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Requirement of PAN by Non-Residents & Tax Consequences

Deepak Agrawal 
on 01 April 2013

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NOTE ON REQUIREMENT OF PAN BY NON-RESIDENTS IN INDIA AND TAX CONSEQUENCES:

The analysis of the requirement of PAN is made on the basis of following cases:

I. Non resident is exempt from tax in India:

II. Non resident is liable to tax in India:

III. Grossing Up of tax u/s. 195A when tax liability is born by the payer

Relevant Provisions of the Income Tax Act, 1961 (‘the Act’):

Section 206AA:

“206AA. (1) Notwithstanding anything contained in any other provisions of this Act, any person entitled to receive any sum or income or amount, on which tax is deductible under Chapter XVIIB (hereafter referred to as deductee) shall furnish his Permanent Account Number to the person responsible for deducting such tax (hereafter referred to as deductor), failing which tax shall be deducted at the higher of the following rates, namely:

(i) at the rate specified in the relevant provision of this Act; or

(ii) at the rate or rates in force; or

(iii) at the rate of twenty per cent.”

Section 139A(8)(d) read with rule 114C:

“(8) The Board may make rules providing for—

(a) to (c)*****

(d) class or classes of persons to whom the provisions of this section shall not apply;”

Rule 114C:

“Class or classes of persons to whom provisions of section 139A shall not apply.

114C. (1) The provisions of section 139A shall not apply to following class or classes of persons, namely:

(a) ***

(b)  the non-residents referred to in clause (30) of section 2;

Section 2(30):

"non-resident" means a person who is not a "resident" and for the purposes of sections 9293 and 168, includes a person who is not ordinarily resident within the meaning of clause (6) of section 6;

I. Non resident is exempt from tax in India:

a. The deductee is required to furnish the PAN to the deductor as per section 206AA, only when tax is deductible under Chapter XVIIB.

b.Thus, if Tax is not deductible under chapter XVIIB or tax is exempted due to effect of DTAA, the deductee is not required to furnish PAN to the deductor.

c. Accordingly, the minimum rate of tax @20% as per section 206AA cannot be applied in this case in the absence of PAN.

II. Non-resident is liable to tax in India:

A. If the payment to non resident (deductee) is covered under the Provisions of the Act and withholding tax rate as per the Act is applied

B. If the payment to deductee is covered under DTAA between the respective two countries and withholding tax rate as per DTAA is applied

A. If the payment to non resident (deductee) is covered under the Provisions of the Act and withholding tax rate as per the Act is applied (DTAA not applicable):

In this case, where payment to non resident payee/deductee is liable for withholding tax as per chapter XVIIB of the Act and rate is also applied as per the Act, it will clearly fall under the ambit of section 206AA, the deductee is compulsorily required to furnish PAN to the deductor.

(a) Because, in case, where DTAA does not apply on any payments to non-residents, the provisions of Act will be binding on the assessee. Accordingly, section 139A(8)(d) r.w.s. 114C will be overruled by section 206AA.

(b) The default in the same, i.e. non-furnishing of PAN to the deductor by the deductee will suffer the minimum rate of withholding tax @20% as per section 206AA.

B. If the payment to deductee is covered under DTAA between the respective two countries and withholding tax rate as per DTAA is applied:

a. Section 206AA provides that if tax is deductible under chapter XVIIB, the deductee is required to furnish PAN to the deductor; default in the same will be liable for minimum rate of tax @20%.

b. Section 90A(2) provides as under:

“Where the Central Government has entered into an agreement with the Government of any country outside India or specified territory outside India, as the case may be, under sub-section (1) for granting relief of tax, or as the case may be, avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, the provisions of this Act shall apply to the extent they are more beneficial to that assessee.

Thus, where the tax is deductible as per DTAA then provisions of DTAA will prevail and the same will be applied to the extent they are more beneficial to the assessee.

The ambiguity arises where the section 206AA starts with “Notwithstanding anything content in any provisions of the Act”. However, DTAA overrides all the provisions of Income tax Act, in which section 206AA is also covered. Further, if provision of section 206AA is applied in case of the non resident assessee, payment to whom is covered under beneficial provisions of DTAA; it will not be beneficial to the assessee because the provision of DTAA does not provides any conditions to furnishing the PAN to apply the beneficial rate of tax as per section 90(2) of the Act.

The provision for applying rate of tax @20% u/s. 206AA in case of non-resident payee will not be in consistency with the provisions under section 90(2) of the Act.

Recently the new provision is inserted vide subsection (4) in section 90, which requires the tax Residency Certificate (TRC) to apply the beneficial provisions of the DTAA. However, no such clarity is provided in section 206AA. Merely adding the word “Notwithstanding anything content in any provisions of the Act” can neither change the position of the law which is prevailing overs years of time nor override the provisions of DTAA. Thus, it can be observed that the section 206AA does not apply to non resident if they are not covered u/c XVII-B and are covered under DTAA.     

By applying the holistic approach in interpretation of the above provisions, it can be observed that even if section 206AA applies to the non-resident deductee, then also the deductee is eligible to take the benefit of the beneficial provisions of the DTAA, if covered, and accordingly, the rate of tax as provided under DTAA and 20% as per section 206AA, whichever is lower, will apply.  

