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CA Garima Mittal

In this article, author attempts to brief ITAT (Pune) judgement of Serum Institute of India Limited describing the rate of tax deduction on payments made to non-resident recipient who do not have Permanent Account Number (PAN). For any queries, author can be reached at

Section 206AA of the Income Tax Act, 1961 (‘Act’) prescribes that if the recipient of any sum or income fails to furnish his PAN to the person responsible for deduction of tax at source, the tax shall be deductible at the rates specified in the relevant provisions of the Act or the rates in force or at 20% rate.

Finance Bill 2009 clearly states that section 206AA of the Act applies to Non-Resident (‘NR’) and Press Release of CBDT No. 402/92/2006-MC reiterates that section 206AA of the Act applies to all NR’s in case of payments/remittances liable to TDS.

Section 90(2) of the Act states that provisions of DTAA would override the provisions of domestic Act in cases where the provisions of DTAAs are more beneficial to the assessee.

Now, question arises whether section 206AA of the Act can override section 90(2) of the Act? At what rate TDS need to be deducted on payments made to NR who do not have PAN, i.e., 20% would be levied or section 90(2) can be applicable and beneficial rate would be applied?

There cannot be any doubt that in case of non-residents, tax liability in India is liable to be determined in accordance with the provisions of the Act or the DTAA between India and the relevant country, whichever is more beneficial to the assessee, having regard to the provisions of section 90(2) of the Act.

DTAA’s entered into between India and other relevant countries provide for the scope of taxation and/or rate of taxation which was different from scope/ rate prescribed under the Act.

Hon’ble Supreme Court in case of Azadi Bachao Andolan and Others vs. UOI, (2003) 263 ITR 706 (SC) has upheld that the provisions made in DTAA’s will prevail over the general provisions of the Act to the extent they are beneficial the assessee.

It would be incorrect to say that though charging section 4 and 5 of the Act dealing with the ascertainment of total income are subordinate to the principles enshrined in Section 90(2) of the Act, but the provisions of Chapter XVII-B, governing tax deduction at source are not subordinate to Section 90(2) of the Act.

Section 206AA is not the charging section but is a part of procedural provision 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 tax at source on payments to NR cannot be looked upon as a charging section.

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

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

In view of aforesaid interpretation of the Act, section 206AA of the Act cannot override the charging section 4 and 5 of the Act. Thus, where section 90(2) of the Act provides that DTAA overrides the domestic law in cases where provisions of DTAA’s are more beneficial to the assessee and the same also overrides the charging section 4 and 5 of the Act which in turn overrides the DTAA provisions of the Act especially section 206AA of the Act.


Where tax has been deducted on the strength of the beneficial provisions of DTAA’s, the provision of section 206AA of the Act cannot be invoked and insist on the tax deduction @ 20%, having regard to the overriding nature of the provisions of section 90(2) of the Act.

This is a controversial topic as in the case of M/s. Bosch Ltd vs ITO (ITAT Bangalore) ITA No. 552 to 558/Bang/2011, it was held that the provisions of section 206AA of the Act overrides the other provisions of the Act and NR whose income is chargeable to tax in India has to obtain PAN and provide the same to the tax deductor. It would be interesting to observe how the higher courts will deal with this matter in future.

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  1. S Agarwal says:

    Please note that the case of Eli Lilly % Co. relates to payment under the head salaries and the issue under consideration was section 192(1) and not section 195. In that case payments were made to Expat Employees working in India on behalf of a Foreign Company. Nowhere does it deals with chargeability under section 195.

    The chargeability issue as stated in section 195 has been clearly stated in GE India.

    Please check and clarify!

  2. Nem Singh says:

    Dear Mittal, Good view on the subject matter and provisions of the Act about charge-ability of tax on income and collection and deduction of tax at source are different provisions to identify the transaction and benefit under the global laws. God grace you more and yours too!

  3. casaisridhar says:

    nicely articulated. 206AA is a settled provisions it overrides domestic law which includes sec. 90,there is no go except obtaining PAN or gross up.

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June 2024