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Income Tax Appellate Tribunal, “A” BENCH : BANGALORE
Before: SHRI N. V. VASUDEVAN & SHRI A. K. GARODIA
O R D E R Per Bench: These are appeals by the Revenue and Cross objections by the Assessee against four orders all dated 19.3.2018 of CIT(A)-12, Bengaluru, relating to AY 2009-10 to 2012-13.
The Assessee is a company and is engaged in the business or providing Information technology solutions and services. It made certain payments to its Associated Enterprises (AE) who were non-residents. There were two kinds of payment viz., Onsite Service Charges and Selling and marketing charges. According to the revenue the payments were in the nature of “Fees for Technical Services” (FTS) rendered by the AE and therefore the Assessee ought to have deducted tax at source on such payments at the time of remittance or credit to the account of the AE, as required under the provisions of Sec.195 of the Income Tax Act, 1961 (Act). The Assessee did not deduct tax source on the aforesaid payments, as according to the Assessee, the payments were not in the nature of FTS and were not chargeable to tax in India in the hands of the AE and therefore the provisions of Sec.195 of the Act are not applicable. In an order passed u/s.201(1) & 201(1A) of the Act dated 27.2.2013 for AY 2011-12 & 2012-13 and an order dated 31.3.2013 passed for AY 2009-10 & 2010-11, the Assessee was held to be liable to deduct tax and to the extent tax was not so deducted, the Assessee was held to be an Assessee in default u/s.201(1) of the Act and interest on tax not so deducted from the date on which tax ought to have been deducted till payment of the taxes to the credit of the Government were levied u/s.201(1A) of the Act. The said orders of the DCIT, International Taxation, Circle-1(1), Bangalore, (AO) are in challenge before the appellate authorities. There were also -93/Bang/2018 & CO 107 to 109/Bang/2018 Page 3 of 12 orders dated 30.4.2013 rectifying certain errors in the computation of interest for all the aforesaid Assessment Years. If ultimately in the appellate proceedings it is held that there was no liability on the part of the Assessee to deduct tax at source, then all subsequent proceedings on the basis of the order dated 31.3.2013, as a corollary will have no basis and will become infructuous.
The present proceedings arise out of order dated 27.10.2017 passed u/s.154 of the Act. The Revenue audit took an objection stating that the Assessee had to bear taxes if any, payable on Onsite Services Charges and Selling and marketing charges payable to AE and therefore in terms of Sec.195A of the Act, the payments should have been grossed up and tax payable and interest ought to have been calculated accordingly. The provisions of Sec.195A reads thus: “Income payable "net of tax". 195A. In a case other than that referred to in sub-section (1A) of section 192, where under an agreement] or other arrangement, the tax chargeable on any income referred to in the foregoing provisions of this Chapter is to be borne by the person by whom the income is payable, then, for the purposes of deduction of tax under those provisions such income shall be increased to such amount as would, after deduction of tax thereon at the rates in force for the financial year in which such income is payable, be equal to the net amount payable under such agreement or arrangement.”
