Provisions of DTAA prevail over Section 206AA of the Income Tax Act, allowing lower tax rates for non-residents.

JUDGMENT

Manmohan, J. (Oral)--Present Income Tax Appeal has been filed challenging the Order dated 23rd April, 2021 passed by the Income Tax Appellate Tribunal (ITAT) in ITA No. 2260/DEL/2018, ITA No. 2261/DEL/2018 and ITA No. 2262/DEL/2018 for the Assessment Year 2013-14.

2. Learned counsel for the Appellant states that the ITAT has erred in holding that the provisions of Section 206AA of the Income Tax Act, 1961 (`the Act') 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.

3. He states that the ITAT has erred in holding that the rate of deduction of tax in the case of a non-resident who does not have a PAN and whose case does not lie in the exceptions laid down in Sub-Section 7 of Section 206AA of the Act shall be the rate prescribed in the DTAA if such rate is lower than the rate specified in the relevant provisions of the 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 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, i.e. "the rate or rates in force" is not such highest rate.

5. A perusal of the paper book reveals that in the present case the ITAT has held that it is not in dispute that the engine is a part of aircraft and cannot be said to be an aircraft and the payment being made for rent of engine can be covered under equipment as per Article 12(4) of the DTAA between India and Netherlands. The ITAT has also held that the ELFC, the lessor, is a foreign company having no permanent establishment and was a tax resident of Netherland. It is not in dispute that assessee has not deducted this TDS from the payment but has deposited from their own account and has absorbed it as cost. It is also not in dispute that since payee, ELFC, being a foreign company having no PAN, the assessee reported the transaction without PAN in the quarterly TDS statements. The relevant portion of the ITAT judgment is reproduced hereinbelow:

7. "Undisputedly, the dispute in the instant appeals is qua applying the TDS rate at 20.12% or 10% on transfer between ELFC and the assessee for taking an engine on lease under an Agreement. It is also not in dispute that ELFC, the lessor is a foreign company having no Permanent Establishment (PE) and was a tax resident of Netherland. It is also not in dispute that under Article 7 of Double Taxation Avoidance Agreement (DTAA) between Indian and Netherland, the profits of enterprise of a contracting state shall be taxable only in that state unless the enterprise carries on business in the other contracting state through a "permanent establishment" situated therein. It is also not in dispute that engine is a part of aircraft and cannot be said to be an aircraft and the payment being made for rent of engine can be covered under equipment as per section 12(4) of the DTAA between India and Neitherland. It is also not in dispute that assessee has not deduc