Failure in submission of PAN to person making payment: Rate as Section 206AA vs tax treaty rate
Outcome: In favour of Assessee
- The Assessee was a company engaged in the business of manufacturing metal cutting grinding machines, spares, accessories and related services. The DCIT, International Taxation, Circle 1(1), Bangalore received information from the ACIT, TDS Circle 1(1), Bangalore that as per the Tax Audit Report in Form 3CD, it was mentioned that the Assessee had not deducted tax at source on a payment of Rs.2.63 crore towards design charges and Rs.29.11 lakhs on payment of exhibition fees, both payments had been made to the non-residents (Tax residents of Germany) and therefore the DCIT passed an order under seciton 201(1) and 201(1A) of the Income-tax Act, 1961 dated 31.03.2018 holding the Assessee to be an assessee in default for non-deduction of tax at source. The rate of tax was also applied by the DCIT at the rate of 21.115% in terms of section 206AA of the Act at a higher rate because of the provisions of section 206AA of the Act.
- Reliance was placed on the decision of the Special Bench of the Income Tax Appellate Tribunal, Hyderabad in the case of Nagarjuna Fertilisers and Chemicals Ltd. vs ACIT, wherein it was concluded that Double Taxation Avoidance Agreements overrides the Act, even if it was inconsistent with the Act. Double Taxation Avoidance Agreements are entered into between two nations in good faith and were supposed to be interpreted in good faith. Otherwise it would amount to the breach of Article 253 of the constitution.
- 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.