Ita/233/2022 Of Commissioner Of Income Tax International Taxation-1, New Delhi v. Air India Ltd

$~26 *IN THE HIGH COURT OF DELHI AT NEW DELHI +ITA 233/2022 CORAM: HON'BLE MR. JUSTICE MANMOHAN HON'BLE MS. JUSTICE MANMEET PRITAM SINGH ARORA J U D G M E N T MANMOHAN, J (Oral): 1.Present Income Tax Appeal has been filed challenging the Orderdated 23[rd]April, 2021 passed by the Income Tax Appellate Tribunal(ITAT) in ITA No. 2260/ DEL/2018, ITA No. 2261/DEL/2018 and ITANo. 2262/DEL/2018 for the Assessment Year 2013-14. 2.Learned counsel for the Appellant states that the ITAT has erred inholding that the provisions of Section 206AA of the Income Tax Act,1961 (‘the Act’) cannot override the provisions of the Double TaxAvoidance Agreement without appreciating the fact that the provisionsof Section 206AA are non obstante provisions and therefore these ITA No.233/2022 provisions override the provisions of other Sections of the Act includingSection 90(2) of the Act under which the assessee can avail benefit ofthe DTAA. 3.He states that the ITAT has erred in holding that the rate ofdeduction of tax in the case of a non-resident who does not have a PANand whose case does not lie in the exceptions laid down in Sub-Section7 of Section 206AA of the Act shall be the rate prescribed in the DTAAif such rate is lower than the rate specified in the relevant provisions ofthe Act and not as per the provisions of Section 206AA of the Act. 4.He also states that the ITAT has erred in not appreciating thatSection 206AA of the Act is in respect of deduction of tax at source inspecified circumstances and not in respect of charge of tax and that it iswith respect to charge of tax that rates in the DTAA, if more beneficialto the assessee, then the rate specified in the relevant provision of theAct, shall apply. He submits that ITAT has erred in not appreciating thatSection 206AA read with Section 2(37A)(iii) of the Act provides that,for deduction of tax in circumstances covered in that Section, thehighest of the three rates as given in sub-Section (1) of Section 206AAof the Act shall apply, even where the rate prescribed in DTAA, i.e. “therate or rates in force” is not such highest rate. 5.A perusal of the paper book reveals that in the present case theITAT has held that it is not in dispute that the engine is a part of aircraftand cannot be said to be an aircraft and the payment being made for rentof engine can be covered under equipment as per Article 12(4) of theDTAA between India and Netherlands. The ITAT has also held that theELFC, the lessor, is a foreign company having no permanent ITA No.233/2022 Page 2 of 8 establishment and was a tax resident of Netherland. It is not in disputethat assessee has not deducted this TDS from the payment but hasdeposited from their own account and has absorbed it as cost. It is alsonot in dispute that since payee, ELFC, being a foreign company havingno PAN, the assessee reported the transaction without PAN in thequarterly TDS statements. The relevant portion of the ITAT judgmentis reproduced hereinbelow:- ITA No.233/2022 Page 2 of 8 establishment and was a tax resident of Netherland. It is not in disputethat assessee has not deducted this TDS from the payment but hasdeposited from their own account and has absorbed it as cost. It is alsonot in dispute that since payee, ELFC, being a foreign company havingno PAN, the assessee reported the transaction without PAN in thequarterly TDS statements. The relevant portion of the ITAT judgmentis reproduced hereinbelow:- 7. “Undisputedly, the dispute in the instant appeals is qua applyingthe TDS rate at 20.12% or 10% on transfer between ELFC and theassessee for taking an engine on lease under an Agreement. It is alsonot in dispute that ELFC, the lessor is a foreign company having noPermanent Establishment (PE) and was a tax resident of Netherland.It is also not in dispute that under Article 7 of Double TaxationAvoidance Agreement (DTAA) between Indian and Netherland, theprofits of enterprise of a contracting state shall be taxable only in thatstate unless the enterprise carries on business in the other contractingstate through a “permanent establishment” situated therein. It is alsonot in dispute that engine is a part of aircraft and cannot be said to bean aircraft and the payment being made for rent of engine can becovered under equipment as per section 12(4) of the DTAA betweenIndia and Neitherland. It is also not in dispute that assessee has notdeducted this TDS from the payment but has deposited from their ownaccount and has absorbed it as cost. It is also not in dispute that sincepayee, ELFC, being a foreign company having no PAN, the assesseereportedthetransactionwithoutPANinthequarterlyTDSstatements. 