Delhi HC Reads down Provision mandating 20% TDS on payments to Non-Residents: Says Provisions of DTAA prevails [Read Judgment]

The Delhi High Court, while hearing the writ petition of DANISCO India Private Limited, has read down the provisions of section 206AA of the Income Tax Act, 1961 which mandates deduction of tax at source (TDS) at twenty percent on payments to non-residents since the provision of DTAA would prevail over the said provision.

In the instant case, the petitioner is an Indian taxpayer who remitted a payment as a fee for technical service rendered from M/s DuPont Singapore, a non-resident company, located in Singapore and he is not the taxpayer of India. In order to regulate the tax relationship of two countries, Indo-Singapore Double Taxation Avoidance Agreement (DTAA) mandates a cap of 10% upon the recovery of amounts, in respect of tax incidence that occurs in the concerned host country (Article 12).

Mr. Sujit Ghosh, Ms. Kanupriya Bhargava, and Ms. Mannat Waraich have appeared at the behest of Petitioner-Assessee. The bench including Justice S. Ravindra Bhat and Justice A. K. Chawla heard the contention of Assessee that Section 206AA (i) have the effect of undoing the provisions of DTAA, besides being in violation of Article 265 of Constitution of India. In order to press the aforementioned statement, the assessee called for recommendations of Justice Easwar’s Committee’s report of 2016 made to the Central Government.

After hearing both the parties’ contentions, the bench observed that the amendment is mitigating to a large extent, the rigors of the preexisting laws. The law, as it existed, went beyond the provisions of DTAA which in most cases mandates a 10% cap on the rate of tax applicable to the state parties, the bench said.

While looking at the position of law explained in Azadi Bachao Andolan which was later followed in numerous decisions regarding the Double Taxation Avoidance Agreement,  the Court observed that “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”.