S/s. 195A and 206AA – The grossing up of the payment in case of net of tax contracts is to be made at “rates in force” and should not be made at the higher rate of 20% specified u/s. 206AA.

Taxpayer, an Indian company, entered into repairs contracts with its foreign supplier, a resident in Germany. Further, as per the contracts, taxpayer was required to pay on net-of-tax-basis. The Tax Authority contended that
(a) the payments were in the nature of technical services and constituted FTS, both under the Act and the India-Germany DTAA.
 (b) Also, section 206AA overrides all other provisions of the IT Act and, hence, nonresidents are also required to furnish their PAN to the payer of income
 (c). Accordingly, in the absence of PAN, higher rate of 20% should be applied and consider net of tax payments grossing up also should be done at 20%. CIT(A) upheld tax authority’s observations. Aggrieved, the taxpayer filed an appeal before the Tribunal.

Held:

Section 206AA overrides all the other provisions of the ITL and applies to all recipients of income, irrespective of the recipients’ residential status. Therefore, a nonresident whose income is chargeable to tax in India has to obtain a PAN and provide the same to the payer of income/taxpayer. In the absence of PAN, section 206AA is applicable and tax is required to be withheld at 20%.

A literal reading of the grossing up provisions u/s. 195A implies that the income should be increased by the “rates in force” for the relevant tax year and not the rate at which the “tax is to be withheld” by the taxpayer. Meaning and effect has to be given to the expression used in a section, as held by the SC in the case of GE India Technology [(2010) 327 ITR 456 (SC)]. Thus, the grossing up of the amount is to be done at the “rates in force” and not at the rate of 20% specified u/s. 206AA.