Income Tax Appellate Tribunal - Hyderabad
M/S Nagarjuna Fertilizers And ... vs Adit, (It) Ii,, Hyderabad on 13 February, 2017
I.T.A.Nos.1187 & 1188/H/2014 Assessment Years : 2011-2012 & 2012-2013 Page 21 of 29
25. It is evident that section 206AA contains a non-obstante clause and relying on the same, the stand taken by the authorities below, which is supported by the ld. CIT(D.R.) at the time of hearing before us, is that the provisions of section 206AA have a overriding effect and since the said provisions override all other provisions of the Income Tax Act, 1961, the same are required to be given effect to. On the other hand, one of the contentions raised on behalf of the assessee in this regard is that the non- residents at the relevant time were not even required to obtain Permanent Account Numbers as per the provisions of section 139A(8) read with Rule 114C and since they were not obliged to even obtain the PAN, they cannot be required to furnish the same as envisaged in section 206AA and the said provisions, therefore, cannot be applied in the case of non-residents even by the overriding effect given to the said provisions, which is required to be read down. In support of this contention, reliance has been placed on behalf of the assessee on the decision of the Hon'ble Andhra Pradesh High Court in the case of Mullapudi Venkatarayudu -vs.- Union of India (supra), wherein it was held that any failure to file return must connote obligation to file the return. Reliance is also placed on behalf of the assessee in support of this stand on the decision of the Hon'ble Karnataka High Court in the case of Smt. Kaushallaya Bai & Others (supra).
26. In the case of Smt. Kaushallaya Bai & Others (supra), the assessees having income below the taxable limit were not required to obtain Permanent Account Numbers as per section 139A of the Act and still the provisions of section 206AA were invoked to deduct tax at higher rate from the amount of interest income paid to them as a result of their failure to furnish the Permanent Account Numbers to the payers/deductors. Taking note of this contradiction between the provisions of section 139A and 206AA, Hon'ble Karnataka High Court read down the overriding provisions of section 206AA and made them inapplicable to the persons, who were not even required to obtain the permanent Account Numbers by virtue of section 139A. Although the facts involved in the present case are slightly I.T.A.Nos.1187 & 1188/H/2014 Assessment Years : 2011-2012 & 2012-2013 Page 22 of 29 different, inasmuch as, the non-resident payees in the present case were having taxable income in India, the facts remain to be seen is that they were not obliged to obtain the Permanent Account Numbers in view of section 139A(8) read with Rule 114C. There is thus a clear contradiction between section 206AA and section 139A(8) read with Rule 114C, as was prevailed in the case of Kaushallaya Bai & Others (supra) and by applying the analogy of the said decision, we find merit in the contention raised on behalf of the assessee that the provisions of section 206AA are required to be read down so as to make it inapplicable in the cases of concerned non- residents payees who were not under an obligation to obtain the permanent Account Numbers.
27. The next issue that requires our consideration in this context is whether the rate of tax as provided in the relevant DTAAs and adopted for the purpose of tax deduction at source being rate in force by virtue of section 2(37A) would be applicable or the higher rate as provided in section 206 by virtue of the overriding effect given to the said provision, for the purpose of deduction of tax at source. Here it is necessary to understand the scope and applicability of the provisions of Tax Treaty, vis- a-vis, the provisions of Domestic Law and the norms governing the co- existence of Tax Treaties and Domestic Law Legislation. A useful reference in this regard can be made to the landmark decision of the Hon'ble Andhra Pradesh High Court in the case of Sanofi Pasteur Holding SA -vs.- Department of Revenue & Others (supra). In the said case, the core issue was required to be decided on appreciation of synergies between the DTAA provisions and those of the Domestic Law and while deciding the same, the origins and evolution of tax treaties and how those conflate, cooperate with domestic tax legislation and converge to signal a unified raft of applicable norms, were taken into consideration by the Hon'ble Andhra Pradesh High Court in the light of relevant judicial pronouncements including the decision of the Hon'ble Supreme Court in the case of Azadi Bachao Andolan (supra) and P.V.A.L. Kulandagan Chettiar (supra). In this regard, a I.T.A.Nos.1187 & 1188/H/2014 Assessment Years : 2011-2012 & 2012-2013 Page 23 of 29 reference was made to the decision of the Hon'ble Supreme Court in the case of Azadi Bachao Andolan (supra), wherein it was held that when Double Taxation Avoidance Treaty, Convention or Agreement (for short, 'Treaty') becomes operational and is notified by the Central Government for implementation of its terms under section 90 of the Act, provisions of the Treaty, with respect to cases to which they would apply, would operate even if inconsistent with provisions of the Act. As a consequence, if a tax liability is imposed by the Act, the treaty may be referred to for negativing or reducing it and in case of conflict between the provisions of the Act and of the Treaty, the provisions of the Treaty would prevail and are liable to be enforced. It was also held that since the general principle of chargeability of tax under section 4 and the general principle of ascertainment of total income under section 5 of the Act are subject to the provisions of the Act, the provisions of the Treaty would automatically override the provisions of the Act in the matter of ascertainment of chargeability to income tax and ascertainment of the total income, to the extent of inconsistency with Treaty terms.
