INCOME TAX ACT, 1961

Section 195 Section 206AA

Tax deduction at source - Tax rates for grossing up under section 195 - Applicability of section 206AA vis-à-vis applicability of respective provisions of DTAA -

Assessee-company was engaged in business of products, platforms and services. It made payments to non-residents and pleaded that payments were not chargeable to tax and therefore assessee was not liable to deduct tax at source. Alternatively, assessee pleaded that rate at which tax was not at higher rate as prescribed by section 206AA but at the rate applicable as per DTAA between India and the country of which the payees were tax residents. Plea of the revenue was that section 206AA starts with a non-obstante clause and therefore, it overrides all other provisions including sections 90(2), 115A and 139A. Held: Special Bench of Tribunal in case of Nagarjuna Fertilizers & Chemicals Ltd. v. Asstt. CIT held that DTAA overrides IT Act, 1961, even if it is inconsistent with IT Act, 1961. DTAAs are entered into between two nations in good faith and are supposed to be interpreted in good faith. Otherwise, it would amount to the breach of Article 253 of the Constitution. Further, in Danisco India Private Limited, it was held that where reciprocating States mutually agree upon acceptable principles for tax treatment, 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.