PAN AND NON RESIDENT – Section 206AA

(i) rate specified in the Act,
(ii) rate in force, or
(iii) rate of 20%.

Section 206AA also provides that a person cannot furnish a valid declaration u/s 197A without furnishing his PAN.

Section
195 requires a payer to deduct tax at source, at the rates in force, on
payments to a non-resident or a foreign company of any interest or any
other sum chargeable to tax under the Act. Section 2(37A) defines ‘rate
or rates in force’. One of the clauses of this section provides that for
the purposes of deduction of tax u/s. 195, the rate at which tax to be
deducted is the rate of income tax specified by the Finance Act of the
relevant year or the rate or rates specified in the relevant DTAA.
Section 2 of the Finance (No.2) Act, 2014, vide various sub-sections,
provides for payment of surcharge, education cess and secondary and
higher education cess on taxes, including on tax deduction at source, on
payments to a non-resident or a foreign company.

Issues have arisen, in the context of abovementioned provisions, which are listed as under;

are provisions of section 206AA applicable to cases of payees who are non resident or foreign companies,

are they applicable in cases where the tax is payable as per the provisions of DTAA ,

is
there a liability to deduct and pay surcharge and education cess in
cases where tax is deducted at 20% as per section 206AA, on payments to
non-resident or foreign company, and

what shall be the amount of tax that is to be grossed up for the payment of section 195A in cases where tax is paid by payer.

Bosch Ltd .’s case.
The
issue first came up for consideration of the Bangalore tribunal in the
case of Bosch Ltd., 28 taxmann.com 228 (Bangalore – Trib.) for
Assessment Year 2011-12. In that case, the assessee, a manufacturing
company with both imported and indigenous plant and machinery, entrusted
Annual Maintenance Contracts as well as repairs contracts to foreign
suppliers of machinery and equipments. The suppliers were residents of
Germany. The assessee made payments towards the AMCs and RCs without
deduction of tax at source on the understanding that the payments
represented business receipts of non-resident companies, who did not
have any PE in India, and as such, the payments were not chargeable to
tax in India. The AO as well as the Commissioner (Appeals) held that the
payments made by the assessee to the non-residents towards AMC and RC
were not their business profits, but were ‘fees for technical services’,
and the assessee was liable to withhold tax at the rate of 20 %. They
further held that since non-resident recipients did not furnish their
PANs to assessee-deductor, tax was required to be deducted at source at
higher rate u/s. 206AA.

In the appeal to the Tribunal, as
regards the applicability of the rate of 20% u/s. 206AA, the assessee
submitted that, the non-residents are not required to apply and obtain a
PAN u/s. 139A as per section 139A(8)(d) r.w.rule 114c(b); the reliance
of the CIT(A) on the press note dated 20.01.2010 was misplaced, as a
press note could not override the provisions of law; the provisions of
section 206AA were applicable only where the recipients were required
under the law to obtain the PAN and not otherwise. In support of the
contention, reliance was placed upon the judgment of the Karnataka High
Court in the case of Smt. A. Kowsalya Bai, 346 ITR 156.

On the
other hand, the Income tax Department supported the orders of the CIT(A)
and submitted that as per the form 15CB furnished by the assessee, the
payments for repairs had been treated as ‘FTS’ and the rate of tax was
mentioned as 20%; that the certificate issued by the assessee’s own
auditors was binding on the assessee and the assessee had rightly
deducted tax @ 20%, though out of caution, as provided u/s. 206AA of the
Act; that the CBDT in its press note dated 20.01.2010 had clearly
stated that the procedure of obtaining PAN was easy and inexpensive and
that even non-residents were required to obtain the same; s. 206AA had
overriding effect over all other provisions of the Act and, therefore,
whenever there was taxable income, the non-residents were required to
furnish their PANs to the deductor, failing which the rate specified u/s
206AA had to be applied; the decision of the Karnataka High Court, in
the case of Smt. A. Kowsalya Bai (supra), relied upon by the assessee,
was distinguishable on facts in as much as in that case, the assessees’
therein, whose income was below the taxable limit were residents, while
in the case before the tribunal, the recipients of the remittances were
non-residents having income above the taxable limit; and the income
being taxable in India as FTS, the recipients were required to obtain
PAN, failing which the rate u/s 206AA was applicable.

