Applicability of Section 206AA in case of Non Resident

Motichand Gupta

Section 206AA has been brought into Act from 1.4.2010. This section talks about furnishing of Permanent Account number (PAN) by any person entitled to receive any sum or income or amount on which tax is deductible under Chapter XVIIB. This provision cast a obligation on any person receiving an income to furnish PAN to deductor, failing on which tax shall be deducted at the higher of following;

a. At the rate specified in the relevant provision of this Act; or

b. At the rate or rates in force; or

c. At the rate of twenty percent.

Section 206AA is non substance clause i.e. it over rites other provision of this Act as far as any person receives any income on which tax is deductible under Chapter XVIIB.

Now, controversy arose in case of non resident who is not obliged to obtain PAN U/s 139A and section 90(2) is applicable.

Section 90 – ‘Agreement with foreign countries or specified territories’ is beneficial provision applicable to non resident assessee as far as DTAA vis-à-vis this Act is concerned.

In the absence of any judgement on section 206AA and with abundant caution, assessee was forced to withhold TDS @ 20% in spite of favourable TDS rate available in the DTAA.

However, we have two Tribunal judgements, from ITAT Pune and ITAT Banglore.

Dy. Director of Income Tax V/s Serum Institute of India Limited, ITAT- Pune, delivered on 30th March, 2015

DCIT (International Taxation) V/s M/s Infosys BPO Limited, ITAT Banglore, delivered on 29th June, 2015.

In both cases, Tribunal held that 206AA is not a charging section but it is a part of a procedural/ machinery provisions dealing with collection and deduction of tax at source. The provision of section 195 of the Act which casts a duty on the assessee to deduct a tax on payment to a non resident can not be looked upon as a charging section. In-fact, in the context of section 195 of the Act also, the

Hon’ble Supreme Court in the case of CIT vs. Eli Lily & Co., (2009) 312 ITR 225 (SC) observed that the provisions of tax withholding i.e. section 195 of the Act would apply only to sums which are otherwise chargeable to tax under the Act.

The Hon’ble Supreme Court in the case of GE India Technology Centre Pvt. Ltd. vs. CIT, (2010) 327 ITR 456 (SC) held that the provisions of DTAAs along with the sections 4, 5, 9, 90 & 91 of the Act are relevant while applying the provisions of tax deduction at source.

Therefore, in view of the aforesaid schematic interpretation of the Act, section 206AA of the Act cannot be understood to override the charging sections 4 and 5 of the Act. Thus, where section 90(2) of the Act provides that DTAAs override domestic law in cases where the provisions of DTAAs are more beneficial to the assessee and the same also overrides the charging sections 4 and 5 of the Act which, in turn, override section 206AA of the Act.

Therefore, in our view, where the tax has been deducted on the strength of the beneficial provisions of section DTAAs, 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 CIT(A), in our view, correctly inferred that section 206AA of the Act does not override the provisions of section 90(2) of the Act and that in the impugned cases of payments made to non-residents, assessee correctly applied the rate of tax prescribed under the DTAAs and not as per section 206AA of the Act because the provisions of the DTAAs was more beneficial.