Nagarjuna Fertilizers and Chemicals Limited vs. ACIT (ITAT Hyderabad) (Special Bench)

(i) It is evident that section 206AA contains a non-obstante clause and relying on the same, the stand taken by the authori ties 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 ef fect and since the said provisions override al l 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 behal f of the assessee in this regard is that the nonresidents 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 ef fect given to the said provisions, which is required to be read down. In support of this contention, rel iance has been placed on behalf of the assessee on the decision of the Hon’ble Andhra Pradesh High Court in the case of Mul lapudi Venkatarayudu –vs. – Union of India (supra), wherein i t was held that any fai lure to f i le return must connote obl igation to f i le the return. Reliance is also placed on behal f of the assessee in support of this stand on the decision of the Hon’ble Karnataka High Court in the case of Smt. Kaushal laya Bai & Others (supra).

(ii) In the case of Smt. Kaushal laya 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 sti l l the provisions of sect ion 206AA were invoked to deduct tax at higher rate from the amount of interest income paid to them as a result of their fai lure 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 inappl icable 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 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 obl iged 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 wi th Rule 114C, as was prevailed in the case of Kaushal laya 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 nonresidents payees who were not under an obligation to obtain the permanent Account Numbers.
(iii) 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 appl icable or the higher rate as provided in section 206 by virtue of the overriding ef fect given to the said provision, for the purpose of deduction of tax at source. Here it is necessary to understand the scope and appl icabi l ity of the provisions of Tax Treaty, visa- vis, the provisions of Domestic Law and the norms governing the coexistence 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 Sanof i 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 Domest ic Law and whi le deciding the same, the origins and evolution of tax treaties and how those conf late, cooperate with domestic tax legislation and converge to signal a uni f ied raft of appl icable norms, were taken into consideration by the Hon’ble Andhra Pradesh High Court in the l ight 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 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 noti f ied 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 i f inconsistent with provisions of the Act. As a consequence, i f a tax l iabi l ity is imposed by the Act, the treaty may be referred to for negativing or reducing it and in case of conf l ict between the provisions of the Act and of the Treaty, the provisions of the Treaty would prevai l and are l iable to be enforced. It was also held that since the general principle of chargeabi l ity of tax under sect ion 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 automatical ly override the provisions of the Act in the matter of ascertainment of chargeabi l ity to income tax and ascertainment of the total income, to the extent of inconsistency with Treaty terms.

(iv) Hon’ble Andhra Pradesh High Court in the case of Sanof i Pasteur Holding S.A. –vs. – Department of Revenue & Others (supra) also rel ied on the decision of the Hon’ble Supreme Court in the case of CIT –vs. – P.V.A.L. Kulandagan Chettiar (supra), wherein i t was held that the taxation pol ity is wi thin the power of the Government and sect ion 90 of the Act enables the Government to formulate its pol icies through treaties entered into by it and such treaties determine the f iscal domici le in one State or the other and this determinat ion in the treaty prevai ls over the other provisions of the Act. Af ter taking into consideration, inter al ia, 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 pol icy of more than one sovereign State, negotiated and entered into at a pol itical or diplomatic level and have several expl icit, subl iminal 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 pol icy underlying India entering into a Double Taxation Avoidance Treaty wi th another State, by enabl ing dual taxat ion through art i f icial 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 fai th 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 fai th interpretation, no further interpretive exert ion 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 relat ive weight and priority, to give ef fect 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 clari f ied by the Hon’ble Andhra Pradesh High Court in the case of Sanof i Pasteur Holding SA –vs. – Department of Revenue & Others (supra) makes it abundant ly 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 content ion 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.

(v) 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-XVI I -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 El i 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-XVI I 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) Limi ted is rendered by the Hon’ble Supreme Court after taking into consideration the earlier decision rendered in the case of Transportation Corporation of A.P. Limited (supra) on which reliance has been placed by the ld. CIT, D.R.

(vi) The ratio of the two decisions of the Hon’ble Supreme Court in the case of Il i 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. Simi larly, 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 fal ls in Chapter XVI I-B deal ing with tax deduction at source, i t fol lows 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.

(vii) There is one more basis to support the above conclusion. As right ly pointed out on behal f 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 ef fect from 1st April , 2016 and although the provisions contained in the said Chapter are given overriding ef fect 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 shal l apply to the assessee even if such provisions are not benef icial to him. As rightly pointed out on behalf of the assessee, no such provision, however, is made separately and speci f ical ly in section 90 to give overriding ef fect to section 206AA over sect ion 90(2), which clearly shows that the intention of the legislature is not to give overriding ef fect to section 206AA over the provisions of the relevant DTAA which are beneficial to the assessee. In the case of Sanof i 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 subsection (2A) in sect ion 90 to enable application of Chapter X-A even i f 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 whi le 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 restrict ive 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.

(viii) In the case of Bosch Limited (supra) rel ied 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, i t was considered in the context of grossing up and whi le 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 establ ishment in India, the payments did not require wi thholding 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 fai lure on the part of the concerned non-resident to furnish PAN to the assessee, the assessee was held to be l iable to withhold tax at higher of rates prescribed in section 206AA by the Tribunal. It, however, appears that al l the relevant aspects as discussed above, such as overriding effect of the Treaty provisions as per section 90(2), the limited effect of nonobstante clause contained in the machinery provision of section 206AA etc. were not argued before the Tribunal on behal f 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 Inst itute 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), El i Li l ly 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.

(ix) 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 sect ion 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 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.