The Delhi High Court held that Section 206AA of the Income Tax Act, 1961 cannot be invoked when tax deducted according to beneficial provisions of Double Tax Avoidance Agreement (DTAA).
The Counsel for the appellant (COMMISSIONER OF INCOME TAX INTERNATIONAL TAXATION), Puneet Rai submitted that the ITAT has erred in holding that the provisions of Section 206AA of the Income Tax Act, 1961 cannot override the provisions of the Double Tax Avoidance Agreement without appreciating the fact that the provisions of Section 206AA are non obstante provisions and therefore these provisions override the provisions of other Sections of the Act including Section 90(2) of the Act under which the assessee can avail benefit of the DTAA.
The Counsel also submitted that ITAT has erred in not appreciating that Section 206AA of the Act is in respect of deduction of tax at source in specified circumstances and not in respect of charge of tax and that it is with respect to charge of tax that rates in the DTAA, if more beneficial to the assessee, then the rate specified in the relevant provision of the Act, shall apply. He submits that ITAT has erred in not appreciating that Section 206AA read with Section 2(37A) (iii) of the Act provides that, for deduction of tax in circumstances covered in that Section, the highest of the three rates as given in sub-Section (1) of Section 206AA of the Act shall apply, even where the rate prescribed in DTAA
The Bench consisting of Justice Manmohan and Justice Manmeet Pritam Singh Arora, agreed with the view of the Tribunal that the issues of law sought to be raised in the present appeal are squarely covered by the judgment of the Delhi High Court in Danisco India (P.) Ltd. vs. Union of India wherein it was held 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.”
“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” The Court said.
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