Tiol Article_Section 206 AA Mandatory PAN Who All Are Covered

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Section 206AA ‘Mandatory PAN': Who ALL are covered?

MARCH 9, 2010

By Romesh S A Sankhe

WHEN Finance (No.2) Bill 2009 was presented one proposal which attracted everyone's
attention was section 206AA. It provided that in respect of any payments or credits on or
after 1 April 2010 the applicable withholding tax rate would be 20% of the gross amount or
higher rate, if the payee does not provide his/her/its Permanent Account Number (PAN).
This provision later became part of the statute and it will be effective from 1 April 2010.
The said provision reads as under;

“ 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 206AA of the Income Tax Act 1961 (the Act) further states that without PAN the
deductee will not be able to make an application for lower deduction of tax under section
197 of the Act. Also, PAN will have to be mentioned in all the correspondence, bills,
vouchers and other documents. This provision being ‘ Notwithstanding anything contained
in any other provisions of this Act ' has overriding effect over the other existing provisions
and hence commands mandatory compliance. Considering the consequential provisions of
section 40(a)(i)/(ia) and section 201 the Act with respect to failure in withholding tax
compliances, it is of prime importance to the tax payers to properly comply with provisions
of section 206AA.

This article is to share few thoughts on some issues which the taxpayers may face while
complying with section 206AA.

Double Tax Avoidance Agreement (tax treaty) vs. section 206AA

As per section 90(2) of the Act, the taxpayer can opt for the provision of the relevant tax
treaty over the provisions of the Act to the extent the same are more beneficial to that
taxpayer. In this regard the relevant paragraphs of Circular 333 issued by Central Board of
Direct Taxes (CBDT) on 2 April 1982 dealing with this issue can be discussed. The same
reads as under;

“Where a double taxation avoidance agreement provides for a particular mode

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of computation of income, the same should be followed, irrespective, of the
provisions in the Income-tax Act. Where there is no specific provision in the
agreement, it is the basic law, i.e., the Income-tax Act, that will govern the
taxation of income”

The same view has also been upheld by various judicial authorities including the Supreme
Court. Hence based on the above discussion a view which may emerge is, that section
206AA will not have overriding effect over the provisions of the tax treaty.

However, the above view may not be tenable on the following grounds;

section 206AA is ‘ notwithstanding anything contained in any other provisions of this Act
and hence the same will override provisions of section 90(2),

Section 90(2) is in relation to any relief of tax, whereas section 206AA stipulates for higher
withholding of tax on non furnishing of PAN. It does not in any way alter the final tax
liability or computation of the non-resident because the nonresident always has an option
to file his/her/it's return and claim the refund of excess taxes withheld,

Further, as mentioned in CBDT Circular 333, in the absence of any specific provision in the
tax treaty the provision of Income Tax Act will prevail. Since tax treaty does not contain
any provisions in the nature of section 206AA, implications of section 206AA are out of the
scope of the tax treaty.

Based on the above discussion, it appears that provisions of section 206AA will prevail over
the section 90(2) and hence nonresident will not be able to avail the treaty benefits in
absence of PAN.

Applicability of section 206AA in the absence of TDS liability

Before discussing this issue with respect to the resident and nonresident taxpayers, let us
refer the relevant extract from explanatory memorandum on section 206AA which reads as
under;

“In order to strengthen the PAN mechanism, it is proposed to make
amendments in the Income Tax Act to provide that any person whose receipts
are subject to deduction of tax at source i.e. the deductee, shall mandatorily
furnish his PAN to the deductor failing which the deductor shall deduct tax at
source at higher of the following rates ……….”

From the above it could be inferred that intention of legislature to make PAN mandatory is
only for those deductee whose income is subject to deduction of tax under the Act. The
wordings of the section 206AA also make it clear that the provisions of this section will
apply only when the tax is deductible under the Chapter XVIIB. Therefore the applicability
of section 206AA could be discussed for following two categories of payees.

Resident payee

Section 192 to section 194 LA of the Act primary deals with the deduction of tax with
respect to various payments made to Residents. Section 191 provides for direct payment of
tax by the recipient when the tax is not deductible or deducted under any of the said
provisions of the Act.

Therefore, only if the tax is deductible under the provisions of the Act then provisions of
section 206AA will be applicable and the PAN will have to be obtained by the resident
payee. Hence in cases such as sale of goods, payments below the prescribed exemption
limits, etc. where the tax is not deductible under the provisions of section 192 to section
194LA, the resident payee will be out of the ambit of section 206AA and hence does not



have to furnish his/her/its PAN to the deductor.

