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    Sec 206AA- Twist And Turns

    History:-

     

    Finance Act (no.2) 2009 has introduced the provisions of section 206AA. It provides that the deductee should furnish his PAN to the person responsible for deducting the tax else the minimum rate of TDS applicable would be 20%.

     

    The requirement to obtain PAN is governed by the provisions of section 139A. The section 206AA starts with a non-obstante clause “Notwithstanding anything contained in any other provisions of this Act”. This section will also be applicable in case the deductee provides an invalid PAN or PAN not belonging to him.

     

    So, reading together the provisions of section 139A and 206AA, one may conclude that though it is not mandatory for a person to obtain PAN still the provisions of higher rate of TDS referred U/S 206AA would apply on non-furnishment of PAN.

     

    This section will also apply in case the deductee is non-resident 1. However, if any beneficial provisions exist in DTAA then they will have overriding effect over the provisions of Income Tax Act, 1961 2.

     

    One issue which will arise is whether to claim the concessional rate mentioned in DTAA, should the non-resident have PAN so as not to be governed by provisions of section 206AA?

     

    To answer this, first look at the Judicial pronouncements which answered this question. The Bangalore ITAT 3 has held that the provisions of section 206AA will apply as it has overriding effect over other provisions of the Act. Thus, a non-resident whose income is chargeable to tax in India should obtain the PAN. However, the Pune ITAT 4 and the Bangalore Tribunal 5 have held that once the provisions of DTAA are applicable, section 206AA doesn’t apply.

     

    Even the honorable Supreme Court 6 has held that the provisions of DTAA with respect to the case to which they apply would operate even if inconsistent of the provisions of the Income Tax Act. So even the provisions of section 206AA has overriding effect over other provisions of the Act still they were inapplicable in applying the DTAA.

     

    Besides the section 90(2) provides that for granting relief of tax or as the case maybe, avoidance of double taxation, then, in relation to the assessee to whom DTAA applies, the provisions of the Act shall apply to the extent they are more beneficial to the assessee.

    Relief granted: -

     

    The FA 2013 has excluded the interest referred to in section 194LC7 from the operation of provisions of section 206AA8 with effect from 01-06-2013.

     

    FA 2016 has further amended the provisions of section 206AA (7) by extending the non-applicability of this section in relation to any payment subject to the conditions as may be prescribed 9.

     

    Rule 37BC provides the relaxation from the provisions of section 206AA. It mentioned that in case of non-resident, not being a company, or a foreign company and not having Permanent Establishment (PE) in India, the provisions of section 206AA shall not apply in respect of payments of interest, royalty, fees for technical services and payment on transfer of any capital asset, if the deductee furnishes the specified documents.

     

    Latest Developments: -

     

    The Visakhapatnam ITAT10 held that TDS on salary payment u/s 192 should be deducted as per applicable rates in force after allowing basic exemption limit and deductions towards investment in savings etc. Unlike any other provisions of the TDS, tax on salary can’t be deducted by applying a flat rate on gross amount. A careful study of the provisions of section 206AA made it clear that it is not automatic that a flat rate of 20 per cent shall be applied wherever PAN is not furnished. The deductor shall compute the tax in the manner specified under section 206AA, by applying the rate specified under the relevant provision of the act, or at the rate or rates in force and then, compared to flat rate of 20 per cent to decide whichever is higher.

     

    It further held that it is settled position of law that a short deduction of tax at source, by itself does not result in a legally sustainable demand under sections 201(1) and 201(1A). The taxes cannot be recovered once again from the assessee in a situation where the recipient of income has already paid the due taxes on such income.

     

    Unless, the Assessing Officer verified himself that the recipient of income has not paid the tax on such income and demonstrate that the rate applied by him was in accordance with the provisions of section 206AA, the assessee cannot be held as assessee in default under sections 201(1) and 201(1A)

     

    Note: - The CBDT circular 1/2017 dated 02-01-2017 which contains the rate of deduction of income tax from the payment of income chargeable under the head “Salaries” during the FY 2016-17 has mandated the furnishing of PAN by the employee in case of receipt of any sum or income or amount, on which tax is deductible. If the employee fails to furnish PAN to the deductor the provisions of section 206AA shall apply. It further states that the deductor should determine the tax amount in all the three conditions11and

     

    apply the higher rate of TDS. However, where the income of the employee computed for TDS u/s 192 is below taxable limit, no tax will be deducted. But where the income of the employee computed for TDS u/s 192 is above taxable limit, the deductor will calculate the average rate of income-tax based on rates in force as provided in sec 192.

     

    If the tax so calculated is below 20%, deduction of tax will be made at the rate of 20% and in case the average rate exceeds 20%, tax is to be deducted at the average rate. Education cess @ 2% and Secondary and Higher Education Cess @ 1% is not to be deducted, in case the tax is deducted at 20% u/s 206AA of the Act.

     

    This circular has answered the concerns raised by the Visakhapatnam ITAT (supra) to the extent of inability of the deductor in comparing the average rate of tax and rate mentioned in sec 206AA.

     

    The JAIPUR ITAT12 held that on perusal of the provisions of section 206AA, primary onus is on the person entitled to receive income on which tax is deductible at source to furnish his PAN and in case such PAN is invalid or does not belong to the said person by deeming fiction, it has been stated that he has not furnished his PAN to the deductor. In such a scenario, the onus shifts on the person responsible for deducting the tax that he shall deduct the tax at the rate specified in the relevant provisions of the Act or at the rate of 20 per cent whichever is higher.

     

    The Bangalore ITAT13 held that the obligation of deducting tax at source arises only when there is a sum chargeable under the Act. Thus, the provisions of TDS should 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 the rate of 20 per cent as provided under the provisions of section 206AA when the benefit of DTAA is available.

     

    CBDT vide notification no. 2/2017 dated 06-01-2017 has mandated that the person who has an account (other than time deposit and basic savings bank deposit account) maintained with banking company or co-operative bank to which Banking Regulation Act, 1949 applies and has not quoted his PAN or furnished Form no. 60 at the time of opening or subsequently, he shall furnish PAN or Form no. 60 to a manager or officer of a banking company or co-operative bank, as the case may be on or before 28-02-2017.

     

    One question which remains is that who will get the credit of TDS in case tax has been deducted applying the provisions of section 206AA? (Food for thought).

     

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