Income Tax Appellate Tribunal (“ITAT”) recently ruled that where taxes have been withheld as per beneficial provisions of Tax Treaty, the provisions of Section 206AA of the Income Tax Act (“Act”) cannot be invoked by the Revenue authorities to insist tax deduction at the rate of 20%.
Section 206AA of the Act states that if any person who is entitled to receive any sum on which tax is deductible at source fails to provide Permanent Account Number, then tax can be deducted at the rate of 20%.
Pune Bench of the Tribunal said, “…..where the tax has been deducted on the strength of the beneficial provisions of DTAAs [Double Taxation Avoidance Agreement], the provisions of section 206AA of the Act cannot be invoked by the Assessing Officer to insist on the tax deduction @ 20%, having regard to the overriding nature of the provisions of section 90(2) of the Act.”
The Tribunal further said that Section 206AA of IT Act is not a charging section, but a part of procedural provisions dealing with deduction of tax at source. Even provisions of Section 195 of the IT Act which cast duty on the Taxpayer to withhold taxes from payments to non-residents cannot be looked upon as a charging provision. In fact, in context of Section 195 of the IT Act withholding provisions apply only to sums which are chargeable to tax under the Act.