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TMI Blog2017 (3) TMI 81X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 consideration by the Automatic System, the assessee was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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. (e) As per sect ion 115A, the Income tax rate on fees for technical services is 10.56%. Therefore, TDS rates cannot be more than the tax at which the income is liable to be taxed. (f) Wherever Double Taxation Avoidance Agreement provisions are applicable, the TDS is deducted at the rates prescribed u/s 115A, therefore, the TDS shoul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 order to strengthen the PAN mechanism by providing that any person, whose receipts are subject to deduction of tax at source i .e. the deductee, shall mandatorily furnish his PAN to the deductor failing which the deductor shall deduct tax at source at higher of the rates specified therein. 7. Mr. C.S. Subrahmanyam invited our attention to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 effect of beneficial provision of treaty over the Domestic Law was neither argued nor considered by the Bangalore Bench of the Tribunal . He contended that in the case of Serum Institute of India Limited (supra), Pune Bench of ITAT, however, considered this aspect in the light of various judicial pronouncements including that of Hon'ble Supreme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 there is thus really no different or divergent view, which can be said to have been taken by the Tribunal on this issue and even the subsequent decisions rendered by the various Benches of the ITAT taking the view in favour of the assessee clearly shows that a consistent view has been taken by the Tribunal in favour of the assessee on the issue u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntended 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 required to obtain PAN and need not file the return of income where TDS is done at appropriate rate, section 206AA, if is held to be applicable in such cases, will put an obligation on the assessee to file the return and claim the refund of TDS, which cannot be the purpose or intent of the legislature. He contended that as per the proposition propound ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 to obtain Permanent Account Number or even after obtaining the same, not to furnish it and the only consequence in such case as per section 206AA is that he would be subjected to TDS which may be higher than the normal rate. He contended that the fact that the Parliament has enacted the provisions of section 206AA requiring a non-resident to furnish his P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sions 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. 17. As regards the observations of the Bangalore Bench of ITAT recorded in paragraphs no. 12, 22 and 23 of its order passed in the case of Bosch Limited (supra) as relied on behalf of the assessee to contend that the same are in favour of the assessee on the issue under consideration, the ld. CIT(D.R.) contended that the said observations were recorded by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ic 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 including the Hon'ble Apex Court in the decisions already cited on behalf of the assessee. He submitted that even the contention of the ld. D.R. that sect ion 206AA containing nonobstante clause has a overriding effect over the other provisions of the Act including Section 139A read with Rule 114C is contrary to the decision of the Hon'ble Karnataka High Court in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 with deduction of tax at source are given in Part B of Chapter XVI I and Section 195 of Part XVI I -B, which deals with deduction of income-tax on the payments made to non-resident, inter alia, on account of fees for technical services being relevant in the present context is reproduced below:- "(1) Any person responsible for paying to a non- resident, not being a com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 abrogation of the relevant provisions of treaty in this regard. We also do not find the arguments raised by the ld. CIT(D.R.) that the role of the assessee as a payer of the sum is l imi ted to deducting tax at source as per law and he has nothing to do with the determination of tax liability eventually in the hands of the payee, which is within the complete domain of the Assessing Off ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich 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) No certificate under section 197 shall be granted unless the application made under that section contains the Permanent Account Number of the applicant. (5) The deductee shall furnish his Permanent Account Number to the deductor and both shall indicate the same in all the correspondence, bills, vouchers and other documents which are sent to each other. (6) Where the Permanent Account Number p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtue 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 obtain the permanent Account Numbers. 27. The next issue that requires our consideration in this context is whether the rate of tax as provided in the relevant DTAAs and adopted for the purpose of tax deduction at source being rate in force by virtue of section 2(37A) would be applicable or the higher rate as provided in section 206 by virtue of the overriding effect given to the said provision, for the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hers (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 Court that Treaty provisions are expressions of sovereign pol icy of more than one sovereign State, negotiated and entered into at a pol itical or diplomatic level and have several expl icit, subl iminal and unarticulated considerations as their basis. Principles relevant to treaty interpretation are not the same as those pertaining to interpretation of municipallegislation. A strained construction which s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ility 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, the contention was raised on behalf of the Department that the moment there is remittance, the obligation to deduct tax at source arises and the same was rejected by the Hon'ble Supreme Court by observing that the obligation to deduct tax at source arises only when there is a sum chargeable under the Act. It was held that the relevant TDS provisions as contained in section 195 have to be read in conformity ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ained 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 (supra), the contention raised on behalf of the Revenue was that the relevant retrospect ive amendments made in the Income Tax Act, 1961 override the tax treaties and the same was rejected by the Hon'ble Andhra Pradesh High Court on the ground that the relevant amendments were not fortif ied by a non-obstante clause expressed to override Tax Treaties as was made in case of the GAAR provisions specifically by insert ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urnish 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 Azadi Bachao Andolan & Another (supra), Eli Lilly And Co. (India) P. Limited (supra) and G.E. Technology Centre (P) Limited (supra), it was held by the Tribunal , and in our opinion, rightly so, that section 206AA of the Act cannot override the provisions of section 90(2) of the Act. 33. In view of the above discussion, we are of the view that the provisions of section 206AA of the Act will not have a overriding eff ..... X X X X Extracts X X X X X X X X Extracts X X X X
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