13.Keeping in view the facts inter alia that engine is a part of aircraftand cannot be said to be an aircraft and payment made for rent ofengine are covered under equipment as perArticle 12(4) of theDTAA between India and Netherland; that under Article 12(4) of theDTAA between India and Netherland, the term “royalty” does notcover use of, or the right to use equipment itself; that rental ofaircraft engine is neither a copyright nor a payment of any ITA No.233/2022 information; that under Article 12(6) of the DTAA, fee for technicalservices also does not include the amount paid for services that areancillary and subsidiary to the rental of ships, aircrafts, containers orother equipment used in connection with the operation of ships oraircrafts in international traffic, the assessee is entitled for beneficialprovisions of DTAA. 14.So, following the order passed by the coordinate Bench of theTribunal in cases of DDIT (IT-II), Pune vs. Serum Institute of IndiaLtd., DCIT vs. M/S Infosys BPO Ltd. and the judgment of Hon’bleDelhi High Court in case of Danisco India Pvt. Ltd. vs. UOI, we areof the considered view that ld. CIT(A) has erred in holding that in thiscase, provisions contained u/s 206AA overrides beneficial provisionsof DTAA between India and Netherland. Consequently, assessee hasrightly deducted the tax @ 10% as per provisions contained underDTAA as section 206AA cannot have overriding effect on DTAA,hence no demand is payable by the assessee. Hence, question framedis decided in favour of the assesee. So, additions made by the AO andconfirmed by the ld. CIT(A) to the tune of Rs.73,00,719.77,Rs.80,82,662.74 & Rs.57,05,582.11 for second quarter, third quarterand fourth quarter of FY 2012-13 respectively is ordered to bedeleted.Consequently, all the appeals filed by the assessee areallowed.” 6.This Court is in agreement with the view of the Tribunal that theissues of law sought to be raised in the present appeal are squarelycovered by the judgment of this Court in Danisco India (P.) Ltd. vs.Union of India [2018] 90 taxmann.com 295 (Delhi), wherein it hasbeen held as under:- 6.This Court is in agreement with the view of the Tribunal that theissues of law sought to be raised in the present appeal are squarelycovered by the judgment of this Court in Danisco India (P.) Ltd. vs.Union of India [2018] 90 taxmann.com 295 (Delhi), wherein it hasbeen held as under:- “6. After hearing the counsel for the parties, it is quite apparentthat the issue urged has been rendered largely academic onaccount of corrective amendment made by the Parliament-whichsubstituted pre-existing Sub-section (7) with the present Section206AA (7). The amendment is mitigating to a large extent, therigors of the pre-existing laws. The law, as it existed, wentbeyond the provisions of DTAA which in most cases mandates a ITA No.233/2022 10% cap on the rate of tax applicable to the state parties. Section206AA (prior to its amendment) resulted in a situation, where,over and above the mandated 10%, a recovery of an additional10%, in the event, the non- resident payee, did not possess PAN. 7. In this context, the ITAT in Serum Institute of India(Supra) discussed this very issue in some detail and stated, asfollows: "..................The case of the Revenue is that in theabsence of furnishing of PAN, assessee was under anobligation to deduct tax @ 20% following the provisionsof section 206AA of the Act. However, assessee haddeducted the tax at source at the rates prescribed in therespective DTAAs between India and the relevantcountry of the non-residents; and, such rate of tax beinglower than the rate of 20% mandated by section 206AAof the Act. The CIT(A) has found that the provisions ofsection 90(2) come to the rescue of the assessee. Section90(2) provides that the provisions of the DTAAs wouldoverride the provisions of the domestic Act in caseswhere the provisions of DTAAs are more beneficial to theassessee. There cannot be any doubt to the propositionthat in case of non-residents, tax liability in India isliable to be determined in accordance with the provisionsof the Act or the DTAA between India and the relevantcountry, whichever is more beneficial to the assessee,having regard to the provisions of section 90(2) of theAct. In this context, the CIT(A) has correctly observedthat the Hon'ble Supreme Court in the case of AzadiBachaoAndolanandOthersv.UOI,MANU/SC/1219/2003 : (2003) 263 ITR 706 (SC) hasupheld the proposition that the provisions made in theDTAAswillprevailoverthegeneralprovisionscontained in the Act to the extent they are beneficial tothe assessee. In this context, it would be worthwhile toobserve that the DTAAs entered into between India andthe other relevant countries in the present contextprovide for scope of taxation and/or a rate of taxation ITA No.233/2022 ITA No.233/2022 which was different from the scope/rate prescribed underthe Act. For the said reason, assessee deducted the