Sushma Chowla, JM-The appeal filed by the Revenue is against the order of CIT(A)-13, Pune, dated 29.06.2015 relating to assessment year 2011-12 against order passed under section 143(3) r.w.s. 144C(3) of the Income-tax Act, 1961 (in short ‘the Act’).
2. The Revenue has raised the following grounds of appeal:-
1) Whether the CIT(A)-13 erred in facts and in law in concluding that subsequent obtaining of PAN by the deductee would absolve the assessee from the application of the provision of the section 206AA of the I.T. Act.
2) Whether the Ld. CIT(A)-13, Pune was right in law and on facts in coming to the conclusion that the Sec.206AA of the I.T. Act, does not override the provision of sec.90(2) of the I.T. Act, despite the fact that Sec.206AA starts with a non-obstante clause.
3) Whether the Ld. CIT(A)-13, Pune was right in ignoring the memorandum explaining the provisions of the Finance (No.2) Bill, 2009 which clearly states that the Sec 206AA of the I.T. Act, applies to non-residents and also Press Release of CBDT No.402/92/2066-MC (04 of 2010) dated 20.01.2010 which reiterates that sec.206AA of the I.T. Act, will also apply to all non-residents in respect of payments/remittances liable to TDS.
3. The Revenue is in appeal against the order of CIT(A) in absolving the assessee from the application of provisions of section 206AA of the Act.
4. Briefly, in the facts of the case, the assessee for the year under consideration had filed the return of income on 30.03.2013. The assessee was Non Resident company, which was part of Imerys group and an associated enterprise of Calderys India. The assessee was engaged in manufacturing and selling of refractory products which were materials used for building or repairing refractory linings and which withstand high temperatures and severe operating conditions, to its customers worldwide. The assessee was also carrying out central functions i.e. Business administration and General management, Human resources, communication and marketing, industrial services, etc. The assessee’s business model in India was selling its products in Indian market to Calderys India to other customers; and was also buying refractory manufacturing input from Calderys India for manufacturing refractory products in France and was providing management and technical services to Calderys India, meeting Calderys India’s specific requirements. During the year, the assessee received payment of Rs. 8,12,62,290/- towards management services rendered and IT support services. The said services were taxable as royalty, as per the Assessing Officer under section 9(1)(vi) of the Act. The said services as per the Assessing Officer, were taxable under the head ‘Fees for technical services’ as per provisions of section 9(1)(vii) of the Act and as per provisions of DTAA between India and France. The Assessing Officer noted that the assessee had offered the said income in its return of income. The Indian entity i.e. Calderys India Refractory Ltd. from whom the assessee had received the payment, had deducted taxes @ 20%. The assessee filed a letter dated 19.03.2014 before the Assessing Officer stating that taxes were deducted at higher rates as the assessee was not having PAN number at the time of receipt of said payment. The total tax deducted was Rs. 1,89,80,100/-. In the return of income, however, the assessee claimed that the amount was taxable @ 10% being royalty / FTS as per Article 13 of the DTAA between India and France. The assessee thus, claimed the refund of Rs. 1,08,53,871/-, in its return of income. The Assessing Officer noted as far as taxability of amount was concerned, there was no dispute, however, the only dispute was vis-à-vis applicability of tax rates on such provisions. The Assessing Officer noted that the Indian entity had deducted the taxes on such payments as per provisions of section 206AA of the Act. Referring to the provisions of the Act, the Assessing Officer further noted that the assessee had received PAN number on 14.08.2012 and the scanned copy of PAN details are placed at page 3 of the assessment order. The Assessing Officer noted that under the provisions of section 206AA of the Act, no such situation was envisaged. There was no provision under the Act to allow refund, where the tax was deducted at higher rate as per provisions of section 206AA of the Act and where the deductee obtains PAN in subsequent period. In view thereof, proposition made by the assessee was rejected and the tax was charged @20% plus SC+EC as applicable. The draft assessment order proposed under section 144C(1) r.w.s. 143(3) r.w.s. 147 of the Act, was passed as per the final assessment order and the said computation of tax was assessed.
5. The CIT(A) after considering the submissions of assessee and held as under:-
“2.4 I do not agree with the learned AO. According to me, the Appellant's action of filing return is of self-assessment. Thereafter, the AO assesses the taxpayer's total income and determines tax payable on such income. Therefore, the AO is required to determine the Appellant's total income at the time of the finalization of assessment in accordance with the provisions of law irrespective of the taxpayer's understanding of legal provisions and offering of tax based on such understanding. It is trite to state that there cannot be estoppel against the operation of law. The act of taxpayer offering tax at the higher rate cannot estop operation of law, if such income is taxed at the lower rate. Besides, there cannot be unjust enrichment of the State because of the erroneous understanding of law by taxpayer. Accordingly, when the Appellant deducted tax @ 15 in absence of deductee’s PAN, it was incumbent on the learned AO to use the law applicable at the time of making assessment appreciating the fact that the deductee has PAN and lower tax rate @ 10% under the DTAA would be applicable.
