Facts of the Case

The present appeal was filed by the Revenue challenging the order dated 23.04.2021 passed by the Income Tax Appellate Tribunal (ITAT) for Assessment Year 2013–14.

The case involved payments made by Air India Ltd. to a foreign entity (ELFC), a tax resident of the Netherlands, for leasing aircraft engines. The foreign entity did not have a Permanent Establishment (PE) in India and did not possess a PAN.

Air India deducted tax at source (TDS) at the rate prescribed under the Double Taxation Avoidance Agreement (DTAA) (10%), instead of applying the higher rate of 20% under Section 206AA due to absence of PAN.

The Assessing Officer raised a demand by applying Section 206AA, which mandates higher TDS where PAN is not furnished.

Issues Involved

  1. Whether Section 206AA of the Income Tax Act, 1961 overrides the provisions of DTAA in case of non-residents not having PAN.
  2. Whether TDS should be deducted at 20% under Section 206AA or at the beneficial DTAA rate (10%).
  3. Whether Section 206AA, being a non obstante provision, can override Section 90(2) of the Act.

Petitioner’s Arguments (Revenue)

  • Section 206AA is a non obstante provision and overrides all other provisions of the Act, including Section 90(2).
  • In absence of PAN, TDS must be deducted at higher rate (20%), irrespective of DTAA rates.
  • Section 206AA governs tax deduction at source, and the DTAA applies only to charge of tax, not TDS mechanism.
  • The ITAT erred in allowing deduction at DTAA rate despite non-compliance with PAN requirements.

Respondent’s Arguments (Assessee – Air India Ltd.)

  • The DTAA between India and Netherlands provides beneficial tax rate (10%), which should prevail under Section 90(2).
  • The foreign lessor had no Permanent Establishment in India, hence income is governed by DTAA provisions.
  • Section 206AA is procedural and cannot override substantive treaty provisions.
  • Payments for aircraft engine lease qualify under DTAA provisions and are not subject to higher withholding merely due to absence of PAN.

Court’s Findings / Order

  • The Delhi High Court upheld the ITAT’s decision and ruled in favour of the assessee.
  • It held that DTAA provisions override Section 206AA when they are more beneficial to the assessee.
  • Section 206AA is not a charging provision, but a procedural one related to TDS compliance.
  • Reliance was placed on the judgment in Danisco India Pvt. Ltd. vs Union of India (2018).
  • The Court observed that Section 90(2) gives primacy to DTAA where beneficial.
  • It was clarified that TDS must be deducted at DTAA rates even if PAN is not available.
  • The appeal of the Revenue was dismissed as no substantial question of law arose.

Important Clarification

  • Section 206AA cannot override DTAA provisions.
  • For non-residents, beneficial DTAA rates apply even without PAN.
  • Section 206AA is subordinate to Section 90(2) and treaty obligations.
  • TDS provisions must be interpreted in line with international tax treaties.

Sections Involved

  • Section 206AA – Higher TDS rate in absence of PAN
  • Section 90(2) – DTAA override provision
  • Section 195 – TDS on payments to non-residents
  • Section 2(37A)(iii) – Rate in force
  • Relevant DTAA provisions (India–Netherlands, Article 12 & Article 7)

Link to download the order -https://delhihighcourt.nic.in/app/case_number_pdf/2022:DHC:2862-DB/MMH28072022ITA2332022_195555.pdf

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