Case summary, Income Tax

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

Case: Shriram Capital Ltd vs. Director of Income Tax, Madras HC

Outcome: Assessee


  • The Assessee had engaged the services of a foreign law firm for the purposes of acquiring insurance business in Indonesia. The Assessee had filed an application under section 195 for exemption from deduction of tax at source on the payment being made to the foreign law firm which was rejected by the Director of Income-tax as he opined that the services were in the nature of consultancy services and as the Assessee did not have any business activity abroad. Hence, the services were ultimately utilised by the resident company only and accordingly, considered that they would be taxable as deemed income in India.
  • As the non-resident did not have PAN as mandated by section 206AA, the Assessee was required to make the said payment as per the agreement after deduction of tax at the rate of 20%.

Key Points

  • Reliance was placed on the decision of the Hon’ble Delhi High Court in the case of Danisco India Private Limited Vs. Union of India & ORS, which in turn had placed reliance on the decision of Pune Income Tax Appellate Tribunal in the case of Dy. Director of Income Tax Vs. Serum Institute of India Ltd., wherein it was held that “where the section of the Act provides that tax treaty override domestic law in cases where the provisions of a tax treaty 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 tax treaty 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 the section tax treaty, the provisions of section 206AA of the Act cannot be invoked by the Assessing Officer to insist on the tax deduction at the rate of 20%, having regard to the overriding nature of the provisions of section of the Act. The 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 tax treaty and not as per section 206AA of the Act because the provisions of the tax treaty were more beneficial”.
  • Taking into consideration the decisions mentioned above, it was inferred that even in the absence of PAN, the tax has to be deducted as per the rates prescribed in the tax treaty as the beneficial provisions of the treaty will override the machinery provision of section 206AA of the Income Tax Act.

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