SKP Tax Alert
30 July 2015 | Volume 8 Issue 14
Provisions of Income Tax Act cannot override the Double Tax Avoidance Agreement
 
In the recent decision, the Bangalore bench of the Income Tax Appellate Tribunal (ITAT) in case of Infosys BPO Limited [1], held that the provisions of the Income Tax Act, 1961 (the Act) cannot override the provisions of a Double Tax Avoidance Agreement (DTAA) and the tax liability of the non-resident cannot exceed the rate prescribed in the relevant DTAA.

The provisions of section 90(2) of the Act permit any non-resident taxpayer to avail the provisions of the Act or the relevant tax treaty, whichever is more beneficial. Further, as per various judicial pronouncements, it is a settled principle that beneficial treaty provisions will override the provisions of the Act.

However, as per section 206AA of the Act, in case a recipient whose receipts are subject to tax deduction, fails to provide a Permanent Account Number (PAN) to the person responsible for deducting the taxes, the deductor will be required to deduct tax at the highest of the following rates:
  • At the rate prescribed under ITA, or
  • At the rate in force (rates as mentioned in the Finance Act), or
  • At the rate of 20%.
Since the section begins with the words, "Notwithstanding anything contained in any other provisions of this Act..." it has been commonly understood to mean that it will override the entire Act, including provisions of section 90(2) of the Act. Thus, in cases, where the PAN is not available, tax is being deducted at the rate of 20%.

However, the ITAT in the case of Infosys has held that the provisions of the Act cannot override the provisions of the DTAA and hence tax can be deducted at the rate prescribed in the treaty which is usually 10% or 15%.

Facts of the case
  • Infosys BPO Limited (the company) was incorporated in India and engaged in Business Process Outsourcing (BPO) services.
  • During the years under consideration (i.e. financial year (FY) 2010-11 and FY 2011-12), the company had made remittances to various non-residents. These payments were in the nature of Royalty and Fees for Technical Services.
  • The company had deducted taxes as per the rates provided in the applicable tax treaty, with respect to payments made to non-residents who did not hold a PAN, without considering the provisions of section 206AA of the act.
  • While processing the company's withholding tax return under section 200A, the Indian Revenue Authorities raised a demand for 'short deduction' of taxes. The demand was raised for the difference between tax rate as per section 206AA (i.e. 20%) and lower rate as per the act/tax treaty.
  • The company had appealed before first level appellate authority, Commissioner of Income Tax Appeals (CIT(A)), contesting the demand and the validity of the intimation issued. The company's appeal was accepted and the demand was deleted on the basis that section 206AA cannot override the tax treaty.
  • The tax authorities preferred the appeal to the ITAT.
  • The key issue before the Bangalore ITAT was whether the DTAA would override the provisions of section 206AA of the Act.

Tax deductor's contention
  • According to section 90(2), there is no dispute that benefit of a tax treaty would be available to non-resident taxpayers.
  • The rate of deduction of tax in India cannot be more than the rate provided in the tax treaty.
  • The company heavily relied on the decision of the Pune ITAT in the case of Serum Institute of India Ltd (ITA No. 792 of 2013) in which it was held that the provisions of the tax treaty will prevail over the general/mechanical provisions of the Act insofar as they are beneficial to the assessee.
  • The company also relied on the following decisions while putting forward its argument:
    • Bosch Ltd 28 taxmann.com 228
    • Bharti Airtel Ltd 52 taxmann.com 31

Tax authorities' contention
  • Section 206AA begins with, "notwithstanding anything contained under ITA i.e. it overrides the entire ITA. Accordingly, section 206AA overrides section 90(2)."
  • In the present case, in the absence of a PAN of a non-resident, withholding should have been carried out at the rate of 20% as per section 206AA.

Bangalore ITAT's ruling 
  • There is no dispute that the benefit of the DTAA would be available to non-resident taxpayers.
  • Tax liability of the non-resident cannot be more than the rate prescribed under the DTAA. Accordingly, the scope of deduction of tax cannot be more than the tax liability under the DTAA.
  • The ITAT relied on the decision of Serum Institute of India Ltd in which a similar issue was examined. The key findings are:
    • Sections 195 and 206AA are procedural provisions dealing with collection and deduction of tax at source.
    • Section 195 which casts the duty for deduction of tax is not a charging section. Treaty provisions are charging sections which will override machinery/procedural provisions such as sections 195 and 206AA. Accordingly, it would not be logical to construe that section 206AA to override section 90(2). The ITAT held that the taxes were correctly deducted at treaty rates.
  • The ITAT also relied on the decision of Bosch Limited and Bharti Airtel.
  • Based on the above decisions, the Bangalore ITAT upheld the order of the CIT(A) by holding that even in the absence of a PAN of a non-resident, withholding should be carried out at rates prescribed in the Act or the applicable tax treaty, whichever is beneficial to the taxpayer and not at 20% as provided by section 206AA.
     
SKP's comments
This is the second favourable ruling on the issue of applicability of section 206AA vis-à-vis the provisions of a tax treaty. The first decision was rendered by the Pune ITAT and this one by the Bangalore ITAT. Thus, now two different benches have adopted views favourable to the tax deductor, and the tax deductors in these two tax jurisdictions can conveniently adopt the position that the DTAA provisions would override the provisions of section 206AA of the ITA. However, tax deductors in other jurisdictions have to tread with caution as their tax authorities may not accept the decisions of these benches and could lead to litigation.

SKP
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ABOUT THIS TAX ALERT
This SKP Tax Alert contains general information existing at the time of its preparation only. It is intended as a news update and is not intended to be comprehensive nor to provide specific accounting, business, financial, investment, legal, tax or other professional advice or opinion or services. This tax alert is not a substitute for such professional advice or services, and it should not be acted on or relied upon or used as a basis for any decision or action that may affect you or your business. Before making any decision or taking any action that may affect you or your business, you should consult a qualified professional adviser and also refer to the source pronouncement/documents on which this tax alert is based. It is also expressly clarified that this tax alert is not a solicitation or an invitation of any sort whatsoever or a source of advertising from SKP Group or any of its entities to create any adviser-client relationship.

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