SECTION 206AA and DTAA
Section 206AA provides that any person entitled to receive income or amount on which tax is deductible under Chapter XVIIB shall furnish his permanent account number (PAN) to the person responsible for deducting such tax. Failure would attract TDS at higher of the following rates:-
(i) Rates specified in the relevant provision of the Act
(ii) Rate or Rates in force
(iii) Rate of 20%
It is true that Section 206AA is a non-obstante provision but Section 90(2) provides that if DTAA has been entered into the provisions of the Act shall apply to the extent they are more beneficial to the assessee.
The Bangalore Bench of Tribunal in the case of Bosch Ltd. Vs. ITO (2013- TII- 14) in para 21 has held as under:-
“Now, having held that the services rendered by the nonresidents are technical services, we will have to examine the applicability of sec. 206AA of the Income-tax Act. The assessee’s contention has been that the assessee being a non-resident is not required to apply for and obtain PAN No. by virtue of Rule 114(C)(b) of Income-tax Rules read with sec. 139A(8)(d) of the Income-tax Act. We cannot agree with this contention of the assessee. The provisions of sec. 206AA clearly overrides the other provisions of the Act. Therefore, a non-resident whose income is chargeable to tax in India has to obtain PAN No. and provide the same to the assessee deductor. The only exemption given is that non-resident whose income is not chargeable to tax in India are not required to apply and obtain PAN No. However, where the income is chargeable to tax irrespective of the residential status of the recipients, every assessee is required to obtain the PAN No. and this provision is brought in to ensure that there is no evasion of tax by the foreign entities. The assessee’s reliance upon the decision of the Hon’ble Karnataka High Court in the case of Kowsalyabai (cited Supra), in our opinion, is misplaced and distinguishable on facts from the facts of the case before us. In the case of Kowsalyabai and others, the recipients of the interest were residents of India and their total income was less than the taxable limit prescribed by the relevant Finance Act. It was in these facts and circumstances that the Hon’ble High Court has held that where the recipients of the ‘interest income’ were not having income exceeding taxable limits, it was not required to obtain the PAN No. But in the case before us, the assessee’s are non-residents and admittedly the income exceeds the taxable limit prescribed by the relevant Finance Act. In the circumstances, the recipients are bound and are under an obligation to obtain the PAN No. and furnish the same to the assessee. For failure to do so, the assessee is liable to withhold tax at the higher of rates prescribed u/s 206AA of the Income-tax Act i.e 20% and the CIT(A) has rightly held that the provision of sec. 206AA are applicable to the assessee.”
In the case of Kowsalyabai A Vs. Union of India (2012) 346 ITR 156, the Karnataka High Court after taking into account the provisions of Section 139A read down Section 206AA and made it inapplicable to persons whose income is less than the taxable limit as per the Finance Act, 1991.
The Pune Bench of the Tribunal in the case of DDIT Vs. Serum Institute of India Ltd. (2015-TII-50-ITAT-Pune-INTL) has held as under:-
(i) 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 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.
(ii) 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 Supreme Court in the case of Azadi Bachao Andolan & Others Vs. Union of India (2003) 263 ITR 706.
(iii) In our view it would be incorrect to say that though the charging Section 4 and Section 5 are subordinate to the principle enshrined in Section 90(2) of the Act, the provisions of Chapter-XVII-B governing tax deduction at source are not subordinate to Section 90(2).
(iv) In the context of Section 195, the Hon’ble Supreme Court in the case of CIT Vs. Eli Lily & Co. (2009) 312 ITR 225 has observed that the provisions of withholding would apply only to sums which are otherwise chargeable to tax under the Act.
(v) The Supreme Court in the case of GE India Technology Centre Pvt. Ltd. Vs. CIT (2010) 327 ITR 456 has held that the provisions of DTAA along with Section 4, Section 5 and Section 9, Section 90 and Section 91 of the Act are relevant while applying the provisions of tax deduction at source.
(vi) Where tax has been deducted on the strength of the beneficial provisions of DTAA, the provisions of Section 206AA of the Act cannot be invoked by the Assessing Officer.
The Bangalore Bench of the Tribunal in the case of DDIT Vs. Infosys BPO Ltd. (2015-TII-138-ITAT-Bangalore-INTL) followed the decision of the Pune Bench and has held that where the benefit of DTAA is available to a recipient, the scope of deduction of tax at source cannot be more than the tax liability under DTAA. The Tribunal however also referred to a similar view taken by the co-ordinate bench in Bosch whereas the decision in Bosch was against the assessee.
Entry 14, Union List, Seventh Schedule of the Constitution of India empowers the Parliament to enter into treaties and agreements with foreign countries and implementing of treaties, agreements and conventions with foreign countries. The power to enter into a treaty is an inherent part of the sovereign power as observed by the Supreme Court in the Azadi Bachao case. In the said case, the Supreme Court also held an assessee who is covered by the provisions of DTAA is entitled to seek the benefit thereunder even if the provisions of the DTAA are inconsistent with those of the Act.
The Supreme Court in the case of Ram Jethmalani Vs. Union of India (2012) 339 ITR 107 has referred to the general rule of interpretation which forms part of Article 31 of the Vienna Convention of the Laws of Treaties which provides that a treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose. The Court also observed that though India is not a party to the Vienna Convention, it contains many principles of customary international law and article 31 of the convention provides broad guidelines as to what would be an appropriate manner of interpreting a treaty in the Indian context also.
The decision of the Pune Bench of the Tribunal in the case of Serum Institute has correctly addressed the issue and the said decision has taken into account the spirit and intent of Section 90(2) as well as the scope and nature of Double Taxation Avoidance Agreements. Further, Section 206AA is not a charging Section and in a given case where the rates under the DTAA is lower than the rate determined through Section 206AA, the rate as per the agreement should prevail.