In
rejoinder, the assessee submitted that the Form 15CB prepared by the C.A
of the assessee company only reflected the opinion or a view of the C.A
and could not be considered as the admission of the assesse, and the
assessee had the right to deny its liability to deduct tax at source and
the issue had to be decided in accordance with law, and not on the
basis of the opinion of the C.A of the assessee.

The tribunal
first dealt with the issue of Form No.15CB and its binding nature on the
assessee. It held that the argument of the Department that the assessee
by furnishing Form No.15CB had admitted that the payment was ‘fees for
technical services’ could not be accepted, because Form No.15CB was a
certificate issued by an accountant (other than an employee) and,
therefore, it was the opinion or view of the accountant and could not be
said to be binding on the assessee; every transaction between the
assessee and the non-residents had to be considered in its own right,
and its nature was to be decided in accordance with the intention of the
parties and in accordance with law; even where it was to be considered
as an admission by the assessee, the same could not be accepted to be
the gospel truth and had to be verified by the AO; and the assessee had
every right to challenge the opinion given by its own C.A and it was for
the Revenue authorities to decide the issue in accordance with law and,
therefore, Form No.15CB alone would not determine the nature of the
transaction.

On applicability of section 206AA the tribunal
observed that the provisions of section 206AA clearly override the other
provisions of the Act and therefore, a nonresident whose income was
chargeable to tax in India had to obtain PAN and provide the same to the
assessee deductor; the only exemption given was that non-resident whose
income was not chargeable to tax, in India was not required to apply
for and obtain a PAN; however, where the income was chargeable to tax
irrespective of the residential status of the recipients, every assessee
was required to obtain a PAN and this provision was brought to ensure
that there was no evasion of tax by foreign entities.

The assessee’s contention that the assesse, being a non resident, was not required to apply for and obtain a Pan by virtue of rule 114(C)(b) of income-tax rules read with section 139a(8)(d) of the income-tax act was negatived by the tribunal as, in its view, the provisions of section 206aa clearly override the other provisions of the act. therefore, a non-recipient whose income was chargeable to tax in india had to obtain a Pan and provide the same to the assessee deductor. the assessee’s reliance upon the decision of the Karnataka high Court in the case of Smt. A. Kowsalya Bai (supra), was found to be misplaced and distinguishable on facts from the facts of the case as, in the case of Smt. A. Kowsalya Bai (supra), the recipients of the interest were residents of india and their total income was less than the taxable limit prescribed by  the  relevant  finance  act.  it  was  in  such  facts  and circumstances that the high Court had held that where the recipients of the ‘interest income’ were not having income exceeding taxable limits, it was not required to obtain a Pan. it held that in the instant case, the recipients were non-residents and admittedly the income exceeded the taxable  limit  prescribed  by  the  relevant  finance act.  In the circumstances, the recipients were bound and were under an obligation to obtain a Pan and furnish the same to the assessee; for failure to do so, the assessee was liable to withhold tax at the higher of rates prescribed u/s. 206aa i.e. 20 % and the Commissioner (appeals) had rightly held that the provision of section 206aa were applicable to the assessee.

   Serum Institute of India LTD.’s case
The issue again came up for consideration of the Pune tribunal in the case of Serum institute of india Ltd., ita no.s 1601 to 1604/Pn/2014. in that case, the assessee, a company incorporated under the Companies act, 1956 was engaged in the business of manufacture and sale of vaccines, and was a major exporter of the vaccines. in the course of its business activities, the assessee made payments to non-residents on account of interest, royalty and fees for technical services during the financial year 2010-11, relevant to the assessment year under  consideration.  These  payments  were  subjected to withholding tax u/s 195 of the act and the assessee deducted tax at source on such payment in accordance with   the   tax   rates   provided   in   the   double  taxation avoidance agreements (dtaas) with the respective countries.  The  tax  rate  so  provided  in  the  dtaas  was lower than the rate prescribed under the act and therefore, in terms of the provisions of section 90(2) of the act, the tax was deducted at source by applying the beneficial rates prescribed under the relevant dtaas.

