Serum Institute Of India Ltd.,, vs Department Of Income Tax

Dy. Director of Income Tax (IT-II), Pune. .... Appellant

Vs.

Serum Institute of India Limited, 212/2, Off Soli Poonawala Corp. Building, Hadapsar, Pune - 411 028. PAN : AABCS4225M .... Respondent

ITA Nos.1601 to 1604/PN/2014 (Assessment Year : 2011-12)

Dy. Director of Income Tax (IT-II), Pune. .... Appellant

Vs.

Serum Institute of India Limited, 16/B-1/Sarosh Bhavan, Dr. Ambedkar Road, Pune - 411 001. PAN : AABCS4225M .... Respondent

Department by : Shri B. C. Malakar Assessee by : Shri Rajan Vora Date of hearing : 12-02-2015 Date of pronouncement : 30-03-2015

ORDER

PER G. S. PANNU, AM

ITA Nos.1601 to 1604/PN/2014 are four appeals by the Revenue

directed against a consolidated order of the Commissioner of Income Tax

(Appeals)-IT/TP, Pune dated 28.01.2013 which, in turn, has arisen from four

separate orders passed by the Assessing Officer u/s 200A of the Income-tax

Act, 1961 (in short "the Act") for Quarter 1 to Quarter 4 of assessment year

2011-12. Initially, Revenue had filed a single appeal vide ITA

No.792/PN/2013 assailing the combined order of the CIT(A) passed in relation

to four orders passed by the Assessing Officer u/s 200A of the Act. 2 ITA No.792/PN/2013

ITA Nos.1601 to 1604/PN/2014

Subsequently, Revenue has rectified and filed four separate appeals in ITA

Nos.1601 to 1604/PN/2014 and accordingly the initial appeal vide ITA

No.792/PN/2013 is rendered infructuous.

2. In all the appeals i.e. ITA Nos.1601 to 1604/PN/2014, Revenue has

raised common Grounds of Appeal which read as under :-

"1) The CIT(A) erred in law in concluding that sec 206AA is not applicable in case of non-residents as the DTAA overrides the Act as per section 90(2).

2) The decision of the CIT(A) is not according to the law and erred in ignoring the memorandum explaining the provisions of the Finance (No.2) Bill, 2009 which clearly states that the sec. 206AA applies to non-residents and also Press Release of CBDT No.402/92/2006-MC (04 of 2010) dated 20.01.2010 which reiterates that sec. 206AA will also apply to all non- residents in respect of payments/remittances liable to TDS.

3) The CIT(A) is erred in ignoring the decision of the ITAT Bangalore in the case of Bosch Ltd. vs ITO, ITA No.552 to 558 (Bang.) of 2011 dated 11.10.2012, in which it was held that if the recipient has not furnished the PAN to the deductor, the deductor is liable to withhold tax at the higher rates prescribed u/s. 206AA."

3. Briefly put, the relevant facts are as follows. The respondent-assessee

is a company incorporated under the provisions of the Companies Act, 1956

and is, inter-alia, engaged in the business of manufacture and sale of

vaccines, and it is a major exporter of the vaccines. In the course of its

business activities, assessee made payments to non-residents on account of

interest, royalty and fee for technical services during the financial year 2010-

11 relevant to the assessment year under consideration. The aforesaid

payments were subject to withholding tax u/s 195 of the Act. The respondent-

assessee deducted tax at source on such payment in accordance with the tax

rates provided in the Double Taxation Avoidance Agreements (DTAAs) with

the respective countries. The tax rate so provided in the DTAAs was lower

than the rate prescribed under the Act and therefore in terms of the provisions

of section 90(2) of the Act, the tax was deducted at source by applying the

beneficial rate prescribed under the relevant DTAAs. It was noted by the 3 ITA No.792/PN/2013 ITA Nos.1601 to 1604/PN/2014

Revenue that on account of payment of royalty and fee for technical services

in case of some of the non-residents, the recipients did not have Permanent

Account Numbers (PANs). As a consequence, Revenue treated such

payments, as cases of 'short deduction' of tax in terms of the provisions of

section 206AA of the Act. Notably, section 206AA prescribes that if the

recipient of any sum or income fails to furnish his PAN to the person

responsible for deduction tax at source, the tax shall be deductible at the rate

specified in the relevant provisions of the Act or at the rates in force or at the

rate of 20%. On the strength of section 206AA of the Act, Revenue treated

payments to those non-residents who did not furnish the PAN as cases of

'short deduction' being difference between 20% and the actual tax rate on

which tax was deducted in terms of the relevant DTAAs. As a consequence,

demands were raised on the assessee for the short deduction of tax and also

for interest u/s 201(1A) of the Act. The aforesaid dispute was carried by the

assessee in appeal before the CIT(A).

