Thursday, April 2, 2015

Non-furnishing of PAN by NR doesn't attract higher TDS rate of 20% u/s 206AA if tax rate under DTAA is beneficial


Where payment has been made to non-residents who did not have PAN and tax has been deducted on the strength of the provisions of DTAAs, the provisions of section 206AA could not be invoked by the AO to insist on the tax deduction at 20% having regard to overriding nature of Section 90(2).

Facts:


a)Assessee made payment of royalty and fee for technical services to non-residents after deducting tax at source in accordance with the rates provided under DTAAs.

b)It was noted by the AO that on account of payment of royalty and fee for technical services in case of some of the non-residents, the recipients did not have PANs. As a consequence, AO treated such payments, as cases of 'short deduction' of tax in terms of the provisions of section 206AA of the Income-tax Act (‘the Act’).

c)The AO contended that assessee was under an obligation to deduct tax at higher rate of 20% following the provisions of section 206AA, hence he raised demand relatable to the difference between 20% and the actual tax rate provided under the DTAAs.

d)Onappeal, the CIT(A) deleted the demandas he was of the view that Section 206AA would not be applicable in case of non-residents as the DTAA overrides the Act. The aggrieved-revenue filed the instant appeal before the Tribunal.

The Tribunal held in favour of assessee as under:

1)Section 206AAof the Act prescribes that where PAN is not furnished by recipient of income on which tax is deductible the payer would be required to deduct tax at the higher of the following rates:

- At the rate prescribed in the relevant provisions of the Act; or

- At the rate/rates in force; or

- At the rate of 20%

2)Further, Section 90(2) of the Act provides that the provisions of the DTAAs would override the provisions of the Act in cases where the provisions of DTAAs are more beneficial to the assessee.

3)Thus, there could not be any doubt to the proposition that in case of non-residents, tax liability in India is liable to be determined in accordance with the provisions of the Act or the DTAA between India and the relevant country, whichever is more beneficial to the assessee, having regard to the provisions of section 90(2) of the Act.For the said reason, assessee deducted the tax at source having regard to the provisions of the respective DTAAs which provided for a beneficial rate of taxation.

4)It would be incorrect to say that though the charging section 4 and section 5 of the Act are subordinate to the principle enshrined in section 90(2) of the Act but the provisions of Chapter XVII-B governing tax deduction at source are not subordinate to section 90(2) of the Act. Notably, section 206AA of the Act is not a charging section but is a part of a procedural provisions dealing with collection and deduction of tax at source.

5)Therefore, where the tax has been deducted on the strength of the beneficial provisions of section DTAAs, the provisions of section 206AA of the Act could not be invoked by the AO to insist on the tax deduction at 20%, having regard to the overriding nature of the provisions of section 90(2) of the Act. -DEPUTY DIRECTOR OF INCOME-TAX V. SERUM INSTITUTE OF INDIA LTD.[2015] 56 taxmann.com 1 (Pune - Trib.)
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