The ao found that in cases of some of the non-residents, the recipients did not have Permanent account numbers (PANs). As a consequence of such finding, he treated such payments, as cases of ‘short deduction’ of tax in terms of the provisions of section 206aa of the act. as    a consequence, demands were raised on the assessee for the short deduction of tax and also for interest u/s. 201(1a)  of  the  act.  The  aforesaid  dispute  was  carried by the assessee in appeal before the Commissioner (appeals), who allowed the appeals of the assessee.

Aggrieved by the orders of the Commissioner (appeals), the revenue raised common Grounds of appeal as under :-

“1) The CIT(A) erred in law in concluding that sec 206AA is not applicable in case of non-residents as the DTAA overrides the Act as per section 90(2).

2)    The decision of the CIT(A) is not according to the law and erred in ignoring the memorandum explaining the provisions of the Finance (No.2) Bill, 2009 which clearly states that the sec. 206AA applies to non-residents and also Press Release of CBDT No.402/92/2006-MC (04 of 2010) dated 20.01.2010 which reiterates  that  sec.  206AA  will also apply to all non-residents in respect of payments/remittances liable to TDS.

3)    The CIT(A) erred in ignoring the decision of  the ITAT Bangalore in the case of Bosch Ltd. vs ITO, ITA No.552 to 558 (Bang.) of 2011 dated 11.10.2012, in which it was held that if the recipient has not furnished the PAN to the deductor, the deductor is liable to withhold tax at the higher rates prescribed u/s. 206AA.”

The assessee   contested the claims of the department and reiterated the contentions raised before the Commissioner(appeals) by submitting that the provisions of section 206aa were not applicable to payments made to non-residents; that the provisions of section139a(8) of the act r.w. rule 114C(1) of the income tax rules, 1962 prescribed that non-residents were not required to apply for Pan; that section 206aa of the act  prescribed  that the recipient should furnish Pan and such furnishing would be possible only where the recipient was required to obtain Pan under the relevant provisions; that where the non-residents were not obliged to obtain a Pan, the requirement of furnishing the same in terms of section 206aa of the act did not arise; that the tax rate applicable in terms of section 206aa of the act could not prevail over the tax rate prescribed in the relevant dtaas, as the rates prescribed in the DTAAs were beneficial.

The assessee relied on the provisions of section 90(2) of the act, which prescribed that provisions of the act were applicable to the extent that they were more beneficial to the assessee, and since section 206aa of the act prescribed higher rate of withholding tax, it would not be beneficial to the assessee vis-à-vis the rates prescribed in the dtaas.

On consideration of the rival submissions, the tribunal observed and held as under;

•     There cannot be any doubt in view of section 90(2), that the tax liability in india of a non-resident was to be determined in accordance with the more beneficial provisions of the act or the dtaa,

•     The CIT(a), relying on the decision of the Supreme Court in the case of azadi Bachao andolan and others, (2003) 263 itr 706 (SC), had correctly held that the provisions of the DTAAs would prevail over the general provisions contained in the act to the extent they were beneficial to the assessee,

•     The dtaas entered into between india and the other relevant countries in the present context, provided for scope of taxation and/or a rate of taxation which was different from the scope/rate prescribed under the act, and for the said reason, the assessee deducted the tax at source having regard to the provisions of the respective DTAAs which provided for a beneficial rate of taxation,

•     Even the charging section 4 as well as section 5 of the act, which dealt with the principle of ascertainment of total income under the act, were subordinated to the principle enshrined in section 90(2) as was held by the Supreme Court in the case of azadi Bachao andolan and others (supra), and

•     In so far as the applicability of the scope/rate of taxation with respect to the impugned payments made to the non-residents was concerned, no fault could be found with the rate of taxation invoked by the assessee based on the DTAAs, which prescribed for a beneficial rate of taxation.

•     In our considered opinion, it would be quite incorrect to say that though the charging section 4 of the act and section 5 of the act dealing with ascertainment of total income are subordinate to the principle enshrined in section 90(2) of the act but the provisions of Chapter XVii-B governing tax deduction at source were not subordinate to section 90(2) of the act.

