ITAT: DTAA overrides provisions of Income Tax Act

a) The Bangalore bench of the Income Tax Appellate Tribunal (ITAT) has recently held that the provisions of the Double Taxation Avoidance Agreement (DTAA) would prevail over the provisions of the Income Tax Act, 1961.

b) The contention of the assessee contended before the Tribunal was that the rate of tax at which TDS should be made by the assessee is 10% in accordance with the Treaty for Avoidance of Double Taxation between India and Germany (DTAA) and not at the higher rate of tax @ 20% by invoking the provisions of section 206AA of the Act.

c) Based on the order passed by the Pune Tribunal in the case of Serum Institute of India Ltd, the CIT(Appeals) allowed relief to the assessee.

d) Aggrieved by the order, the Revenue approached the Tribunal for relief contending that section 206AA starts with a non-obstante clause and therefore it overrides all other provisions of the Act including 90(2), 115A and 139A.

“The issue regarding the applicability of provisions of section 206AA of the Act, in cases of tax to be deducted at source, when the income is exigible to tax under DTAA and the payees are unable to provide valid Permanent Account Numbers, came up for consideration before the Special Bench, ITAT Hyderabad in the case of Nagarjuna Fertilizers & Chemicals Ltd. Vs. AC IT (2017) 78 264 (Hyderabad-Tribunal) (SB). The question before the special bench was whether the provisions of section 206AA had an overriding effect for all other provisions of the Act, whether the assessee has to deduct tax at source at the rates prescribed in section 206AA in case the payees are unable to furnish their PANs, even in cases where tax liability arises out of the treaty. The DTAA provides for a rate of 10% whereas as per the provisions of Sec.206AA of the Act, the rate of tax deduction at source is 20%,” the Tribunal observed.

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