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The I.T.O [TDS] International Taxation Noida vs. Continental India Ltd NH 58, Meerut Roorke Road Modipuram, Meerut
May, 17th 2019

Subject: DR, other than supporting the findings of the Assessing Officer, could not bring any distinguishing decision in favour of the revenue.

Referred Sections:
Section 206AA(1) of the Income tax Act 1961,
Section 90(2) of the Act
Section 4 of the Act
Section 5 of the Act
Section 195 of the Act
Sub-section (7)
Sections 4, 5, 9, 90 & 91 of the Act

Referred Cases / Judgments
Emmsons International Ltd Vs. DCIT 171 ITD 140.
Danisco India Private Limited Vs. Union Of India WP(C) 5908/2015 decided on 05/02/2018,
DCIT Vs Serum Institute of India Limited, ITA Nos.1601 to 1604/PN/2014
Others vs. UOI, (2003) 263 ITR 706 (SC)
CIT vs. Eli Lily & Co., (2009) 312 ITR 225 (SC)

          

    IN THE INCOME TAX APPELLATE TRIBUNAL, DELHI `B' BENCH,
                          NEW DELHI

      BEFORE SHRI N.K. BILLAIYA, ACCOUNTANT MEMBER, AND
           SHRI K.N. CHARY, JUDICIAL MEMBER

                       ITA No. 5632/DEL/2016
                    [Assessment Year: 2014-15]
                                 &
                      ITA No. 5633/DEL/2016
                    [Assessment Year: 2015-16]

The I.T.O [TDS]                   Vs.    Continental India Ltd
International Taxation                   NH 58, Meerut Roorke Road
Noida                                    Modipuram, Meerut

                                         PAN: AAFCM 5366 B

 [Appellant]                                           [Respondent]

                Date of Hearing               :   14.05.2019
                Date of Pronouncement        :    17.05.2019


                 Assessee by :    Shri Rohit Jain, Adv.
                                   Shri Deepak Jain, Adv

                Revenue by   : Shri Abhiskek Kumar, Sr. DR


                                 ORDER


PER N.K. BILLAIYA, ACCOUNTANT MEMBER,



     The above two captioned separate appeals by the Revenue are

preferred against the two separate orders of the Commissioner of
                                            2


Income Tax [Appeals] 2, Noida dated 26.08.2016 pertaining to

assessment years 2014-15 and 2015-16.



2.           The common grievances raised by the Revenue read as

under:


     (i)       Whether on the facts and in law, the C1T(A) has erred in holding

               that the provisions of DTAA shall prevail over the provisions of'

               section 206AA(1) of the Income tax Act 1961, even when the

               provision of section 206AA(1) are overriding in nature containing

               a clear non-obstante clause.



     (ii)      Whether the CIT(A) has erred on facts and in law in overlooking

               the fact that the intention of section 206AAof the Act is to

               strengthen the PAN and TDS mechanism and that the provisions

               of section 206AA do not have a bearing on the ultimate tax

               liability of the assessee.



     (iii)     Whether the CIT(A) has erred on facts and in law in giving

               precedence to the DTAA over the overriding provisions of

               Section 206AA(1) even when the DTAA does not deal with the

               rates of TDS, while section 206AA(I) deals exclusively with the

               rates of TDS.
                                       3


3.     At the very outset, the ld. AR stated that the impugned

issue is squarely covered in favour of the assessee and

against the revenue by the decision of the co -ordinate bench

in the case of Emmsons International Ltd Vs. DCIT 171 ITD

140.




4.     The ld. DR, other than supporting the findings of the

Assessing Officer, could not bring any distinguishing decision

in favour of the revenue.




5.     We have given a thoughtful consideration to the orders

of the authorities below. We find force in the contention of

the ld. AR.      Similar issue was considered by the co -ordinate

bench [supra].        The relevant findings of the same read as

under:


       "5. We have gone through the record in the light of the

       submissions on either side. At the outset it is the submission of

       the Ld. AR that the issue that is substantially involved in this

       appeal is this whether Section 206AA of the Act override the

       provisions of Section 90(2) of the Act and whether in cases of

       the payments made to non-residents, what is the rate of tax to
                                4


be applied, whether it is as per Section 206AA or as per the

provisions of DTAA. He submitted that in a number of decisions

of the tribunal this issue has been decided in favour of the

assessee and recently in Danisco India Private Limited Vs. Union

Of India WP(C) 5908/2015 decided on 05/02/2018, the Hon'ble

jurisdictional High Court noted the order of the Pune tribunal in

DCIT Vs Serum Institute of India Limited, ITA Nos.1601 to

1604/PN/2014 (Assessment Year : 2011-12) to hold that section

206AA of the Act does not override the provisions of Section

90(2) of the Act and that in the cases of payments made to non-

residents, the rate of tax to be applied is as prescribed under

the DTAA and not as per Section 206AA of the Act because the

provisions of the DTAA are more beneficial.

