Sec. 206 AA of Income tax act 1961 (effective from 1.4.2010) was once a hot topic not only in India, but also some other countries which have financial dealings with India. These Non obstante clauses have been historically known to be plaguing our interpretations in Income Tax Law. A few glimpses in the wake of this section as below,
The below discussion may not be a moot point. There have been views that the provisions of Sec.206 AA should not be applicable to Expatriates as any amendment to the taxation law of a country cannot be done unilaterally to override the provisions of DTAA with another country. In this regard the following counter argument is presented. In any DTAA, there is an article that will speak for non discriminatory treatment of foreign nationals in the other contracting state (Article 26 in USA and UK treaties). The ruling is as below,
“The nationals of a Contracting State shall not be subjected in the other Contracting State to any taxation or any requirement connected therewith which is other or more burdensome than the taxation or any requirement connected therewith to which nationals of that other State in the same circumstances are or may be subjected”
Does the above mean that the provisions of Sec.206 AA being non discriminatory in nature (applicable equally to Nationals of India as well) is something that is already intrinsically allowed in the DTAAs? We also some implication in the form of proviso (2) in Article 26 which reads as follows,
“The taxation on a permanent establishment which an enterprise of a Contracting State has in the other Contracting State shall not be less favourably levied in that other State than the taxation levied on enterprises of that other State carrying on the same activities in the same circumstances or under the same conditions. This provisions shall not be construed as preventing a Contracting State from charging the profits of a permanent establishment which an enterprise of the other Contracting State has in the first-mentioned State at a rate of tax which is higher than that imposed on the profits of a similar enterprise of the first-mentioned Contracting State, nor as being in conflict with the provisions of paragraph 4 of Article 7 of this Convention”
The above clause is obviously relating to charge of corporate taxes on a PE of a foreign company. Could it be possible to apply the same interpretation to the provisions on deduction of tax at source under Chapter XVIIB?
The summary of the above Counter arguments is that Sec.206 AA is within the permissible limits of a DTAA. Therefore can the fine print be that Sec.206 AA if applied to Non Residents does not turn out to be anything unilaterally decided by Indian Government? In fact this provision is primarily intended to be a disciplinary measure rather than a charging measure.
In the light of the above discussions there may be a corollary in this fashion. Though Sec.90 of the Income tax act clarifies that the provisions of the act should be applicable in a beneficial way to the Assessee, we have a non obstante clause in Sec.206AA which will overrule the former. After all Sec.90 is a unilaterally inserted provision in our Income tax act! No wonder why CBDT has already issued Circular No.4/2010 dt.18.5.2010 wherein Paragraph 51.4 elucidates that the provisions of Sec.206AA will apply equally to Non residents. It has also done its homework already by withdrawing the old Circular No.23 dt.23.7.1969 which exempted transactions on a P2P basis between parent and subsidiary from the purview of chargeability under Sec.9. This could further widen the tax net for TDS purpose. In fact, practically bankers abroad have accepted Interest payments on the ECB Loans at a rate of 20% TDS for want of a valid PAN for themselves.
The next glimpse is on the starting phrase of the proviso (1) of Sec.206 AA which is the non obstante clause reads as below,
“Notwithstanding anything contained in any other provisions of this Act, any person entitled to receive any sum or income or amount”
The words’ person entitled’ carries significance in our context since we have been following a concept called ‘Overriding Income’. In this case the income is overridden by an already existing obligation at the source itself. The person is not entitled to the portion of the income which is already by source of law or a legal agreement becomes the entitlement of another person. For e.g. a garnishee order from Court creates an overriding income. Thus if A was to receive salary from B ltd and due to a garnishee order from Court in favour of another person C, the provisions of Sec.206AA if any should be applicable to C. Thus A can stay unscathed even if he does not possess a PAN.
One more observation is on the usage of words “The deductee shall furnish his Permanent Account Number to the deductor and both shall indicate the same in all the correspondence, bills, vouchers and other documents which are sent to each other”. Thus for example if a depositor at a Bank holds both Fixed deposit and Savings Deposit in the same bank, PAN has to be quoted in both the statement of accounts, irrespective of the fact that no TDS is required on Savings deposit as per Sec.194A. It may be noted that Rule 114B covers only quoting of PAN at the time of opening an account other than a Time deposit with a Bank and depositing in cash exceeding Rs.50000/- and not anything else. This is because, as per the words coined above once the deductor-deductee relationship is established, PAN is required to be quoted in all document flows between them and nothing is spared. It is not just restricted to those specifically mentioned documents in clause (5B) of Sec.139A. May be a word’ relevant’ if prefixed to the words ‘correspondence, bills…..’ will make the difference.
It is not unfair to conclude that widespread PAN possession will help the Government to identify/track various transactions which do not fall in the ambit of Sec.139A, though there are sarcastic comments around that it is a measure to create sources of revenue.