4. In appeal before the CIT(A), assessee raised varied arguments.

Assessee submitted that the provisions of section 206AA are not applicable to

payments made to non-residents. In support, assessee pointed out that

provisions of section 139A(8) of the Act r.w. rule 114C(1) of the Income Tax

Rules, 1962 (in short "the Rules") prescribe that non-residents are not required

to apply for PAN. According to the assessee, section 206AA of the Act

prescribed that the recipient shall furnish the PAN and such furnishing would

be possible only where the recipient is required to obtain PAN under the

relevant provisions. Thus, where the non-residents are not obliged to obtain a

PAN, the requirement of furnishing the same in terms of section 206AA of the

Act does not arise. Secondly, assessee also pointed out that the tax rate

applicable in terms of section 206AA of the Act cannot prevail over the tax rate

prescribed in the relevant DTAAs, as the rates prescribed in the DTAAs were 4 ITA No.792/PN/2013 ITA Nos.1601 to 1604/PN/2014

beneficial. In support of such a stand, assessee relied upon the provisions of

section 90(2) of the Act, which prescribe that provisions of the Act are

applicable to the extent that they are more beneficial to the assessee and

since section 206AA of the Act prescribed higher rate of withholding tax, it

would not be beneficial to the assessee vis-à-vis the rates prescribed in the

DTAAs. The CIT(A) did not agree with the assessee on the point that the non-

residents recipient are not required to obtain PAN. So however, with respect

to the second plea of the assessee, CIT(A) concurred with the assessee and

held that section 206AA of the Act would override other provisions of the Act

but not the provisions of section 90(2) of the Act. Therefore, according to the

CIT(A), where the DTAAs provide for a tax rate lower than that prescribed in

206AA of the Act, the provisions of the DTAAs shall prevail and the provisions

of section 206AA of the Act would not be applicable. Therefore, he deleted

the tax demand raised by the Revenue relatable to the difference between

20% and the actual tax rate provided by the DTAAs. Aggrieved with the

aforesaid decision of the CIT(A), Revenue is in appeal before us.

5. In the above background, the rival counsels have been heard. The Ld.

Departmental Representative submitted that the CIT(A) erred in holding that

section 206AA of the Act was not applicable in cases which are governed by

the DTAAs. According to him, section 206AA of the Act would override

section 90(2) of the Act and therefore the tax deduction was liable to be made

@ 20% in absence of furnishing of PANs by the recipient non-residents.

According to the Ld. Departmental Representative, the CIT(A) had himself

concluded that section 206AA of the Act required even the non-resident

recipients of income to obtain and furnish PAN to the dedutors of the tax at

source, being the assessee in the present case.

5 ITA No.792/PN/2013

ITA Nos.1601 to 1604/PN/2014

6. On the other hand, the Ld. Representative for the respondent-assessee

has defended the ultimate conclusion of the CIT(A) that section 206AA of the

Act would not override the provisions contained in section 90(2) of the Act.

7. 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 non-residents who had not furnished their

PANs to the assessee. The case of the Revenue is that in the absence of

furnishing of PAN, assessee was under an obligation to deduct tax @ 20%

following the provisions of section 206AA of the Act. However, assessee had

deducted the tax at source at the rates prescribed in the respective DTAAs

between India and the relevant country of the non-residents; and, such rate of

tax being lower than the rate of 20% mandated by section 206AA of the Act.

The CIT(A) has found that the provisions of section 90(2) come to the rescue

of the assessee. Section 90(2) provides that the provisions of the DTAAs

would override the provisions of the domestic Act in cases where the

provisions of DTAAs are more beneficial to the assessee. There cannot be 6 ITA No.792/PN/2013 ITA Nos.1601 to 1604/PN/2014

any doubt to the proposition that in case of non-residents, tax liability in India