It is pursuant to the above audit objection that proceedings u/s.154 of the Act were initiated. In those proceedings, the Assessee convinced the AO that as far payment of onsite charges are concerned, the agreement between the parties did not provide that taxes have to be borne by the Assessee and therefore there is no question of applicability of the provisions of Sec.195A of the Act and consequent higher amount of tax deduction at source and interest on taxes short/not deducted -93/Bang/2018 & CO 107 to 109/Bang/2018 Page 4 of 12 at source. As far as Selling and Marketing Charges are concerned, the Assessee took a stand that the grossing up and tax payable should be as per the Double Taxation Avoidance Agreement (DTAA) between India and the country of which the payees were tax residents and that as per the DTAA, the rate of tax deduction at source cannot be in excess of 10%. The details of the grossing up and tax rate applied by the AO for determining the tax payable on the payments made to AE in the order dated 27.10.2017 are as follows: Selling & Grossed up AY Marketing Tax Rate Amount (Rs.) Expenses (Rs.) 2009-10 2,18,02,449 10.51% 2,43,61,911 2010-11 5,33,03,393 10.51% 5,95,60,857 2011-12 7,62,75,089 21.02% 9,65,65,414 2012-13 6,74,38,632 21.02% 8,53,78,326
As far as AY 2011-12 & 2012-13 are concerned, the tax rates are higher because of the provisions of Sec.206AA of the Act, which were applicable for those years. Section 206AA was introduced from FY 2010-11. Section 206AA requires every taxpayer who receives taxable income to furnish their PAN to the payer of such income. This applies to both the resident as well as non-resident recipients. The payments in case of residents would include salary, rent, professional receipts, contractual receipts and so on. In the case of non-resident, , these would include all receipts that are taxable in India. A recipient of taxable income should furnish PAN to comply with the provisions of TDS under the Income Tax Act. Upon furnishing of the PAN, payments made to the recipient would be taxed at the rate of TDS specified under the various TDS provisions of -93/Bang/2018 & CO 107 to 109/Bang/2018 Page 5 of 12 the Income Tax Act. A recipient who does not furnish PAN would suffer TDS at the higher rates specified in Section 206AA. The recipient is also required to furnish his PAN to the payer and both of them are required to indicate the same in all correspondence, bills, vouchers and other documents which are sent to each other. A recipient who fails to furnish PAN to the person making a payment would suffer TDS at the higher of the rates mentioned below: At the rate specified in the relevant provision of the Act; At the rate or rates in force, i.e., the rate prescribed in the Finance Act.; At the rate of 20%
It is on the above basis that the tax rate for grossing up u/s.195A and for determining the liability to deduct tax at source was adopted at 21.02% in AY 2011-12 & 2012-13 by the AO. The rates adopted in AY 2009-10 & 2010-11 is 10..51% because of the surcharge and other levies.
The AO rejected the plea of the Assessee that it is only the rates of taxes mentioned in the DTAA that should be adopted for the purpose of grossing up and also for determining the tax liability u/s.201(1) of the Act. According to the AO, the provisions of the Act, especially non-obstante clause in Sec.206AA of the Act have an overriding effect on the DTAA.
On appeal by the Assessee, the CIT(A) accepted the plea of the Assessee that the DTAA will override the provisions of the Act including Sec.206AA of the Act and that the rate of tax to be applied for grossing up should be as per the DTAA. The following were the relevant observations of the CIT(A) in this regard:
“9.2.FINDINGS:
-93/Bang/2018 & CO 107 to 109/Bang/2018 Page 6 of 12 I have carefully considered the contentions of the appellant. There is force in the arguments of the Assessee. Identical issue came up for consideration before the Hon’ble ITAT Delhi in the case of Computer Science Corporation (2017) 77 Taxmann.com 306 (delhi). Referring to the Circular of the Board (No.17/2014), the Hon’ble Tribunal held that once the rate of 20% as per Sectiopon 206AA is being applied, it cannot be further enhanced by surcharge and cess. The relevant extract is as under: “9. The other issue taken up by the ld. AR is against the levy of surcharge and education cess. The assessee deducted tax at source @ 20% in terms of clause (iii) of section 206AA(1) of the Act. The AO opined that apart from the correct rate of tax in his view, the assessee should have also been levied surcharge and education cess. The contention of the assessee for non levy of surcharge and education cess was turned down by the ld. CIT(A), against which the assessee has come up in appeal before us.
