Despite the lack of a PAN for a non-resident payee, TDS must be withheld at the rates outlined in Tax Treaties
Fact and issue of the case
The brief facts leading the present appeal are that in the intimation passed by learned AO dated the 03-08-2020, he has invoked section 206AA of the Act and held that the assessee company was under an obligation to deduct higher rate of TDS in case of non-availability of PAN of the nonresident payee. The assessee company, during the period under consideration had made payments to various non-resident parties and had deducted TDS as per the rate mentioned in the Treaty between India and respective countries or as per the rate mentioned in the Act, whichever is more beneficial to the assessee. An intimation under section 154 of the Act for the first quarter of financial year 2010-11 (assessment year 2011-12) was issued by the Asst Commissioner of Income Tax, Centralised Processing Cell, TDS (AO) to the assessee on account of short deduction of TDS (and interest thereon) amounting to Rs. 36,39,590/- on the ground that in case of payments where PAN of the non—resident parties was not available, the assessee was required to deduct tax under section 206AA of the Act and there was short deduction of TDS in case where TDS was deducted at the rate applicable under the respective Tax Treaty.
The assessee preferred appeal before Ld. CIT(Appeals) against the aforesaid additions. In appeal, Ld. CIT(Appeals) decided the issue in favour the assessee on the ground that the assessee’s own case, the Ahmedabad ITAT in ITA number 2642/Ahd/2017 dated 05-04-2018 for assessment year 2016-17 has adjudicated this issue in favour of the assessee. Further, Ld. CIT(Appeals)-8, Ahmedabad in appeal number CIT (A)-8/11363/16-17 dated 25-05-2018 has also passed order in favour of the assessee on this very issue.
This issue was discussed at length by the ITAT in the case of Serum Institute of India Ltd. 56 taxmann.com 1 (Pune – Trib.), wherein the ITAT held that TDS on payments made to non-residents who did not furnish their PAN can be deducted as per rate prescribed in DTAA and section 206AA cannot be invoked to insist on tax deduction at rate of 20 per cent.
Observation of the court
Accordingly, Ld. CIT(Appeals) decided the appeal in favour of the assessee with the following observations:
Ground no. 1 to 4 relates to the deduction of Rs. 36,39,590/- for short deduction of TDs and interest thereon. The appellant has relied upon the order of Hon’ble Ahmadabad ITAT Bench in ITA no. 2642/AHD/2017 dated, 05.04.2018 in his own case for A.Y. 2016-17 which is in appellant’s favour. Moreover, appellant has relied upon the decision of Ld. CIT(A)-8, (Ahmadabad) with relevant para is as under: “Considering the facts stated herein above and respectfully following the decision of the High Court of Delhi, Ahmadabad ITAT and my predecessor CIT(A) referred above, it is held that as per the provision of TDS are to be read along with DTAA for computing the tax liability on the sum in question and therefore when the recipient is eligible for benefit to DTAA the addition on the ground of short deduction of TDS applying the provision of 206AA is not correct. The assessing officer is directed to delete the on the basis of application of section 206AA. He is also directed to delete the interest which is consequential too the demand of short deduction. Accordingly the related grounds of appeal are allowed.” 8. Since, the facts are identical and it has also been held in various judicial pronouncement that provision under section 206AA cannot over ride beneficial provision of DTAA. Therefore, appellant is not liable for short deduction of TDS and interest thereon as levied by AO. Therefore, these grounds of appeal are allowed. 9. In the result, the appeal is allowed.
the ITAT made the following important observations:
We have carefully considered the rival submissions. Section 206AA of the Act has been included in Part B of Chapter XVII dealing with Collection and Recovery of Tax – Deduction at source. Section 206AA of the Act deals with requirements of furnishing PAN by any person, entitled to receive any sum or income on which tax is deductible under Chapter XVII-B, to the person responsible for deducting such tax. Shorn of other details, in so far as the present controversy is concerned, it would suffice to note that section 206AA of the Act prescribes that where PAN is not furnished to the person responsible for deducting tax at source then the tax deductor would be required to deduct tax at the higher of the following rates, namely, at the rate prescribed in the relevant provisions of this Act; or at the rate/rates in force; or at the rate of 20%. In the present case, assessee was responsible for deducting tax on payments made to non-residents on account of royalty and/or fee for technical services. The dispute before us relates to the payments made by the assessee to such nonresidents who had not furnished their PANs to the assessee.
In the case of Danisco India (P.) Ltd. 90 taxmann.com 295 (Delhi), the Delhi High Court held that where assessee, an Indian remits payments to company located in Singapore which is not a tax assessee in India, and tax relationship between two countries is regulated in terms of Indo-Singapore DTAA, rate of taxation would be as dictated by provisions of treaty and not under section 206AA.
In the case of Infosys Ltd. v DCIT  140 taxmann.com 600 (Bangalore – Trib.), the ITAT held that if rate of tax applicable under DTAA is lower than 20 per cent tax rate as prescribed under section 206AA, TDS has to be deducted at such lower rate even if non-resident deductee fails to furnish its PAN.
We further observe that all appeals filed by the Department are time barred by 2 days. However, considering the miniscule period of delay, the delay in filing of appeal by the Department is hereby condoned.
In the combined result, all eighteen appeals filed by the Department are dismissed.
In the result, appeal of the assessee is allowed and ruled in favour of the assessee