is liable to be determined in accordance with the provisions of the Act or the

DTAA between India and the relevant country, whichever is more beneficial to

the assessee, having regard to the provisions of section 90(2) of the Act. In

this context, the CIT(A) has correctly observed that the Hon'ble Supreme

Court in the case of Azadi Bachao Andolan and Others vs. UOI, (2003) 263

ITR 706 (SC) has upheld the proposition that the provisions made in the

DTAAs will prevail over the general provisions contained in the Act to the

extent they are beneficial to the assessee. In this context, it would be

worthwhile to observe that the DTAAs entered into between India and the

other relevant countries in the present context provide for scope of taxation

and/or a rate of taxation which was different from the scope/rate prescribed

under the Act. For the said reason, assessee deducted the tax at source

having regard to the provisions of the respective DTAAs which provided for a

beneficial rate of taxation. It would also be relevant to observe that even the

charging section 4 as well as section 5 of the Act which deals with the principle

of ascertainment of total income under the Act are also subordinate to the

principle enshrined in section 90(2) as held by the Hon'ble Supreme Court in

the case of Azadi Bachao Andolan and Others (supra). Thus, in so far as the

applicability of the scope/rate of taxation with respect to the impugned

payments make to the non-residents is concerned, no fault can be found with

the rate of taxation invoked by the assessee based on the DTAAs, which

prescribed for a beneficial rate of taxation. However, the case of the Revenue

is that the tax deduction at source was required to be made at 20% in the

absence of furnishing of PAN by the recipient non-residents, having regard to

section 206AA of the Act. In our considered opinion, it would be quite

incorrect to say that though the charging section 4 of the Act and section 5 of

the Act dealing with ascertainment of total income are subordinate to the

principle enshrined in section 90(2) of the Act but the provisions of Chapter 7 ITA No.792/PN/2013 ITA Nos.1601 to 1604/PN/2014

XVII-B governing tax deduction at source are not subordinate to section 90(2)

of the Act. Notably, section 206AA of the Act which is the centre of

controversy before us is not a charging section but is a part of a procedural

provisions dealing with collection and deduction of tax at source. The

provisions of section 195 of the Act which casts a duty on the assessee to

deduct tax at source on payments to a non-resident cannot be looked upon as

a charging provision. In-fact, in the context of section 195 of the Act also, the

Hon'ble Supreme Court in the case of CIT vs. Eli Lily & Co., (2009) 312 ITR

225 (SC) observed that the provisions of tax withholding i.e. section 195 of the

Act would apply only to sums which are otherwise chargeable to tax under the

Act. The Hon'ble Supreme Court in the case of GE India Technology Centre

Pvt. Ltd. vs. CIT, (2010) 327 ITR 456 (SC) held that the provisions of DTAAs

along with the sections 4, 5, 9, 90 & 91 of the Act are relevant while applying

the provisions of tax deduction at source. Therefore, in view of the aforesaid

schematic interpretation of the Act, section 206AA of the Act cannot be

understood to override the charging sections 4 and 5 of the Act. Thus, where

section 90(2) of the Act provides that DTAAs override domestic law in cases

where the provisions of DTAAs are more beneficial to the assessee and the

same also overrides the charging sections 4 and 5 of the Act which, in turn,

override the DTAAs provisions especially section 206AA of the Act which is

the controversy before us. Therefore, in our view, where the tax has been

deducted on the strength of the beneficial provisions of section DTAAs, the

provisions of section 206AA of the Act cannot be invoked by the Assessing

Officer to insist on the tax deduction @ 20%, having regard to the overriding

nature of the provisions of section 90(2) of the Act. The CIT(A), in our view,

correctly inferred that section 206AA of the Act does not override the

provisions of section 90(2) of the Act and that in the impugned cases of

payments made to non-residents, assessee correctly applied the rate of tax

prescribed under the DTAAs and not as per section 206AA of the Act because 8 ITA No.792/PN/2013 ITA Nos.1601 to 1604/PN/2014

the provisions of the DTAAs was more beneficial. Thus, we hereby affirm the

ultimate conclusion of the CIT(A) in deleting the tax demand relatable to

difference between 20% and the actual tax rate on which tax was deducted by

the assessee in terms of the relevant DTAAs. As a consequence, Revenue

fails in its appeals.

8. Resultantly, the captioned appeals of the Revenue are dismissed, as

above.

Order pronounced on 30 th March, 2015.

Sd/- Sd/- (SUSHMA CHOWLA) (G.S. PANNU) JUDICIAL MEMBER ACCOUNTANT MEMBER

Pune, Dated: 30 th March, 2015. Sujeet

Copy of the order is forwarded to: - 1) The Assessee; 2) The Department; 3) The CIT(A)-IT/TP, Pune; 4) The CIT-IT/TP, Pune; 5) The DR "B" Bench, I.T.A.T., Pune; 6) Guard File.

By Order //True Copy//

Assistant Registrar I.T.A.T., Pune