A much awaited relief to non-residents on non-furnishing of PAN | CA Prakash Hegde and CA Raghavendra N.

A much awaited relief to non-residents on non-furnishing of PAN

By CA Prakash Hegde and CA Raghavendra N.

The provisions of Section 206AA of the Income Tax Act (‘Act’) require that when a person (recipient/deductee) is entitled to receive any amount from another person (payer/ deductor) and if that amount is subject to Tax Deduction at Source (‘TDS’), the recipient has to furnish his Permanent Account Number (‘PAN’) to the payer.  If the PAN is not furnished by the recipient, the payer is required to deduct taxes at the highest of the following rates:

  1. Rate specified in the relevant provisions of the Act;
  2. Rates in force;
  3. 20%.

The above provisions were introduced by the Finance Act 2009 with effect from 01 April 2010 to track the taxability of payments in the hands of recipients and also to compel the recipients to obtain PAN in India. These provisions do not distinguish between resident assessees and non-resident assessees and therefore, are applicable to all recipients if the amount they are entitled to receive is subject to TDS.

India has Double Taxation Avoidance Agreements (‘DTAA’) with many countries providing beneficial provisions for taxation of income from royalties, interest, fees for technical services etc. received by non-residents.  Further, the provisions of section 90(2) of the Act give an option to an assessee to be governed either by the provisions of the Act or the applicable Double Taxation Avoidance Agreement (‘DTAA’), whichever are more beneficial.  In contrast to this, section 206AA starts with the non-obstante clause which states that “Notwithstanding anything contained in any other provisions of this Act”, thereby imposing the provisions of this section and overshadowing the beneficial provisions of the DTAA.

Considering the above non-obstante clause, the tax authorities were taking a view that, section 206AA would override the provisions of section 90(2) and hence, the provisions of DTAA as well.  However, the deductors argued that the beneficial provisions of DTAA (allowing a lower tax withholding) cannot be denied.  This matter had become a major issue of litigation in the recent years.

In this regard, recently, the Bangalore bench of the Income Tax Appellate Tribunal (‘ITAT’), in the matter of DCIT Vs Infosys BPO Ltd[1] had held that, the provisions of TDS have to be read along with the machinery provisions of computing the tax liability on the sum in question and there is no scope for deduction of tax at a higher rate, when the benefit of the DTAA is applicable.   Similar decisions were rendered by the ITAT in the cases of Wipro Ltd.[2], Serum Institute of India Limited[3] and Bharti Airtel Ltd.[4] holding that the higher rates are not to be applied where the DTAA rates are lower.

The requirement of obtaining PAN or getting in to the net of litigation in the alternative, deterred many non-resident companies from doing business with India.

Taking note of these issues and concerns, the Government of India, vide the Finance Act 2016, inserted sub-section (7) to section 206AA, which provides that the higher rate of withholding tax shall not be applicable to payments made to non-residents, subject to conditions, as may be prescribed.

In providing these conditions under section 206AA(7), the Central Board of Direct Taxes , vide notification dated 24 June 2016, has inserted a new Rule 37BC to the Income-tax Rules, 1962, prescribing the details and documents that a deductee is required to furnish. The new Rule provides that, section 206AA of the Act will not apply in respect of payments like interest, royalty, fees for technical services and payments on transfer of any capital asset even if the deductee has no PAN but furnishes the details and documents prescribed therein i.e. –

  • Name, e-mail id and contact number;
  • Address in the country or specified territory outside India of which the deductee is resident;
  • A certificate of his being resident in any country or specified territory outside India, from the Government of that country or specified territory if the law of that country or specified territory provides for issuance of such certificate;
  • Tax Identification Number of the deductee in the country or specified territory of his residence and in case no such number is available, then a unique number on the basis of which the deductee is identified by the Government of that country or the specified territory of which he claims to be a resident.

Therefore, effective 24 June 2016, higher withholding tax under the provisions of section 206AA would not be applicable to non-resident payee, if the above mentioned information and documents are made available to the payer, at the time of tax deduction. It is pertinent to note that the new Rule 37BC covers only payments in the nature of fees for technical services, payments on transfer of capital asset, interest and royalty.

By insertion of sub-section (7) to section 206AA and with the notifying of the conditions, the Government has provided a much awaited relief and certainty to the non-residents on the applicability of beneficial rate on furnishing of the prescribed details and documents, enabling further ‘ease of doing business in India’.

 

[1] 154 ITD 816 (Bangalore ITAT) (2016)

[2]ITA Nos. 1544 to 1547/Bang/2013 (Bangalore ITAT) (2016)

[3] 68 SOT 254 (Pune ITAT) (2015)

[4]67 taxmann.com 223 (Delhi ITAT) (2016)

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