tax atsource having regard to the provisions of the respectiveDTAAs which provided for a beneficial rate of taxation.It would also be relevant to observe that even thecharging section 4 as well as section 5 of the Act whichdeals with the principle of ascertainment of total incomeunder the Act are also subordinate to the principleenshrined in section 90(2) as held by the Hon'bleSupreme Court in the case of Azadi Bachao Andolan andOthers (supra). Thus, in so far as the applicability of thescope/rate of taxation with respect to the impugnedpayments make to the non-residents is concerned, nofault can be found with the rate of taxation invoked bythe assessee based on the DTAAs, which prescribed for abeneficial rate of taxation. However, the case of theRevenue is that the tax deduction at source was requiredto be made at 20% in the absence of furnishing of PANby the recipient non-residents, having regard to section206AA of the Act. In our considered opinion, it would bequite incorrect to say that though the charging section 4of the Act and section 5 of the Act dealing withascertainment of total income are subordinate to theprinciple enshrined in section 90(2) of the Act but theprovisions of Chapter XVII-B governing tax deduction atsource are not subordinate to section 90(2) of the Act.Notably, section 206AA of the Act which is the centre ofcontroversy before us is not a charging section but is apart of a procedural provisions dealing with collectionand deduction of tax at source. The provisions of section195 of the Act which casts a duty on the assessee todeduct tax at source on payments to a non-residentcannot be looked upon as a charging provision. In-fact,in the context of section 195 of the Act also, the Hon'bleSupreme Court in the case of CIT v. Eli Lily & Co.,MANU/SC/0487/2009:(2009)312ITR225(SC)observed that the provisions of tax withholding i.e.section 195 of the Act would apply only to sums which ITA No.233/2022 are otherwise chargeable to tax under the Act. TheHon'ble Supreme Court in the case of GE IndiaTechnologyCentrePvt.Ltd.v.CIT,MANU/SC/0688/2010 : (2010) 327 ITR 456 (SC)held that the provisions of DTAAs along with the sections4, 5, 9, 90 & 91 of the Act are relevant while applyingthe provisions of tax deduction at source. Therefore, inview of the aforesaid schematic interpretation of the Act,section 206AA of the Act cannot be understood tooverride the charging sections 4 and 5 of the Act. Thus,where section 90(2) of the Act provides that DTAAsoverride domestic law in cases where the provisions ofDTAAs are more beneficial to the assessee and the samealso overrides the charging sections 4 and 5 of the Actwhich, in turn, override the DTAAs provisions especiallysection 206AA of the Act which is the controversy beforeus. Therefore, in our view, where the tax has beendeducted on the strength of the beneficial provisions ofsection DTAAs, the provisions of section 206AA of theAct cannot be invoked by the Assessing Officer to insiston the tax deduction @ 20%, having regard to theoverriding nature of the provisions of section 90(2) of theAct. The CIT(A), in our view, correctly inferred thatsection 206AA of the Act does not override the provisionsof section 90(2) of the Act and that in the impugned casesof payments made to non-residents, assessee correctlyapplied the rate of tax prescribed under the DTAAs andnot as per section 206AA of the Act because theprovisions of the DTAAs was more beneficial. Thus, wehereby affirm the ultimate conclusion of the CIT(A) indeleting the tax demand relatable to difference between20% and the actual tax rate on which tax was deductedby the assessee in terms of the relevant DTAAs. As aconsequence, Revenue fails in its appeals." 8. Having regard to the position of law explained in AzadiBachao Andolan (supra) and later followed in numerousdecisions that a Double Taxation Avoidance Agreement acquiresprimacy in such cases, where reciprocating states mutually agree 8. Having regard to the position of law explained in AzadiBachao Andolan (supra) and later followed in numerousdecisions that a Double Taxation Avoidance Agreement acquiresprimacy in such cases, where reciprocating states mutually agree ITA No.233/2022 upon acceptable principles for tax treatment, the provision inSection 206AA (as it existed) has to be read down to mean thatwhere the deductee i.e the overseas resident business concernconducts its operation from a territory, whose Government hasentered into a Double Taxation Avoidance Agreement with India,the rate of taxation would be as dictated by the provisions of thetreaty.” 7.Consequently, this Court is of the view that no substantial questionof law arises for consideration in the present appeal. Accordingly, thesame is dismissed. MANMOHAN, J JULY 28, 2022KA MANMEET PRITAM SINGH ARORA, J ITA No.233/2022 Page 8 of 8