28. Hon'ble Andhra Pradesh High Court in the case of Sanofi Pasteur Holding S.A. -vs.- Department of Revenue & Others (supra) also relied on the decision of the Hon'ble Supreme Court in the case of CIT -vs.- P.V.A.L. Kulandagan Chettiar (supra), wherein it was held that the taxation polity is within the power of the Government and section 90 of the Act enables the Government to formulate its policies through treaties entered into by it and such treaties determine the fiscal domicile in one State or the other and this determination in the treaty prevails over the other provisions of the Act. After taking into consideration, inter alia, the decisions of the Hon'ble Supreme Court in the case of Azadi Bachao Andolan & Another (supra) and P.V.A.L. Kulandagon Chettiar (supra), the origins and evolution of Tax Treaties and other relevant aspects, it was held by the Hon'ble Andhra Pradesh High Court that Treaty provisions are expressions of sovereign policy of more than one sovereign State, negotiated and entered into at a political or diplomatic level and have several explicit, subliminal I.T.A.Nos.1187 & 1188/H/2014 Assessment Years : 2011-2012 & 2012-2013 Page 24 of 29 and unarticulated considerations as their basis. Principles relevant to treaty interpretation are not the same as those pertaining to interpretation of municipal legislation. A strained construction which subverts the policy underlying India entering into a Double Taxation Avoidance Treaty with another State, by enabling dual taxation through artificial interpretation of treaty provisions, either by the tax administrator or by the judicial branch at the invitation of the Revenue of one of the Contracting States to a treaty would transgress the inherent and vital constitutional scheme, of separation of powers. It was held that the provisions of the treaty must receive a good faith interpretation and where the operative treaty's provisions are unambiguous and their legal meaning clearly discernible and lend to an un-contestable comprehension on good faith interpretation, no further interpretive exertion is authorized for that would tantamount to unlawful encroachment into the domain of treaty-making under Article
253. It was further held that where the provisions of the Act and of the DTAA are overlapping and competing legal magisteria, the proper interpretive role requires, on harmonious construction and in accordance with the relative weight and priority, to give effect to both competing provisions, as per the inter se weightage mandate by the overreaching legal norms, set out in section 90(2) of the Act. The ratio laid down by the Hon'ble Supreme Court in the cases of Azadi Bachao Andolan and Another (supra) and P.V.A.L. Kulandagan Chettiar (supra) as further explained and clarified by the Hon'ble Andhra Pradesh High Court in the case of Sanofi Pasteur Holding SA -vs.- Department of Revenue & Others (supra) makes it abundantly clear that whenever there is a conflict between the provisions of the Treaty and the provisions of the Domestic Law, the provisions of Treaty will prevail and override even the charging provisions of the Domestic Law. Keeping in view this legal position, we do not find merit in the contention raised by the ld. CIT(D.R.) that as per section 90(2) of the Act, treaty does not override the Act but gets overridden and reject the same being completely contrary to the proposition propounded inter alia by the Hon'ble Apex Court.