We have heard the rival submissions and perused the relevant material on record. While dealing with the first issue, we have held that the assessee had suo motu deducted tax at the rate of 20% as per the prescription of clause (iii) of section 206AA(1), which cannot be interfered. This provision provides in unequivocal terms that the tax should be deducted "at the rate of twenty per cent." This is the prescribed final rate of tax and there is no mention of charging any further surcharge or education cess on the same. Once the section does not provide for the levy of surcharge and education cess on the fixed rate of 20%, we fail to see how the levy of such surcharge etc. can be inferred in the provision. The legislature cannot be understood as oblivious of the levy of surcharge etc. in certain cases in addition to the specific rates prescribed in the Act itself. The term "maximum marginal rate" has been defined in section 2(29C) to mean; 'the rate of income-tax (including surcharge on income-tax, if any) applicable in relation to the highest slab of income in the case of an individual, association of persons or, as the case may be, body of individuals as specified in the Finance Act of the relevant year'. Same position follows from a bare reading of section 115JB which is a special provision for payment of tax by certain companies. Explanation to this section provides in comprehensible terms that : 'For the purposes of clause (a) of Explanation 1, the amount of income-tax shall -93/Bang/2018 & CO 107 to 109/Bang/2018 Page 7 of 12 include— (i) to (ii) … (iii) surcharge, if any, as levied by the Central Acts from time to time; (iv) Education Cess on income-tax, if any, as levied by the Central Acts from time to time; and (v) Secondary and Higher Education Cess on income-tax, if any, as levied by the Central Acts from time to time'. Thus, it is perceptible that wherever the legislature intended to levy surcharge and education cess etc. on a particular prescribed rate of tax in a provision, it expressly provided the same. In the absence of a specific mention for the levy of surcharge on the rate of 20% as prescribed in section 206AA(1)(iii), we cannot read the same into it.
11. At this juncture, it would be apt to consider the judgment of the Hon'ble Supreme Court in CIT v. Vatika Township (P.) Ltd. [2014] 367 ITR 466/227 Taxman 121/49 taxmann.com 249. The issue raised in that case was about the insertion of proviso to section 113 by the Finance Act, 2002 w.e.f. 1.6.2002 providing that the tax chargeable in the case of block assessment or search cases shall be increased by a surcharge, if any, levied by any Central Act and applicable in the assessment year relevant to the previous year in which the search is initiated u/s 132 or the requisition is made u/s 132A. A view was taken by some of the authorities with the insertion of proviso to section 113, that the levy of surcharge on the tax was always intended to be there and hence this proviso being clarificatory, is retrospective in nature. Rejecting this contention, the Constitution Bench of the Hon'ble Supreme Court held that the provision for levy of surcharge is prospective because such surcharge was inserted only w.e.f. 1.6.2002. Turning to the facts of the instant case, we find that the ld. CIT(A) has upheld the levy of surcharge on the rate of 20% u/s 206AA(1)(iii) which provision simply provides for deduction of tax 'at the rate of twenty percent.' Unlike section 113 and other provisions as discussed above, there is no mention for the levy of any surcharge or education cess etc. on such rate of twenty per cent.
12. At this stage, it will be pertinent to have a look at para 4.8 of the Circular No.17/2014 dated 10.12.2004, whose relevant part reads as under :— '4.8 Compulsory Requirement to furnish PAN by employee Section 206AA:
-93/Bang/2018 & CO 107 to 109/Bang/2018 Page 8 of 12
4.8.1 Section 206AA in the Act makes furnishing of PAN by the employee compulsory in case of receipt of any sum or income or amount, on which tax is deductible. If employee (deductee) fails to furnish his/her PAN to the deductor , the deductor has been made responsible to make TDS at higher of the following rates: (i) at the rate specified in the relevant provision of this Act; or (ii) at the rate or rates in force; or (iii) at the rate of twenty per cent. The deductor has to determine the tax amount in all the three conditions and apply the higher rate of TDS. However, where the income of the employee computed for TDS u/s 192 is below taxable limit, no tax will be deducted. But where the income of the employee computed for TDS u/s 192 is above taxable limit, the deductor will calculate the average rate of income-tax based on rates in force as provided in sec 192. If the tax so calculated is below 20%, deduction of tax will be made at the rate of 20% and in case the average rate exceeds 20%, tax is to deducted at the average rate. Education cess @ 2% and Secondary and Higher Education Cess @ 1% is not to be deducted, in case the tax is deducted at 20% u/s 206AA of the Act.' 13. On going through the above parts of the Circular, in the context of compulsory requirement to furnish PAN of employees u/s 206AA, it becomes crystal clear that the CBDT has provided that: 'Education cess @ 2% and secondary and higher education cess @1% is not to be deducted in case the tax is deducted at 20% u/s 206AA of the Act.' Albeit, this part of the Circular is not relevant for the purposes of deduction of tax at source in terms of section 195, yet it throws some guidance on the non-levy of education cess and surcharge etc. in case tax is deducted in terms of section 206AA on the payments made to non residents. No contrary provision mandating the levy of surcharge and education cess on the rate of 20% u/s 206AA(1)(iii) has been brought to our notice by the ld. DR. In view of the foregoing discussion, we are satisfied that the ld. CIT(A) was not justified in upholding the action of the AO in levying the surcharge and education cess on the amount of tax deducted at source u/s -93/Bang/2018 & CO 107 to 109/Bang/2018 Page 9 of 12
206AA(1)(iii) of the Act. The same is, therefore, directed to be deleted.” 9. In view of the above discussion this ground of the Assessee is allowed.
