Question: Whether TDS is to be deducted @ 20% or as per DTAA if the NRI did not have PAN ( Permanent Account Number) ?
TDS on payments made to non-residents who did not furnish their PAN can be deducted as per rate prescribed in DTAA and section 206AA cannot be invoked to insist on tax deduction at rate of 20 per cent
Section 206AA cannot be understood to override charging sections 4 and 5
Where tax has been deducted in respect of payments made to non-residents, who do not furnish their PAN, on strength of provisions of DTAA and such rate is lower than 20 per cent, provisions of section 206AA cannot be invoked by Assessing Officer to insist on tax deduction at rate of 20 per cent, having regard to overriding nature of provisions of section 90(2) [Para 7][In favour of assessee]
IN THE ITAT PUNE BENCH ‘B’
Deputy Director of Income-tax (IT -II), Pune
Serum Institute of India Ltd.
AND MS.SUSHMA CHOWLA, JUDICIAL MEMBER
IT APPEAL NOS. 792 (PUNE) OF 2013
& 1601 TO 1604 (PUNE) OF 2014
[ASSESSMENT YEAR 2011-12]
MARCH 30, 2015
Subject : Deduction of tax at source
Section : 206AA, read with sections 90 and 195, of the Income-tax Act, 1961
Assessment year : 2011-12
■ The assessee-company, an exporter of vaccines, made payment to non-residents on account of interest, royalty and fee for technical services. Tax was deducted on the said payments in accordance with rate provided in DTAAs with respective countries.
■The Assessing Officer noticed that in case of some of the non-residents, the recipients did not have Permanent Account Numbers (PANs). As a consequence, he treated such payments as cases of ‘short deduction’ of tax in terms of the provisions of section 206AA, accordingly, demands were raised on the assessee for short deduction of tax and also for interest under section 201(1A) being difference between rate prescribed in Act and actual tax rate deducted by the assessee.
■ The Commissioner (Appeals) observed that section 206AA would override other provisions of the Act but not the provisions of section 90(2). Therefore he held that where the DTAAs provide for a tax rate lower than that prescribed in section 206AA, the provisions of the DTAAs would prevail and, he deleted the tax demand.
■ On appeal:
■ Section 206AA prescribes that where PAN is not furnished to the person responsible for deducting tax at source then the tax deductor would be required to deduct tax at the higher of the following rates, namely, at the rate prescribed in the relevant provisions of this Act; or at the rate/rates in force; or at the rate of 20 per cent.
■ Section 90(2) provides that the provisions of the DTAAs would override the provisions of the domestic Act in cases where the provisions of DTAAs are more beneficial to the assessee. There cannot 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). In this context, it would be worthwhile to observe that the DTAAs entered into between India and the other relevant countries in the present context provide for scope of taxation and/or a rate of taxation which was different from the scope/rate prescribed under 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. It would also be relevant to observe that even the charging section 4 as well as section 5 which deals with the principle of ascertainment of total income under the Act are also subordinate to the principle enshrined in section 90(2). Thus, insofar as the applicability of the scope/rate of taxation with respect to the impugned payments made to the non-residents is concerned, no fault can be found with the rate of taxation invoked by the assessee based on the DTAAs, which prescribed for a beneficial rate of taxation. However, the case of the revenue is that the tax deduction at source was required to be made at the rate of 20 per cent in the absence of furnishing of PAN by the recipient non-residents, having regard to section 206AA. It would be quite incorrect to say that though the charging section 4 and section 5 dealing with ascertainment of total income are subordinate to the principle enshrined in section 90(2) but the provisions of Chapter XVII-B governing tax deduction at source are not subordinate to section 90(2). Notably, section 206AA is not a charging section but is a part of a procedural provisions dealing with collection and deduction of tax at source. The provisions of section 195 which casts a duty on the assessee to deduct tax at source on payments to a non-resident cannot be looked upon as a charging provision. [Para 7]
■Therefore, in view of the aforesaid schematic interpretation of the Act, section 206AA cannot be understood to override the charging sections 4 and 5. Thus, section 90(2) provides that DTAAs override domestic law in cases where the provisions of DTAAs are more beneficial to the assessee and the same also overrides the charging sections 4 and 5 which, in turn, override the DTAAs provisions especially section 206AA. Therefore, where the tax has been deducted on the strength of the beneficial provisions of DTAAs, the provisions of section 206AA cannot be invoked by the Assessing Officer to insist on the tax deduction at the rate of 20 per cent, having regard to the overriding nature of the provisions of section 90(2). The Commissioner (Appeals) had correctly inferred that section 206AA does not override the provisions of section 90(2) 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 because the provisions of the DTAAs are more beneficial. Thus, the ultimate conclusion of the Commissioner (Appeals) in deleting the tax demand relatable to difference between 20 per cent and the actual tax rate on which tax was deducted by the assessee in terms of the relevant DTAAs was affirmed. [Para 7]