•    Notably, section 206aa of the act was not a charging section but was a part of procedural provisions dealing with  collection  and  deduction  of  tax  at  source.  The provisions of section 195 of the act, which cast a duty on the assessee to deduct tax at source on payments to a non-resident, could not be looked upon as a charging provision. in-fact, in the context of section 195 of the act also, the hon’ble Supreme Court in the case of eli Lily & Co., 312 itr 225 (SC) observed that the provisions of tax withholding i.e. section 195 of the act would apply only to sums which were otherwise chargeable to tax under the act. the  Supreme Court in the case of Ge india technology Centre Pvt. Ltd., 327 itr 456 (SC) held that the provisions of dtaas along with the sections 4, 5, 9, 90 & 91 of the act were relevant while applying the provisions of tax deduction at source, and

In view of the schematic interpretation of the act, section 206AA of the act could not be understood to override the charging sections 4 and 5 of the act.

The provisions of section 90(2) of the act had the effect of overriding domestic law, including the charging sections 4 and 5 of the act, and in turn, section 206aa of the act.

The Pune tribunal accordingly held that   where the tax had been deducted on the strength of the beneficial provisions of dtaas, the provisions of section 206AA of the act could not be invoked by the ao to insist on the tax deduction @ 20%, having regard to the overriding nature of the provisions of section 90(2) of the act. The Tribunal affirmed the ultimate conclusion of the CIT(A) in deleting the tax demand relatable to difference between 20% and the actual tax rate on which tax was deducted by the assessee in terms of the relevant dtaas.

Observations
Section 90(2) provides for application of the provisions of the DTAA over the provisions of the income-tax act. The rate of tax provided for in dtaa apply in preference to the rate provided in the Act where beneficial. The internationally acclaimed position that the provisions of dtaa override the provisions of the domestic law is now also enshrined in the income tax act vide section 90(2) of the act. Please see azadi Bachao aandolan, 263 ITR 706, wherein the Supreme court clearly confirms that the provisions of section 90(2) override the provisions of the act as also the provisions of sections 4 and 5 thereof.

Section 206 aa provides for the rate at which tax is to be deducted at source in cases where the payee does not furnish his Pan. the provisions of section 206aa contain non-obstante clause that override the application of other provisions of the act. Section 90(2) also overrides the provisions of the act including the provisions of sections 4 and 5 of the act, in the manner noted above. in the circumstances, the issue that requires to be considered is which provision shall prevail over the other. apparently, both are special provisions and override the general provisions.

The  operation  of  section  206aa  however  is  limited  to the provisions of chapter XVii-B of the act while the application of the dtaa r.w.s.90(2) is sweeping and travels to cover even the charging provisions. A combined reading of these provisions reveal that in deciding the tax that is ultimately payable by the payee, the tax that is determined by applying the dtaa rates, will alone be relevant and the amount of TDS if found higher will be  refunded.  There  does  not  prevail  any  doubt  on  this position in law. There is therefore an agreement that the ultimate charge is based on the rate provided by section 90(2) read with the provisions of the DTAA and not by section 206 AA.

Section 195 read with the rules and the prescribed forms, clearly permit a deductor to deduct tax at such rate that has been provided under the DTAA. On a combined reading of these provisions, it is clear that the tax is to be deducted at the rate provided in DTAA in as much it is the rate at which the income of a non-resident will be ultimately taxable. There is also no disagreement that no tax is deductible where income is otherwise not taxable even where Pan is not furnished.

The two overriding provisions of the act operate in different fields. One for determining the rate at which the tax is deductible, and the other for determining the rate at which the income will ultimately be taxed. the usual approach in situations, where such conflicting special provisions exist, is to apply both of them to the extent possible. Accordingly, one view of resolving the issue on hand is to deduct tax at 20% while making payment to a non-resident who does not furnish Pan, and eventually tax his income at the rate prescribed under the dtaa and grant refund to him. The other view is to shorten this exercise by deducting only such tax as is ultimately payable by a non-resident which, in the absence of section 206AA, is otherwise the correct approach and meets the due compliance of sections 195, 4, 5, 90 and the provisions of the DTAA; an approach which has the benefit of avoiding the round tripping for refund.  The second view is otherwise also supported by acceptance of the position in law by both the parties that provisions of section 206aa are not applicable where no tax is otherwise required to be deducted at source, on the ground that the income of the non-resident is not liable to tax at all.