10. In AY 2012-13, the Assessee brought to the notice of the CIT(A) that as per selling and marketing agreement dated 1.4.2011 the AE has to bear taxes and therefore there was no question of any grossing up u/s.195A of the Act. The plea of the Assessee was accepted by the CIT(A).
Aggrieved by the orders of the CIT(A), the revenue is in appeal before the Tribunal. The grounds of appeal of the Revenue in AY 2009-10 & 2010-11 are identical. The grounds of appeal of the Revenue in AY 2011-12 & 112-13 are identical. The sum and substance of these grounds is that Sec.206AA of the Act has a non obstante clause and therefore it overrides the rates prescribed in DTAA.
At the time of hearing it was not disputed that the issue raised by the revenue in its appeals are already decided by a Special Bench of ITAT, Hyderabad. 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 in the case of Nagarjuna Fertilizers & Chemicals Ltd. Vs. AC IT (2017) 78 taxmann.com 264 (Hyderabad-Tribunal) (SB). The question before the special bench was whether the provisions of section 206AA had overriding effect for all other provisions of the Act, whether the assesse has to deduct tax at source at the rates prescribed in -93/Bang/2018 & CO 107 to 109/Bang/2018 Page 10 of 12 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 plea of the revenue was 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 plea of the Assessee was that DTAA was supreme and in this regard reliance was placed on the Hon’ble Supreme Court decision in the case of Azadi Bachao Andolan (2003) 263 ITR 706 (SC), whereby it was held that DTAA, even if inconsistent, will prevail over the Act. Reliance was also placed on the decisions of the Hon’ble Andhra Pradesh High Court in the case of Sanofi Pasteur (2013) 354 ITR 316 (AP) wherein it was observed that DTAA being a sovereign matter, the machinery provisions cannot override or control that. Reliance was also placed on the decision of the Hon’ble Karnataka High Court in the case of Kaushallaya Bai and others (2012) 346 ITR 156 (Kar) wherein it has held that the provisions of section 206AA are to be read down.
The Special Bench held that DTAA overrides the Act, even if it is inconsistent with the Act. DTAAs are entered into between two nations in good faith and are supposed to be interpreted in good faith. Otherwise it would amount to the breach of Article 253 of the constitution.
The Hon’ble Delhi High Court in the case of Danisco India Private Limited Vs. Union Of India & Ors. (Delhi High Court) in W.P.(C) 5908/2015 -93/Bang/2018 & CO 107 to 109/Bang/2018 Page 11 of 12 Judgement/Order dated 05/02/2018 held that where reciprocating states mutually agree upon acceptable principles for tax treatment, the provision in Section 206AA (as it existed) 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 Double Taxation Avoidance Agreement with India, the rate of taxation would be as dictated by the provisions of the treaty.
In view of the aforesaid decisions on the issue, we are of the view that there is no merit in the appeals of the Revenue. The grounds raised in the Cross-objections of the Assessee do not require any consideration in view of the decision in the revenue’s appeals and those issues are left open without any adjudication.
In the result, the appeals as well as the cross objections are dismissed. Order pronounced in the open court on this 27th day of November, 2019.