6. The Hon'ble jurisdictional High Court extracted the following

observations of the Tribunal in Serum Institute of India Limited

(supra) with approval: ­

"The case of the Revenue is that in the absence of furnishing of

PAN, assessee was under an obligation to deduct tax @ 20%

following the provisions of section 206AA of the Act. However,

assessee had deducted the tax at source at the rates

prescribed in the respective DTAAs between India and the

relevant country of the non-residents; and, such rate of tax

being lower than the rate of 20% mandated by section 206AA

of the Act. The CIT(A) has found that the provisions of section

90(2) come to the rescue of the assessee. Section 90(2)

provides that the provisions of the DTAAs would override the
                                5







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) of the Act. In

this context, the CIT(A) has correctly observed that the

Hon'ble Supreme Court in the case of Azadi Bachao Andolan and

Others vs. UOI, (2003) 263 ITR 706 (SC) has upheld the

proposition that the provisions made in the DTAAs will prevail

over the general provisions contained in the Act to the extent

they are beneficial to the assessee. 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 of the Act which deals with the principle of

ascertainment of    total income under the Act are also

subordinate to the principle enshrined in section 90(2) as held

by the Hon'ble Supreme Court in the case of Azadi Bachao

Andolan and Others (supra). Thus, in so far as the applicability

of the scope/rate of taxation with respect to the impugned
                                6


payments make 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 20% in the

absence of furnishing of PAN by the recipient non-residents,

having regard to section 206AA of the Act. In our considered

opinion, it would be quite incorrect to say that though the

charging section 4 of the Act and section 5 of the Act dealing

with ascertainment of total income 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 which is the centre of controversy

before us 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 of the Act 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. In-fact,

in the context of section 195 of the Act also, the Hon'ble

Supreme Court in the case of CIT vs. Eli Lily & Co., (2009) 312

ITR 225 (SC) observed that the provisions of tax withholding

i.e. section 195 of the Act Therefore, in view of the aforesaid

schematic interpretation of the Act, section 206AA of the Act

cannot be understood to override the charging sections 4 and 5

of the Act. Thus, where section 90(2) of the Act provides that

DTAAs override domestic law in cases where the provisions of
                                 7


DTAAs are more beneficial to the assessee and the same also

overrides the charging sections 4 and 5 of the Act which, in

turn, override the DTAAs provisions especially section 206AA of

the Act which is the controversy before us. Therefore, in our

view, where the tax has been deducted on the strength of the

beneficial provisions of section DTAAs, the provisions of section

206AA of the Act 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 CIT(A), in our view, correctly inferred that 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. Thus, we hereby affirm the ultimate conclusion of

the CIT(A) in deleting the tax demand relatable to difference

between 20% and the actual tax rate on which tax was deducted

by the assessee in terms of the relevant DTAAs. As a

consequence, Revenue fails in its appeals."




7. It is therefore, clear that that section 206AA of the Act

does not override the provisions of Section 90(2) of the Act and

that in the cases of payments made to non-residents, assessee

correctly applied the rate of tax prescribed under the DTAAs

and not as per Section 206 AA of the Act because the
                                      8


     provisions of the DTAAs were more beneficial. In view of the

     settled position of law, we find it difficult to sustain the orders

     of the authorities below. With this view of the matter, we find

     that the orders of the authorities below are liable to be

     quashed and accordingly they are quashed. Thus, we hereby

     direct the deletion of the tax demand relatable to difference

     between 20% and the actual tax rate on which tax was deducted

     by the assessee in terms of the relevant DTAAs. Appeals are

     allowed accordingly."




3.   On the issue whether the treaty overrides the Act, the

quarrel is settled by the decision of the Hon'ble High Court of

Delhi in the case of Danisco India Pvt Ltd 404 ITR 539.                    The

relevant findings read as under:


     "6. After hearing the counsel for the parties, it is quite

     apparent that the issue urged has been rendered largely

     academic on account of corrective amendment made by the

     Parliament-which substituted preexisting Sub-section (7) with

     the present Section 206AA (7). The amendment is mitigating to

     a large extent, the rigors of the preexisting laws. The law, as it

     existed, went beyond the provisions of W.P.(C) 5908/2015 Page

     8 of 11 DTAA which in most cases mandates a 10% cap on the

     rate of tax applicable to the state parties. Section 206AA

     (prior to its amendment) resulted in a situation, where, over and
                                 9


above the mandated 10%, a recovery of an additional 10%, in the

event, the non- resident payee, did not possess PAN.