2.5 In finality, crux of the matter is of determination of correct rate of tax to the given facts. The learned AO does not dispute the fact that if the deductee has PAN then the tax payable would be according to the DTAA, if the DTAA taxes income at the lower rate than the rate provided in the Income Tax Act. The only objection of the learned AO is that since the Appellant obtained PAN after deduction of tax at the higher rate and therefore, such situation is not covered either u/s 206AA or under normal provisions of the Act for granting refund. I do not agree with the learned AO. As stated, while assessing the Appellant’s total income after the Appellant filed its return of income on 30.03.2013, the deductee has already obtained PAN on 14.08.2012. Therefore, according to the applicable law, the learned AO is bound to apply the beneficial tax rate @ 10% under the DTAA and refund excess tax, if paid under the normal provisions of the law as provided u/s 143(3).
2.6 Even otherwise, I have taken the position in my appellate Order of Serum Institute of India Limited vide Appeal No.Pn/CIT(A)-IT/TP/DDIT(Int.tax)-II/95,94,96/2011-12 & 56/2012-13 dated 28.01.2013 for the AY 2011-12 (Qrt I/II/III/IV) that even if the provisions of the Income Tax Act require the deductee to obtain PAN, such a provision cannot override the bilateral agreement between the countries ie DTAA. This Order is confirmed by the honourable Pune Tribunal and reported at (2015) 56 taxmann.com 1(Pune Trib). Accordingly, the assessees are not required to deduct tax at the higher rate even when the non-resident deductee does not have PAN. Therefore, even if the issue is examined from this perspective, the Appellant’s income is taxable @ 10%.
2.7 In view of the above discussion, I hold that the Appellant’s income is taxable @ 10% as provided under Article 13 of the India-France DTAA. The learned AO is directed to assess the Appellant’s income accordingly and refund the excess tax.”
6. The Revenue is in appeal against the order of CIT(A).
7. The learned Departmental Representative for the Revenue pointed out that there was non-obstante clause in section 206AA of the Act.
8. The learned Authorized Representative for the assessee placed reliance on the order of Pune of Bench of Tribunal in DDIT Vs. Serum Institute of India Ltd. (2015) 56 taxmann.com 1 (Pune Trib) and the Special Bench of Hyderabad Tribunal in Nagarjuna Fertilizers & Chemicals Ltd. Vs. ACIT (2017) 185 TTJ 569 (Hyd – Trib) (SB). He further pointed out that the said Special Bench had held that the provisions of treaty overrides and the TDS provisions were sub-servant as per paras 30 and 31 of the said decision.
9. We have heard the rival contentions and perused the record. The limited issue which arises in the present appeal before us is against invoking of provisions of section 206AA r.w.s. 90 and 195 of the Act. The assessee during the year under consideration had received payment of Rs. 8.12 crores towards management services and IT support services rendered. The assessee had offered the same for taxation purpose in its return of income. The Indian entity i.e. Calderys India Refractories Ltd. had withheld taxes @ 20% from the said payment made to the assessee. The tax was deducted @ 20% since the assessee company did not have any PAN number at the time of receipt of said payments. The total tax deducted was Rs. 1,89,80,100/-. However, in the return of income, the assessee claimed that the same was taxable @ 10% being royalty / FTS, as per Article 13 of DTAA between India and France. Hence, the assessee in the return of income claimed refund of Rs. 1,08,53,871/-.
10. The issue which arises in the present appeal is with reference to applicability of tax rate on the said amount, wherein the taxability of the amount is not in dispute. The Assessing Officer was of the view that the Indian entity had to withhold taxes on such payments as per provisions of section 206AA of the Act and since the assessee had received PAN number on 14.08.2012, the tax on the date of payment was to be deducted at higher rates as per provisions of section 206AA of the Act. The assessee having obtained PAN number in the subsequent period would not entitle it to claim the tax deduction at a lower rate. The issue arising in the present appeal is squarely covered by the ratio laid down by the Pune Bench of Tribunal in DDIT Vs. Serum Institute of India Ltd. (supra), wherein it was held as under:-
“7. We have carefully considered the rival submissions. Section 206AA of the Act has been included in Part B of Chapter XVII dealing with Collection and Recovery of Tax Deduction at source. Section 206AA of the Act deals with requirements of furnishing PAN by any person, entitled to receive any sum or income on which tax is deductible under Chapter XVII-B, to the person responsible for deducting such tax. Shorn of other details, in so far as the present controversy is concerned, it would suffice to note that section 206AA of the Act 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%. In the present case, assessee was responsible for deducting tax on payments made to non-residents on account of royalty and/or fee for technical services. The dispute before us relates to the payments made by the assessee to such non-residents who had not furnished their PANs to the assessee. 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 Union of India v. Azadi Bachao Andolan [2003] 263 ITR 706/ 132 Taxman 373 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 (supra). Thus, in so far as the applicability of the scope/rate of taxation with respect to the impugned 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 v. Eli Lily & Co. [2009] 312 ITR 225/ 178 Taxman 505 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 Center (P.) Ltd. v. CIT [2010] 327 ITR 456/ 193 Taxman 234/7 taxmann.com 18 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 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.”
