INCOME TAX ACT, 1961

Section 195 Section 195A Section 206AA

Tax deduction at source - Tax rate for grossing up under section 195A - Applicability of provisions of section 206AA - Beneficial provisions of DTAA

In an order passed under section 201(1) and 201(1A). Assessee was held to be an assessee in default under section 201(1) and interest on tax not so deducted from the date on which tax ought to have been deducted till payment of the taxes to the credit of the Government were levied under section 201(1A). Revenue audit took an objection stating that the assessee had to bear taxes, if any, payable on Onsite Services Charges and Selling and marketing charges payable to AE and therefore in terms of section 195A, the payments should have been grossed up and tax payable and interest ought to have been calculated accordingly. Assessee took a stand that the grossing up and tax payable should be as per the Double Taxation Avoidance Agreement (DTAA) between India and the country of which the payees were tax residents and that as per the DTAA, the rate of tax deduction at source cannot be in excess of 10%. AO rejected the plea of the assessee that it was only the rates of taxes mentioned in the DTAA that should be adopted for the purpose of grossing up and also for determining the tax liability under section 201(1). The CIT(A), however, accepted the plea of the assessee that the DTAA will override the provisions of the Act including section 206AA.Held: The CBDT No. 17/2014, dt. 10-12-2004 has provided that: 'Education cess @ 2% and secondary and higher education cess @1% was not to be deducted in case the tax is deducted at 20% under section 206AA. In case tax was deducted in terms of section 206AA on the payments made to non residents. No contrary provision mandating the levy of surcharge and education cess on the rate of 20% under section 206AA(1)(iii) had been brought to notice by the DR. DTAA being a sovereign matter, the machinery provisions cannot override or control that.

Followed:Nagarjuna Fertilizers & Chemicals Ltd. v. ACIT (2017) 78 Taxmann.com 264 (Hyd-Trib) (SB) : 2017 TaxPub(DT) 706 (Hyd-Trib), Azadi Bachao Andolan (2003) 263 ITR 706 (SC) : 2003 TaxPub(DT) 1429 (SC), Sanofi Pasteur (2013) 354 ITR 316 (AP) : 2013 TaxPub(DT) 842 (AP-HC), Danisco India Private Limited v. UOI & Ors. (Del-HC) W.P.(C) 5908/2015 Judgement/Order, dated 5-2-2018 : 2018 TaxPub(DT) 848 (Del-HC). Relied:Kaushallaya Bai & Ors. (2012) 346 ITR 156 (Karn) : 2012 TaxPub(DT) 2384 (Karn-HC).