Authors:
In a recent ruling, the Gujarat High Court has negated treaty override by an amendment to domestic law. After the Delhi, Bombay, and Karnataka High Courts, the Gujarat High Court in the case of Commissioner of Income Tax (International Taxation and Transfer Pricing) v. M/s Adani Wilmar Ltd. 1 , has reinforced the legal position that the Double Taxation Avoidance Agreements (“DTAAs”) override domestic law [Section 206AA of the Income-tax Act, 1961 (“the Act”)] where more beneficial tax rates apply.
Key Highlights of the Ruling:
- The Revenue had sought to apply a higher withholding rate of 20% in cases where non-resident payees failed to furnish Permanent Account Number (“PAN”)
- Adani Wilmar had withheld tax at treaty rates (10% or lower) under the Dutch Treaty, despite the absence of PAN data from the payees
- The High Court upheld the decisions of the CIT(A) and ITAT, holding that Section 90(2) of the Act overrides Section 206AA, reaffirming that where the DTAA provides a lower withholding rate, the same must apply
- The Court relied on principle of consistent jurisprudence as laid by the other High Courts including:
- Danisco India (P) Ltd. v. Union of India [2018] 404 ITR 539 (Delhi)
- Commissioner of Income Tax (International Taxation) Pune v. Serum Institute of India Ltd [2018]
(Income Tax Appeal No. 548 of 2016) (Bombay) - Commissioner of Income Tax, (International Taxation) v. Air India Ltd [2022] 456 ITR 117 (Delhi) –
SLP dismissed by the Supreme Court in the case of Commissioner of Income Tax (International
Taxation) v. Air India Ltd reported in [2023] 456 ITR 139 (SC) - Commissioner of Income Tax, International Taxation v. Wipro Ltd. reported in [2023] 146
taxmann.com 129 (Karnataka)
BMR Legal View:
This ruling lends clarity and signifies relief to Indian payers making remittances to non-residents without PAN for payees eligible to treaty relief.
The requirement for obtaining PAN was substantially diluted by an amendment via Finance Act, 2016, to Section 206AA(7), whereunder recipients were exempt from the requirement if they fulfilled conditions specified in Rule 37BC of the Income-tax Rules, 1962. The question is, can the ratio of this judgement be extended to the requirements imposed under Sections 90(4) and 90(5) for furnishing a Tax Residency Certificate and Form 10F to be eligible for claiming treaty benefits? Unlike Sub-Section (2A) of Section 90, these do not impose limitations on the superiority of the treaty over domestic law. Interestingly, the Ahmedabad Tribunal 2 has dealt with a similar issue and held that the mere non-furnishing of TRC cannot per se be treated as a trigger for disentitlement of treaty benefits. This aspect will be litigated by the Revenue in higher appellate forums.
1 R/TAX APPEAL NO. 514 to 523 of 2024 (Gujarat)
2 Skaps Industries India (P.) Ltd. vs. Income Tax Officer, International Taxation, Ahmedabad [2018] 94 taxmann.com 448 (Ahmedabad – Trib.]
DISCLAIMER: The contents contain general guidance on developments on the subject, and specific professional advice should be sought before acting on them. Contents transmitted to the recipient are confidential, legally privileged, and intended solely for the use of the individual or entity to whom they are addressed. If you are not the intended recipient, you are notified that disclosing, copying, distributing, or taking any action in reliance on the contents of this information is strictly prohibited under the law, and the sender shall not be liable for any losses. Unless related to BMR Legal business, the information contained within this document is that of the sender alone and does not necessarily constitute that of the Law Firm.