11. In view thereof, where the provisions of section 206AA of the Act cannot override the provisions of charging sections 4 and 5 of the Act and also where under section 90(2) of the Act, it is provided that DTAAs would override domestic law, in cases where the provisions of DTAAs are more beneficial to the assessee. Hence, the same would also override the charging sections 4 and 5 of the Act. Interpreting the provisions of the Act, therefore, where the tax has been deducted on the strength of beneficial provisions of DTAA, provisions of section 206AA of the Act cannot be invoked by the Assessing Officer to insist that the tax deduction should be @ 20%. Accordingly, since the assessee had received PAN number, it was obliged to pay the taxes as per DTAA i.e. @ 10% of the payment received and if the payee had deducted the tax @ 20% under section 206AA of the Act but the provisions of DTAA being more beneficial had to be applied.
12. Similar view has been taken by the Special Bench of Hyderabad Tribunal in Nagarjuna Fertilizers & Chemicals Ltd. Vs. ACIT (supra), wherein it was held as under:-
“30. The ratio of the two decisions of the Hon’ble Supreme Court in the case of Ili Lilly And Co. (India) P. Limited (supra) and G.E. Technology Centre (P) Limited (supra) as discussed above clearly shows that the charging provisions control and override the machinery provisions dealing with tax deduction at source. Similarly, the provisions of DTAAs by virtue of section 90(2) to the extent more beneficial to the assessee override the provisions of Domestic Law as held, inter alia, by the Hon’ble Supreme Court in the case of Azadi Bachao Andolan & Another (supra) and P.V.A.L. Kulandagan Chettiar (supra). Since section 206AA falls in Chapter XVII-B dealing with tax deduction at source, it follows that the treaty provisions which override even the charging provision of the Domestic Law by virtue of section 90(2) would also override the machinery provisions of section 206AA irrespective of non-obstante clause contained therein and the same is required to be restricted to that extent and read down to give effect to the relevant provisions of DTAAs, which are overriding being beneficial to the assessee.
31. There is one more basis to support the above conclusion. As rightly pointed out on behalf of the assessee, Chapter-XA containing the provision relating to General Anti-Avoidance Rule (GAAR) has been inserted in the Statute by the Finance Act, 2013 with effect from 1st April, 2016 and although the provisions contained in the said Chapter are given overriding effect by virtue of non-obstante clause contained 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 rightly 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 section 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 retrospective 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 fortified by a non-obstante clause expressed to override Tax Treaties as was made in case of the GAAR provisions specifically by inserting sub-section (2A) in section 90 to enable application of Chapter X-A even if the same be not beneficial to the assessee thereby enacting an override effect over the provisions of section 90(2). In the case of Bharat Hari Singhania (supra), it was held by the Hon’ble Supreme Court that the scope and purport of the non-obstante clause has to be ascertained by reading it in the context of the relevant provisions and consistent with the scheme of the enactment. As explained by CBDT while inserting the provision of section 206AA vide Circular No. 5 of 2010, the intention of the said provision is mainly to strengthen PAN mechanism and keeping in view this limited function and purpose, we are of the view that non-obstante clause contained in the machinery provision of section 206AA is required to be assigned a restrictive meaning and the same cannot be read so as to override even the relevant beneficial provisions of the Treaties, which override even the charging provisions of the Income Tax Act by virtue of section 90(2). In our opinion, it, therefore, cannot be said that the provisions of section 206AA, despite the non-obstante clause contained therein, would override the provisions of DTAA to the extent they are more beneficial to the assessee and it is the beneficial provision of treaty that will override the machinery provisions of section 206AA.
13. The Special Bench of Hyderabad Tribunal thus, held as under:-
“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 effect for all other provisions of the Act and the provisions of the Treaty to the extent they are beneficial to the assessee will override section 206AA by virtue of section 90(2). In our opinion, the assessee therefore cannot be held liable to deduct tax at higher of the rates prescribed in section 206AA in case of payments made to non-resident persons having taxable income in India in spite of their failure to furnish the Permanent Account Numbers. We, accordingly, answer the question referred to this Special Bench in the negative and in favour of the assessee and allow both the appeals of the assessee for A.Ys. 2011-12 and 2012-13.”
14. Applying the said principle to the facts of the present case, we find no merit in the grounds of appeal raised by the Revenue and the same are dismissed.
15. In the result, the appeal of Revenue is dismissed.