Treaty prevails over Act reiterated in Danisco India Private Ltd by Delhi HC (Dt. 5 February 2018)
Facts of the case:
1) Danisco India Pvt Ltd( ‘Daniso India’) is an Indian Co.
2) M/s DuPont Singapore (‘Dupont), a non-resident company, located in Singapore and is not a assessee as per Income Tax Act, 1961 (‘the Act’).
3) India has entered into Double Taxation Avoidance Agreement with Singapore
4) Services rendered by Dupont are covered under Fees for Technical Services to be taxed at 10 percent (Article 12) which is not disputed by tax authorities.
5) Section 206AA of the Act requires tax withholding in case of taxable outward remittance.
Details of the cases:
1) Section 206AA (i) has the effect of undoing the provisions of DTAA, besides being in violation of Article 265 of Constitution of India. Thus, on an application of the principle of law enunciated in Azadi Bachao Andolan Vs. Union of India, (2003) 263 ITR 706 (SC), even if the tax rate for the activity which would form part of the expression ‘fees for technical services’ is higher, not more than 10% (being tax rate per treaty) can be recovered by the Indian Tax Authorities.
2) Levy of 20% tax withholding as per section 2016AA is unconstitutional as per the recommendations of Justice Easwar’s Committee’s report of 2016 made to the Central Government.
3) Justice Easwar’s Committee made the following specific recommendations:
“Under the current provisions of Section 206AA, tax is required to be deducted by the deductor at a higher rate as prescribed under the said section, where the deductee does not furnish his Permanent Account Number (PAN). This section was introduced with the objective that the furnishing of PAN was important with a view to trail the taxability of the payments in the hands of a non-resident. As regards non-residents, the Committee noted that in view of the specific provisions of Section 115A and the provisions under the respective Double Tax Avoidance Agreements (DTAAs) prescribing specific rates for tax deduction at source u/s. 195, there was no justification for providing deduction of tax at a higher rate than as prescribed under Section 115A or under the respective DTAA. In fact, this provision has proved to be an impediment in terms of ease of business, as many non-residents prefer not to do business with Indian residents, if obtaining of PAN is insisted from them. The Committee was of the view that it should suffice if the concerned non-resident furnished to the deductor, in lieu of such Permanent Account Number, his tax identification number in the country or the specified territory of residence and in case there is no such number, then, a unique number on the basis of which the person is identified by the Government of the country or the specified territory of which such person claims to be a resident.”
Considering the above recommendations Finance Act 2016 amended the Section 206AA by insertion of subsection (7) w.e.f. 1.6.2016 reads as follows :
“(7) The provisions of this section shall not apply to a nonresident, not being a company, or to a foreign company, in respect of —
(i) payment of interest on long-term bonds as referred to in section 194LC; and
(ii) any other payment subject to such conditions as may be prescribed.”
Accordingly Rule 37BC was notified specifying the conditions to be fulfilled by non-resident deductees to obtain relaxation from higher withholding as per under section 206AA of the Act in the absence of PAN.
High Courts comments:
Due to Finance Act 2016 amendments issue urged has been rendered largely academic on account of corrective amendment made by the Parliament.
The amendment is mitigating to a large extent, the rigors of the preexisting laws. The law, as it existed, went beyond the provisions of DTAA which in most cases mandates a 10% cap on the rate of tax applicable to the state parties.
Section 206AA (prior to its amendment) resulted in a situation, where, over and above the mandated 10%, a recovery of an additional 10%, in the event, the non- resident payee, did not possess PAN
High court considered the Pune Tribunals decision in Serum Institute of India (Supra)where in the section 206AA, section 90(2) and section 195 has been dealt in detail.
As per the law explained in Azadi Bachao Andolan and later followed in numerous decisions that a Double Taxation Avoidance Agreement acquires primacy in such cases, where reciprocating states mutually agree upon acceptable principles for tax treatment, the provision in Section 206AA (as it existed prior to amendment) has to be read down to mean that, where the deductee i.e the overseas resident business concern conducts its operation from a territory, whose Government has entered into a DTAA with India, the rate of taxation would be as dictated by the provisions of the treaty.
The Analysis and author can be reached at CA Mahananda Nevade firstname.lastname@example.org