Section 206AA vs. DTAA conundrum
Issue
involved
1. Section
206AA which override the entire Income Tax Act (Act), provides that where any sum is deductible under the chapter
XVIIB, the Payer is require to deduct TDS at the higher of the following, on failure of Payee
to furnish PAN :-
a) Rates
specified in relevant provision of Act
b) Rate
in force as per section 2(37A)
c) 20%
2. Section
90(2) provides that if India has entered into Double Taxation Avoidance
Agreement (DTAA) with any country, then with reference to assessee to whom DTAA applies, the provision which are more
beneficial, either under the Act or DTAA, will apply to said assessee.
3. If
DTAA has prescribed lower rate of taxation, say 15% for FTS/Royalty and Payee
has not furnished the PAN, then
question for consideration is whether TDS is deductible at a rate prescribed under
DTAA or at 20% prescribed under 206AA.
Hereinafter
Payer mean person, resident in India, who is making payment to Non-resident and Payee means person, non-resident in India
who is getting Income from Payer and does not have PAN.
Legal
Position – Payer and Payee
·
Who
can claim the benefit/protection under DTAA
a) Section
90(1) empower Central Government to enter into DTAA with Foreign Country for
granting relief in respect of:-
i)
Income on which tax paid been paid both under the Act and
corresponding law of foreign country
ii)
For the avoidance of double taxation of Income
under the Act and under corresponding law of foreign country
b)
The
income of Payee is subject to taxation in his resident country (Foreign Country)
as well as in Source country (India). Thus
Payee can always press into service provisions of DTAA to avoid double taxation
or claim relief in respect of double taxed income. The Payer cannot take benefit/shelter
under DTAA with reference to income accruing to payee.
·
Position
Under Income Tax Act
a) Payee
– The Payee substantial liability to tax in India is governed by provision of
section 4 & 5 , which itself is subject to provision of section 90 i.e Taxability
of income and rate of taxation thereon is subject to provision of Income tax Act
or Provision of DTAA, whichever is more beneficial
b) Payer
– The Payer liability to deduct TDS on income
chargeable in hands of Payee is governed by provision of section 195 which
is subject to provision of section 206AA. The Payer cannot have recourse to
section 90(2) to apply the lower of TDS rate under the Act or DTAA, as the
provisions of DTAA simpliciter are not applicable to Payer.
Conclusion
Case -1 - Income of Payee is not taxable in India
under DTAA
a) Suppose
Payer makes payment of Technical fees to Payee, which does not amounts to Fees
for Technical service under DTAA due to make available conditions. Thus such
fees are not taxable in India in the hands of payee by virtue of provision of
section 90(2), which override charging section 4.
b) The
Payer will NOT deduct any TDS on such payment, explained as under:-
i)
The liability to deduct TDS u/s 195 arises only,
when amount is chargeable to tax in India. On application of DTAA, it is found
that amount is not chargeable to tax. In such scenario, there is no requirement
to deduct TDS under section 195 , which falls under Chapter XVII-B
ii)
When there is no liability to deduct TDS under
chapter XVII-B, section 206AA has no application.
Case 2- Income of Payee is
taxable in India
a) Suppose
Payer makes payment of Technical fees to payee and under DTAA, India has right
to tax such income at rate not exceeding 15% of Gross amount of fees.
b) The
payer will deduct TDS @ 20% explained as under:-
i)
Section 195 empowers Payee to deduct TDS at the
rates in force, as such amount is chargeable to tax India. The rates is force
as per section 2(37A) is the rate prescribed under Finance Act or under DTAA,
as the case may be/
ii)
Section 206AA overrides section 195. As a result
thereof, Payer will deduct TDS @ 20%.
c) Since
the payee substantial liability to tax is restricted to 15% on fees, he will
file the return of income to claim refund of excess 5% tax deducted on his Income.