It is also worthwhile to note that section 206aa is not a charging section and perhaps is also not a provision that creates an obligation to deduct tax at source. A primary obligation to deduct tax at source is under different provisions of chapter XViiB and is not  u/s.  206AA,  which section has a limited scope of redefining the rate at which tax, otherwise deductible, is to be deducted. In the absence of a preliminary obligation to deduct tax at source, provision of section 206aa fails.

An important consideration that has to be kept in mind is that there is no leakage of revenue in adopting the second view. The  tax  that  is  deducted  as  per  the  provisions  of section 195 r.w.s 2(37a) and section 90 and the provisions of the dtaa, is the only tax that is otherwise payable on the income of the non-resident. The tax is deducted in full not leaving claim for payment of balance tax. as against that, not applying the provisions of section 206aa in cases of residents, may result into leakage of some
 
Revenue where the payee without PAN, chooses not to file a return of income.

We are of the considered view that in the following cases, the provisions of section 206aa should not be applied;

•    where the income of the non-resident is not taxable under the income-tax act either on account of the provisions of the income-tax act or on account of the provisions of the dtaa,
•    where the income of the non-resident is taxable at the fixed rate as specified in the Income-tax Act or in the dtaa and the tax deductible u/s. 195 matches such rate.

Logically, in most of the cases of payment to non- residents, the provisions of section 206aa should have no application for the simple reason that the tax that is required to be deducted by the payer u/s. 195, is the same that has to be paid on his total income. nothing less, nothing more, and nothing is gained by asking for  a higher deduction for non-furnishing of the Pan and thereafter refunding the higher tax so deducted.

It is for this reason, perhaps, that the provisions of section 139A(8)  of  the act  r.w.  rule  114C(1)  of  the  income tax rules,   1962   prescribed   that   non-residents   were   not required to apply for Pan.

Having said that, we need to take notice of sub- section(7) of section 206aa which grants exemption, from application of the provisions of section 206aa, in respect of payment of interest on long-term bonds referred to in section  194LC  to  a  non-resident.  This  means  that  the tax is such a case is to be deducted at the specified rate of 5%, even where the non-resident does not furnish Pan. This provision in our opinion should be considered to have been inserted out of abundant precaution, and should not be construed to mean that in all other cases of payments to non-residents, provisions of section 206aa should apply.

There does not seem to be any apparent need for reading down the provisions of section 206AA, in our considered view, to exclude its applicability to the cases of non- residents, in as much as it is possible to exclude such application on the basis of the reasonable interpretation of the two special provisions of the act. However, it may be read down if it is so required in the interest of the administration of law.

The  view  expressed  here  can  be  further  tested  by answering the question as to what shall be the ao’s prescription of the rate at which tax is to be deducted,  on a payment to a non-resident,  where an application   is made to him u/s 195(2) or 195(3). Can an ao order that the tax should be deducted at 20%, disregarding  the provisions of dtaa and the act, simply because the non-resident has not furnished Pan? We do not think so.

The Press note dated 20.01.2010 has no legal force and, in any case, its scope should be restricted to the very limited cases of payments to non-residents, where the tax deducted at source u/s. 195 does not represent the tax that is finally payable by them.

Section 206aa therefore cannot be applied in isolation simply because it contains a non-obstante clause. in applying the provisions, it is necessary to read the provisions of the act and in particularly the provisions    of sections 2(37a), 4, 5, 90 and 195 and the dtaa as also some of the provisions of the act that provide for  the rate at which income of a non-resident is required to be taxed. The   Supreme Court in the case of Ge india technology Centre Pvt. Ltd., 327 ITR 456 (SC) held that the provisions of dtaas along with the sections 4, 5, 9, 90 & 91 of the act would have a role to play while applying the provisions of tax deduction at source contained in chapter XVii B of the act.

In view of the observations, the surcharge and education cess in cases of payments to a non-resident, where applicable, shall be payable   on the basis of the rate    of tax determined in accordance with the provisions of section 195. However, section 206aa shall not apply, as discussed here.

It is also interesting to note that even the Bangalore tribunal in Bosch’s case, while upholding the revenue’s stand that the tax was required to be deducted at 20% in cases of non furnishing of Pan, held that for the purposes of grossing up in terms of section 195A, the rate that has to adopted is the rate in force and not 20% as prescribed by section 206AA.