On the other hand, Pune Bench of ITAT in the case of serum Institute of India Limited (supra) has considered some of these relevant aspects and after considering the propositions propounded by the Hon'ble Supreme Court in the case of Aza....