When it comes to deduction of TDS while remitting any payment to a Non-Resident the beneficial provisions of Double Taxation Avoidance Agreement (DTAA) and the Income Tax Act 1961 (Act) is applied. In case where the remittance is not taxable in India then there is no requirement to deduct TDS, otherwise TDS needs to be deducted as per the beneficial provisions of the Act or DTAA [1]. Once the beneficial provisions of the Act or DTAA are applied then there could be two scenarios:
Scenario 1: The applicable TDS rate is as per DTAA
Scenario 2: The applicable TDS rate is as per Act
On analyzing the above, the next question to understand is the availability of PAN of non- resident and the applicability of the provisions of section 206AA of the Act.
Section 206AA was introduced by the Finance Act, 2009 with effect from 1.4.2010, as a ‘non obstante’ provision to provide that any person whose receipts are subject to TDS i.e. the deductee, shall mandatorily furnish his PAN to the deductor failing which the deductor shall deduct TDS at higher of the following rates :—
i. the rate prescribed in the Act;
ii. at the rates in force
iii. at the rate of 20 per cent.
Hence, from the above it can be concluded that in case the deductee doesn’t furnishes the PAN then the highest of the following rates is applicable.
Slab 1: Rate prescribed in the Act – The specific rate as provided in the relevant provisions of the Income Tax Act for eg: 10% for royalty and FTS as per Section 115A
Slab 2: Rates in force – As per the definition provided in Section 2(37A) of the Act, among other items the definition of rates in force for the purpose of section 195 means rates of income tax specified in the Finance Act or in agreement entered into by central government under section 90.
Slab 3: @20%
Now, assuming that for a particular remittance to a non resident which is chargeable to tax in India the rate of TDS is as per the provisions of DTAA entered between India and Country of non resident. In such case, if the non resident furnishes PAN then the tax payer can adopt the DTAA rate and deduct TDS but in case the non resident doesn’t hold PAN in India and if the DTAA rate is less than 20% then a question arises as to whether the TDS is required to be deducted at 20% or the rate as per DTAA.
From the plain reading of the provisions of Section 206AA which has been introduced as a non obstante provision and Section 90(2)[2] being a normal provision an interpretation can be adopted that the provisions of section 206AA will override the beneficial provisions of DTAA.
It is also a trite law that provisions containing non-obstante clause in the Act will have an overriding effect over the other provisions mentioned therein.
Given the above, it could be concluded that as Section 206AA which is a non obstante clause, should be given priority over Section 90(2) which is a normal provision.
There is another view which does not make the non-obstante provision conclusive and suggests to decide the superiority amongst the two provisions.
In this regard, it is pertinent to note the following recommendations of Justice Easwar’s Committee’s report of 2016 to the Central Government:
“Under the current provisions of Section 206AA, tax is required to be deducted by the deductor at a higher rate as prescribed under the said section, where the deductee does not furnish his Permanent Account Number (PAN). This section was introduced with the objective that the furnishing of PAN was important with a view to trail the taxability of the payments in the hands of a non-resident. As regards non-residents, the Committee noted that in view of the specific provisions of Section 115A and the provisions under the respective Double Tax Avoidance Agreements (DTAAs) prescribing specific rates for tax deduction at source u/s. 195, there was no justification for providing deduction of tax at a higher rate than as prescribed under Section 115A or under the respective DTAA. In fact, this provision has proved to be an impediment in terms of ease of business, as many non-residents prefer not to do business with Indian residents, if obtaining of PAN is insisted from them. The Committee was of the view that it should suffice if the concerned non-resident furnished to the deductor, in lieu of such Permanent Account Number, his tax identification number in the country or the specified territory of residence and in case there is no such number, then, a unique number on the basis of which the person is identified by the Government of the country or the specified territory of which such person claims to be a resident.
