Pune Tribunal applies treaty rate over the higher tax rate under the ITL in the absence of a Permanent Account Number

This Tax Alert summarizes a recent decision of the Pune Income Tax Appellate Tribunal (Tribunal) in the case of Serum Institute of India Ltd.  (Taxpayer), wherein the issue was on applicability of higher rate of 20% as prescribed under the Indian Tax Laws (ITL) for tax withholding where the nonresident (NR) does not furnish a valid Permanent Account Number (PAN), as compared to the lower tax rate prescribed for payments in the nature of interest/royalty/ fees for technical services (FTS) under the relevant Double Taxation Avoidance Agreement (DTAA). The Tribunal held that the higher rate prescribed under the ITL would not prevail over the lower rate under the DTAA on account of a specific provision which permits an NR to claim benefit under the ITL only to the extent it is advantageous. Accordingly, the ITL cannot override the beneficial provisions of the DTAA. Therefore, the lower tax rate prescribed under the DTAA applies, whether or not the NR furnishes a valid PAN.

 

The applicability of higher withholding tax rate, in the absence of a PAN, has been a contentious/vexed issue. In the past, the Tax Authority had aggressively targeted payers who had failed to withhold tax at the higher rate of 20% and has disallowed expenditure, initiated recovery proceedings, as also levied interest. This decision of the Tribunal is, therefore, a welcome relief for both, the payer and the NR recipient.

 

The Tribunal has reaffirmed the well-settled principle that provisions of the DTAA prevail over the ITL and that the ITL cannot supersede the DTAA. Accordingly, where the ITL provides for any onerous obligation, which is in direct conflict with the DTAA, the same would not be valid.