7.    In this context, the ITAT in Serum Institute of India

(Supra) discussed this very issue in some detail and stated, as

follows:

      "............The case of the Revenue is that in the absence of

      furnishing of PAN, assessee was under an obligation to

      deduct tax @ 20% following the provisions of section

      206AA of the Act. However, assessee had deducted the

      tax at source at the rates prescribed in the respective

      DTAAs between India and the relevant country of the

      non-residents; and, such rate of tax being lower than the

      rate of 20% mandated by section 206AA of the Act. The

      CIT(A) has found that the provisions of section 90(2)

      come to the rescue of the assessee. 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) of the Act. In

      this context, the CIT(A) has correctly observed that the

      Hon'ble Supreme Court in the case of Azadi Bachao
                         10







Andolan and Others v. UOI, MANU/SC/1219/2003 :

(2003) 263 ITR 706 (SC) has upheld the proposition that

the provisions made in the DTAAs will prevail over the

general provisions contained in the Act to the extent they

are beneficial to the assessee. In this W.P.(C) 5908/2015

Page 9 of 11 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 of the Act which deals with the

principle of ascertainment of total income under the Act

are also subordinate to the principle enshrined in section

90(2) as held by the Hon'ble Supreme Court in the case of

Azadi Bachao Andolan and Others (supra). Thus, in so far

as the applicability of the scop W.P.(C) 5908/2015 Page 10

of 11 context of section 195 of the Act also, the Hon'ble

Supreme Court in the case of CIT v. Eli Lily & Co.,

MANU/SC/0487/2009 : (2009) 312 ITR 225 (SC)

observed that the provisions of tax withholding i.e.

section 195 of the Act would apply only to sums which are

otherwise chargeable to tax under the Act. The Hon'ble

Supreme Court in the case of GE India Technology Centre
                         11


Pvt. Ltd. v. CIT,MANU/SC/0688/2010 : (2010) 327 ITR

456 (SC) held that the provisions of DTAAs along with the

sections 4, 5, 9, 90 & 91 of the Act are relevant while

applying the provisions of tax deduction at source.

Therefore,   in   view   of   the   aforesaid   schematic

interpretation of the Act, section 206AA of the Act

cannot be understood to override the charging sections 4

and 5 of the Act. Thus, 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 and the same also overrides the charging

sections 4 and 5 of the Act which, in turn, override the

DTAAs provisions especially section 206AA of the Act

which is the controversy before us. Therefore, in our

view, where the tax has been deducted on the strength of

the beneficial provisions of section DTAAs, the provisions

of section 206AA of the Act 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 CIT(A), in our view,

correctly inferred that 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. Thus, we hereby affirm the ultimate
                                     12


         conclusion of the CIT(A) in deleting the tax demand

         relatable to difference between 20% and the actual tax

         W.P.(C) 5908/2015 Page 11 of 11 rate on which tax was

         deducted by the assessee in terms of the relevant

         DTAAs. As a consequence, Revenue fails in its appeals.

         8. Having regard to the position of law explained in Azadi

         Bachao Andolan (supra) and later followed in numerous

         decisions that a Double Taxation Avoidance Agreement

         acquires primacy in such cases, where reciprocating states

         mutually   agree   upon     acceptable   principles   for   tax

         treatment, the provision in Section 206AA (as it existed)

         has to be read down to mean that where the deductee i.e

         the overseas resident business concern conducts its

         operation from a territory, whose Government has

         entered into a Double Taxation Avoidance Agreement with

         India, the rate of taxation would be as dictated by the

         provisions of the treaty.

         The writ petition is partly allowed in the above terms."




4.   Respectfully following the findings of the co-ordinate

bench and the Hon'ble High Court [supra], both these appeals

of the revenue are dismissed.
                                 13


5.    In the result, the appeals filed by the in ITA Nos. 5632 &

5633/DEL/2016 stand dismissed.


      The order is pronounced in the open court on 17.05.2019.




      Sd/-                                          sd/-

  [K.N. CHARY]                                [N.K. BILLAIYA]
JUDICIAL MEMBER                            ACCOUNTANT MEMBER


Dated: 17th May, 2019.

VL/

Copy forwarded to:

1.    Appellant
2.    Respondent
3.    CIT                                      Asst. Registrar
4.    CIT(A)                                   ITAT, New Delhi
5.    DR                               ,
                                       14


Date of dictation
Date on which the typed draft is placed before the
dictating Member
Date on which the typed draft is placed before the Other
Member

Date on which the approved draft comes to the Sr.PS/PS


Date on which the fair order is placed before the
Dictating Member for pronouncement
Date on which the fair order comes back to the Sr.PS/PS

Date on which the final order is uploaded on the website
of ITAT
Date on which the file goes to the Bench Clerk
Date on which the file goes to the Head Clerk

The date on which the file goes to the Assistant Registrar
for signature on the order
Date of dispatch of the Order

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