Article Assitant
70 Points
Joined February 2009
Clause (iii) of Section 2(37A) of the I T Act provides for meaning of rates of tax in case of deduction u/s 195 of the I T Act. The said section states as under :
(37A) rate or rates in force or rates in force, in relation to an assessment year or financial year, means……
(iii) for the purposes of deduction of tax under section 195, the rate or rates of income-tax specified in this behalf in the Finance Act of the relevant year or the rate or rates of income-tax specified in an agreement entered into by the Central Government under section 90, or an agreement notified by the Central Government under section 90A, whichever is applicable by virtue of the provisions of section 90, or section 90A, as the case may be;
In view of provisions of section 90(2) of the Act in case of a remittance to a country with which a DTAA is in force, the tax should be deducted at the rate provided in the Finance Act of the relevant year or at the rate provided in the DTAA, which is more beneficial to the assessee. Section 90(2) states as under
(2) Where the Central Government has entered into an agreement with the Government of any country outside India under sub-section (1) for granting relief of tax, or as the case may be, avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, the provisions of this Act shall apply to the extent they are more beneficial to that assessee.
This position has been clarified by the CBDT vide Circular No. 728 dated 30th Oct., 1995. which is given as under
It has been represented to the Board that when making remittances of the nature of royalties and technical fees, tax is being deducted at source at the rates specified in the Finance Act of the relevant year, without taking into account the special rates for taxation of such income provided for under the Double Taxation Avoidance Agreement with the country concerned.
2.The expression rates in force has been defined in section 2(37A) of the Income-tax Act. Under sub-clause (iii) of section 2(37A), for the purposes of deduction of tax under section 195, the expression is to mean the rate or rates of income-tax specified in this behalf in the Finance Act in the relevant year or the rates of tax specified in the Double Taxation Avoidance Agreement entered into by the Central Government whichever is applicable by virtue of the provisions of section 90 of the Income-tax Act, 1961.
3. It is hereby clarified that in view of the provisions of sub-section (2) of section 90 of the Act, in the case of a remittance to a country with which a Double Taxation Avoidance Agreement is in force, the tax should be deducted at the rate provided in the Finance Act of the relevant year or at the rate provided in the DTAA, whichever is more beneficial to the assessee.
Even otherwise CBDT had clarified through circular 333 dated 2.4.1982 that where a specific provision is made in the DTAA, the provisions of the DTAA will prevail over the general provisions contained in the Income-tax Act and where there is no specific provision in the DTAA, it is the basic law; i.e., the Income-tax Act that will govern the taxation of income. This position has been judicially held also in following cases
1. ITO vs. Degremont International (1985) 11 ITD 564 (Jp – Trib)
2.CIT vs. Davy Ashmore Ltd. (1991) 190 ITR 626 (Cal)
3.CIT vs. VR S.R.M. Firm (1994) 208 ITR 400 (Mad)
4.Banque National De Paris vs. IAC (1991) 94 CTR (Bom) 57
5.CIT vs. R.M. Muthiah (1993) 202 ITR 508 (Kar)
Education Cess or Surcharge are prescribed under I .T Act and not DTAA. Therefore , in case any payment has to suffer withholding tax and it is being paid to a person resident of another country with which there is Double Taxation Avoidance Agreement with India , tax rate applicable will be strictly according to the rate prescribed in DTAA which obviously does not prescribe for education cess or surcharge.
Whether higher rate of tax prescribed under DTAA applicable?
No , because section 90(2) , as also clarified by CBDT circular 334 clearly states that ” the provisions of this Act shall apply to the extent they are more beneficial to that assessee” which means that in case of an assessee if Income Tax Act is more beneficial that DTAA , the I T Act shall prevail.So, higher rate is not applicable.
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