I.T.A.Nos.1187 & 1188/H/2014 Assessment Years : 2011-2012 & 2012-2013 Page 25 of 29
29. The ld. D.R. in support of the Revenue's case on the issue under consideration has raised an argument that the role of the assessee as a payer of the sum is limited to deducting tax at source as per the relevant provisions of Chapter-XVII-B and he has nothing to do with the determination of tax liability eventually in the hands of the payee, which is to be done by the Assessing Officer alone as per the relevant charging provisions of the Act. To counter this argument of the ld. D.R., reliance has been placed on behalf of the assesese on the decision of the Hon'ble Supreme Court in the case of Eli Lilly And Co. (India) P. Limited, wherein it was held that it cannot be stated as a broad proposition that the TDS provisions, which are in the nature of machinery provisions to enable collection and recovery of tax, are independent of charging provisions, which determine the assessability in the hands of the payee. Reliance is also placed on behalf of the assessee on the decision of the Hon'ble Supreme Court in the case of G.E. Technology Centre (P) Limited. In the said case, the contention was raised on behalf of the Department that the moment there is remittance, the obligation to deduct tax at source arises and the same was rejected by the Hon'ble Supreme Court by observing that the obligation to deduct tax at source arises only when there is a sum chargeable under the Act. It was held that the relevant TDS provisions as contained in section 195 have to be read in conformity with the charging provisions of sections 4, 5 & 9 and while interpreting the provisions of the Income Tax Act, one cannot read the charging section of that Act de hors the machinery section. It was held that the Act is to be read as an integrated code. It was held that the provisions for deduction of tax at source as contained in Chapter-XVII and the charging provisions of the Income Tax Act form one single integral inseparable code and, therefore, the provisions relating to TDS cannot be applied independent of the charging provisions. It is pertinent to note here that this decision in the case of G.E. Technology Centre (P) Limited is rendered by the Hon'ble Supreme Court after taking into consideration the earlier decision rendered in the case of I.T.A.Nos.1187 & 1188/H/2014 Assessment Years : 2011-2012 & 2012-2013 Page 26 of 29 Transportation Corporation of A.P. Limited (supra) on which reliance has been placed by the ld. CIT, D.R.
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 1 s t 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 I.T.A.Nos.1187 & 1188/H/2014 Assessment Years : 2011-2012 & 2012-2013 Page 27 of 29 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.
32. In the case of Bosch Limited (supra) relied upon by the ld. CIT(D.R.) in support of the revenue's case, the issue relating to the applicability of section 206AA had come up for consideration before the Bangalore Bench of this Tribunal in two contexts. First, it was considered in the context of I.T.A.Nos.1187 & 1188/H/2014 Assessment Years : 2011-2012 & 2012-2013 Page 28 of 29 grossing up and while deciding the same, it was held by the Tribunal that the very nature of relevant income being business income not chargeable to tax in the hands of the non-resident recipients having no permanent establishment in India, the payments did not require withholding of tax at source under section 195 of the Act and the assessee was not under an obligation to withhold tax even as per the provisions of section 206AA at higher rate of 20%. In other context, the amount paid to the non-resident was found by the Tribunal to be in the nature of fees for technical services chargeable to tax in the hands of the non-resident in India and since there was a failure on the part of the concerned non-resident to furnish PAN to the assessee, the assessee was held to be liable to withhold tax at higher of rates prescribed in section 206AA by the Tribunal. It, however, appears that all the relevant aspects as discussed above, such as overriding effect of the Treaty provisions as per section 90(2), the limited effect of non- obstante clause contained in the machinery provision of section 206AA etc. were not argued before the Tribunal on behalf of the assessee and the Tribunal, therefore, had no occasion to consider the same while deciding this issue. On the other hand, Pune Bench of ITAT in the case of serum Institute of India Limited (supra) has considered some of these relevant aspects and after considering the propositions propounded by the Hon'ble Supreme Court in the case of Azadi Bachao Andolan & Another (supra), Eli Lilly And Co. (India) P. Limited (supra) and G.E. Technology Centre (P) Limited (supra), it was held by the Tribunal, and in our opinion, rightly so, that section 206AA of the Act cannot override the provisions of section 90(2) of the Act.
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 I.T.A.Nos.1187 & 1188/H/2014 Assessment Years : 2011-2012 & 2012-2013 Page 29 of 29 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.
34. In the result, both the appeals of the assessee are allowed.
Order pronounced in the open Court on February 13 t h , 2017.
Sd/- Sd/- Sd/-
(Justice Dev Darshan Sud) (D. Manmohan) (P.M. Jagtap)
President Vice-President Accountant Member
Hyderabad, the 13 t h day of February, 2017
Copies to : (1) M/s. Nagarjuna Fertilizers and Chemicals Limited,
8-2-548, Corporate Building,
Nagarjuna Hills,
Punjagu tta,
Hyderabad-500 082
(2 ) Assistant Commissioner of Income Tax,
Circle-15(1 ), Hyderabad,
I.T. Towers, A.C. Guards, Hyderabad
(3) Assistant Di rector of Income Tax,
IT-II, Hyderabad,
I.T. Towers, A.C. Guards,
Hyderabad
(4) Commissioner of Income Tax(Appeals)-II, Hyderabad;
(5) Commissioner of Income Tax- , Hyderabad,
(6) The Depart ment al Represent ative
(7) Guard File
By order
Assistant Registrar,
Income Tax Appellate Tribunal,
Hyderabad Benches, Hyderabad
Laha/Sr. P.S.