(emphasis supplied)
Based on the above recommendations, the Central Government issued an amendment, through Finance Act 2016, that, in effect, neutralized the existing provision by substituting Sub-section (7). The newly added Subsection 206AA(7) w.e.f. 1.6.2016 reads as follows :
“(7) The provisions of this section shall not apply to a non-resident, not being a company, or to a foreign company, in respect of —
(i) payment of interest on long-term bonds as referred to in section 194LC; and
(ii) any other payment subject to such conditions as may be prescribed.”
Later with effect from 24 June 2016, the CBDT has introduced a new rule 37BC stating that in relation to certain payments to Non residents like interest, royalty and FTS, the provisions of section 206AA shall not apply if the prescribed documents as prescribed in rule is submitted by the concerned non resident.
Thus, from the above an inference can be drawn that the issue has been corrected to an extent that on certain specified payments if the non resident furnishes certain documents/ information the provision of section 206AA shall not apply.
Further, there are various judicial precedents which had concluded on this issue:
- Hon’ble Pune ITAT in the case of DDIT Vs Serum Institute of India Ltd [ITA No. 792/PN/2013] held that section 206AA of the Income-tax Act, 1961 would not override provisions of a DTAA to the extent that the latter is more beneficial to a taxpayer.
The Tribunal also observed that 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. Section 4 and section 5 of the Act, which deals with the principle of ascertainment of total income under the Act, were also subordinate to the principle enshrined in section 90(2) as held by the Supreme Court in the case of Azadi Bachao Andolan (2003) 263 ITR 706 (SC).
- The above decision has been further upheld by Chennai Tribunal in the case of DCIT Vs Pricol Ltd (ITA No.880 & 1141/Mds./2014) and Bangalore Tribunal in the case of ADIT Vs Infosys Ltd (IT(IT)A No.1143(B)/2013).
- Bangalore Tribunal in the case of Wipro Ltd vs ITO (ITA no 1544 to 1547/bang/2013) held that when the recipient is eligible to the beneficial provisions of DTAA then there is no scope for deduction of tax @20% u/s 206AA.
- Further, Hyderabad Special Bench in the case of Nagarjuna Fertilizers and Chemicals Ltd v ACIT in [ITA 1187/H/2014) has held as follows:
“……we are of the view that the provisions of section 206AA of the Act will not have a overriding effect for all other provisions of the Act and the provisions of the Treaty to the extent they are beneficial to the assessee will override section 206AA by virtue of section 90(2). In our opinion, the assessee therefore cannot be held liable to deduct tax at higher of the rates prescribed in section 206AA in case payments made to non-resident persons having taxable income in India in spite of their failure to furnish the Permanent Account Numbers.”
- Recently, Delhi High Court in the case of Danisco India (P.) Ltd. Vs Union of India [2018] 90 taxmann.com 295 (Delhi) held that the provision in Section 206AA (as it existed) has to be read down to mean that where the deductee i.e. the overseas resident business concern conducts its operation from a territory, whose Government has entered into a Double Taxation Avoidance Agreement with India, the rate of taxation would be as dictated by the provisions of the treaty.
Conclusion
On the basis of the above analysis and judicial precedents, it can be understood that section 206AA being a procedural section relating to deduction of tax, cannot override the charging section being section 90(2). Hence when tax is required to be deducted as per the provisions of respective DTAA then the provisions of section 206AA shall not apply.
[1] Beneficial provisions of DTAA is available subject to certain information/ documents as prescribed in the Act
[2] Section 90(2) provides that when India has entered into a DTAA with any country then then for the purpose of avoiding double taxation the beneficial provisions of Act or DTAA shall apply.
Disclaimer: The contents of this article are solely for informational purpose. It does not constitute professional advice or a formal recommendation. While due care has been taken in preparing this document, the existence of mistakes and omissions herein is not ruled out. There will be no liabilities on the author for any loss or damage of any kind arising out of any inaccurate or incomplete information in this document nor for any actions taken in reliance thereon.
Author Bio
Very useful article, thanks