Nonresident payee : section 195 vs. section 206AA

The said issue may not be as simple incase of nonresident payee unlike that of resident
payee. The deduction of tax on payments made to nonresidents is governed by section 195
of the Act which uses the word ‘ any other sum chargeable under the provisions of this Act
'. Recently Karnataka High Court in the case of Samsung Electronics has held that any
payments in the nature of income per se to nonresident taxpayers would require
withholding of tax under section 195(1) of the Act and for no withholding of tax or
withholding at lower rate, a taxpayer will have to obtain a prior approval of tax officer
under section 195(2) of the Act.

Therefore, possible view which may emerge from the above discussion is that all the
payments made to nonresident are covered under the ambit of section 195 and hence all
the nonresidents will mandatorily have to obtain PAN under section 206AA.

For addressing this issue, it will be important to compare the provisions of section 195 and
section 206AA. The prime distinction between section 195 and section 206AA is use of
specific words, where the former uses the word ‘ chargeable under the …….. ' the latter
uses ‘ deductible under the……… '. Here, it will be important to discuss the ruling of Delhi
High Court in the case of CIT v. Vasavi Pratap Chand [2002] 255 ITR 517 where the Delhi
High Court has discussed the meaning of words ‘payable' and ‘chargeable'. The relevant
extract is as under;

The words payable and chargeable occurring in section 2(m)(ii) of the Wealth-
tax Act, 1957, before and after its amendment in 1964, are not interchangeable
and they carry different meanings. Wealth-tax shall not be payable in respect of
certain assets and such assets shall not be included in the net wealth of the
assessee. Even in the Income-tax Act, the words chargeable and payable have
been used in different provisions thereof. The assets and property may be
chargeable to tax but tax may not be payable having regard to the exemption
provided for in the Schedule appended to the Act.

The word ‘deductible' can be equated with the term ‘payable' and hence based on the
above judicial decision a view could be adopted that section 206AA is narrow in scope as
compare to section 195. Section 195 aims to cover a situation where the taxpayers are
chargeable under the provisions of the Act, but the tax may or may not be payable
considering the other relevant provisions of the Act. However, section 206AA will only be
attracted when the tax is deductible/payable under the provisions of the Act, hence if a
nonresident is exempt under the provisions of the Act then he/she/it will not be covered
under section 206AA and hence not required to obtain the PAN.

Therefore, a view could be adopted that existence of the liability of withholding tax under
the Act is a prime requirement to invoke provisions of section 206AA. If the tax is not
deductible on certain payments under the Act such as expenses incurred for business &
profession outside India, offshore supplies etc. then provisions of section 206AA may not be
applicable in such cases.

Nonresident payee : section 195A vs. section 206AA

The next issue which could arise in case of nonresident taxpayers is with respect of “net of
tax” contract executed under section 195A where the tax which is deductible on the income
of the nonresidents is borne by the deductor. In such cases, a view may be possible that
since the tax is borne by the deductor the compliance under section 206AA may not be
required to be made by the deductee.

However, this view does not seem to hold ground because once the tax is deductible under



Chapter XVIIB the provisions of section 206AA will get attracted. The mode of discharging
of the said tax liability may not be relevant from the perspective of section 206AA and
hence even when the tax is to be borne by the deductor the payee's PAN will have to be
obtained to comply with the provisions of section 206AA.

Key takeaways

The views expressed so far regarding the applicability and operation of section 206AA may
be summarized as under;

The provisions of section 206AA will prevail over the section 90(2) and hence nonresident
will not be able to avail the tax treaty benefits in absence of PAN.

Existence of the liability of withholding tax under the Act is a prime requirement to invoke
provisions of section 206AA. If the tax is not deductible on certain payments under the Act
then provisions of section 206AA may not be applicable in such cases.

The question as to who bears the withholding tax liability may not be relevant from the
perspective of section 206AA and hence even when the tax is to be borne by the deductor
under section 195A of the Act the payee's PAN will have to be obtained to comply with the
provisions of section 206AA.

(The author is a Chartered Accountant based in Mumbai)

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Tiol Article_Section 206 AA Mandatory PAN Who All Are Covered

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Tiol Article_Section 206 AA Mandatory PAN Who All Are Covered