Income Tax, Issue Update

Failure in submission of PAN to person making payment: Rate as Section 206AA vs tax treaty rate

Case: Dy. CIT vs. Edgeverve Systems Ltd, Bangalore ITAT

This case delves on the issue that in case of failure in submission of PAN by a Non Resident, will the tax be deducted by the payer at the rate prescribed in the tax treaty or as per rate mentioned in section 206AA?

According to the Assessing Officer, the provisions of the Act, especially non-obstante clause in section 206AA of the Act had an overriding effect on the tax treaty. Reliance was placed on the decision of the Hyderabad Income Tax Appellate Tribunal in the case of Nagarjuna Fertilizers & Chemicals Ltd. Vs. ACIT, wherein it was concluded that tax treaty overrides the Act, even if it was inconsistent with the Act.  See Facts & Key Points.

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Facts

  • The Assessee was a company engaged in the business of Products, Platforms and services. During the previous year relevant to A.Y. 2017-18 to 2019- 20, the Assessee made in all about 34 payments to non-residents after grossing up the invoice amount and deducting tax at source thereon at the rates in force as per section 195 of the Income Tax Act.
  • The Assessing Officer rejected the plea of the Assessee that it was only the rates of taxes mentioned in the tax treaty that should be adopted for the purpose of grossing up and also for determining the tax liability. According to the Assessing Officer, the provisions of the Act, especially non-obstante clause in section 206AA of the Act had an overriding effect on the tax treaty.

Key points

  • Reliance was placed on the decision of the Hyderabad Income Tax Appellate Tribunal in the case of Nagarjuna Fertilizers & Chemicals Ltd. Vs. ACIT, wherein it was concluded that tax treaty overrides the Act, even if it was inconsistent with the Act. Tax Treaties were entered into between two nations in good faith and were supposed to be interpreted in good faith.
  • Thus, it was inferred that tax at source was to be deducted at the rates prescribed in the Double Taxation Avoidance Agreements, and not as per the provisions of section 206AA of the Act.

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