CBDT Press Release No.402/92/2006-MC (04 of 2010) dated 20th January 2010:

The relevant extract of this Press Release is reproduced as under:

“A new provision relating to tax deduction at source (TDS) under the Income Tax Act, 1961 will become applicable with effect from 1st April 2010. Tax at higher of the prescribed rate or 20% will be deducted on all transactions liable to TDS, where the Permanent Account Number (PAN) of the deductee is not available. The law will also apply to all non-residents in respect of payments / remittances liable to TDS.

All deductees, including non-residents having transactions in India liable to TDS, are advised to obtain PAN by 31st March 2010 and communicate the same to their deductors before tax is actually deducted on transactions after that date.“

However, the above Press Release does not cover the position of law in case where the amount payable to non-resident deductee is liable for tax in India and is covered under DTAA.

Decision of Hon’ble Bangalore ITAT in case of M/s. Bosch Ltd. vs. ITO (ITA No.552 to 558/Bang/2011), decided on 11/10/2012:

“Now, having held that the services rendered by the nonresidents are technical services, we will have to examine the applicability of sec. 206AA of the Income-tax Act. The assessee’s contention has been that the assessee being a non resident is not required to apply for and obtain PAN No. by virtue of Rule 114(C)(b) of Income-tax Rules read with sec. 139A(8)(d) of the Income-tax Act. We cannot agree with this contention of the assessee. The provision of sec. 206AA clearly overrides the other provisions of the Act.

Therefore, a non recipient whose income is chargeable to tax in India has to obtain PAN No. and provide the same to the assessee deductor. The only exemption given is that non-resident whose income is not chargeable to tax in India are not required to apply and obtain PAN No. However, where the income is chargeable to tax irrespective of the residential status of the recipients, every assessee is required to obtain the PAN No. and this provision is brought in to ensure that there is no evasion of tax by the foreign entities.”

Analysis of the CBDT Press Release and the judgment of Hon’ble Bangalore Tribunal:

In the aforesaid case, the payment was liable for tax u/s. 9(1)(vii) of the Act, hence it was not covered under DTAA and accordingly, the PAN was required to be furnished to the deductor because DTAA will not be helping and provisions of the Act will be biding on the deductee.

In view of the above provisions, Press Release as well as the decision of the Hon’ble Bangalore Tribunal does not clarify the specific position of law if payments liable for tax are covered under DTAA.

Thus, in view of the above we can conclude the above position of law as under:

(a) If the amount payable to non-resident is exempted in India, no question of requirement of PAN arises because as discussed above section 206AA covers only such payment which are liable for tax in India;

(b) If the amount payable to non-resident is taxable in India as per the provisions of the Act (for exp. Section 9(1)(vii) and where DTAA does not cover such payments, the deductee will be required to furnish PAN to the deductor u/s. 206AA, else minimum rate of tax @20% will be applied. As section 139A(8)9d) r.w.s. 114C are clearly overruled by section 206AA, thus, it will not be the case ever that the non-resident are not required to furnish  PAN in all cases.

(c) If the amount payable to non-resident is taxable in India but such payments are covered under DTAA and beneficial rate of tax to the assessee are applied, the deductee will not be required to furnish PAN to the deductor u/s. 206AA, because DTAA will be prevailing over the Act and the rate of tax as provided under DTAA will only be applied on such payments.

Note:

The above position of law is still debatable. But taking the holistic view in consideration of the provisions of section 90A(2) r.w.s. 206AA of the Act, it seems to be the better approach to not to apply the PAN requirement as per section 206AA for such non resident assessee/deductee payment to whom are covered under DTAA without which the convention of DTAA between two countries would become meaningless.

III. Grossing Up of tax when tax liability is born by the payer

Section 195A of the Act:

“Income payable "net of tax":

195A. In a case other than that referred to in sub-section (1A) of section 192, where under an agreement] or other arrangement, the tax chargeable on any income referred to in the foregoing provisions of this Chapter is to be borne by the person by whom the income is payable, then, for the purposes of deduction of tax under those provisions such income shall be increased to such amount as would, after deduction of tax thereon at the rates in force for the financial year in which such income is payable, be equal to the net amount payable under such agreement or arrangement.”

In view of the above provision, the grossing-up of total income shall be done after applying the rate which is prevailing in the financial year under consideration or if DTAA is applicable, the rate as provided in the same. Even in absence of PAN, the question of applying rates @20% does not arise at all, because section 195A considers the rate of tax in force for the financial year not the rate of withholding tax u/s. 206AA.

The above view is also supported by the decision of Bangalore Tribunal in case of M/s. Bosch Ltd. vs. ITO (ITA No.552 to 558/Bang/2011), decided on 11/10/2012:

In this case the Hon’ble Tribunal held as under:

“Thus, it can be seen that the income shall be increased to such amount as would after deduction of tax thereto at the rate in force for the financial year in which such income is payable, be equal to the net amount payable under such agreement or arrangement. A literal reading of sec. implies that the income should be increased at the rates in force for the financial years and not the rates at which the tax is to be withheld by the assessee. The Hon’ble Apex Court in the case of GE India Technology (cited Supra) has held that the meaning and effect has to be given to the expression used in the section and while interpreting a section, one has to give weightage to every word used in that section. In view of the same, we are of the opinion that the grossing up of the amount is to be done at the rates in force for the financial year in which such income is payable and not at 20% as specified u/s 206AA of the Act.”

Conclusion:

If the tax liability of the non-resident is born by the payer itself and even if the PAN is not provided by the non-resident payee, the gross up of the total income u/s. 195A for determining the tax liability would be done at the rate in force for the financial year (as per Act or DTAA) Not @20% as per section 206AA of the Act. 


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