01 May 2015

Compelling a non-resident to seek PAN: A vexed question

by Tapas Misra

With a view to enhance detection capabilities of the tax department and enforcing better compliance Section 206AA was inserted by Finance (No.2) Act, 2009 with effect from 01.04.2010. This new provision mandated all recipients of income to furnish Permanent Account Number (PAN) and in order to discourage non-compliance it required tax to be deducted at a higher rate than would be ordinarily applicable.

The new section carried a non obstante provision with reference to any other provisions of the Act. As a result, all recipients of income, whether residents or non residents appeared to get covered. While no specific reference was made to non residents, a later amendment by Finance Act, 2013, which inserted sub-section (7) in Section 206AA to exclude payment of interest on long term bonds from this requirement, appears to suggest non residents were always contemplated to be covered by the mandate to obtain PAN or be subjected to higher rate of tax deduction at source.

For non residents, apart from the general inconvenience, this new provision posed two problems: (i) under Rule 114C(1)(b) of the Income-tax Rules, 1962 provisions of section 139A were not applicable to non residents; and (ii) in cases covered under the double taxation avoidance agreements, the tax rates prescribed therein had a cap (tax at such rates not exceeding…). The question that arose, in several cases, was whether in view of the fact that a non resident is not required to obtain PAN under Section 139A read with Rule 114C(1)(b), can a non resident be compelled under section 206AA to obtain PAN? Further, the tax deductor/payer was also faced with the question whether to deduct tax at a higher rate of twenty per cent or stick to the rate of ten or fifteen per cent prescribed in the relevant tax treaty.

Dealing with the primary issue of whether a non resident is at all required to apply for and obtain PAN, the Bangalore Bench of the Tribunal held, in Bosch Ltd  DCIT [2013] 141 ITD 38 (Bangalore), as under:

“…The provisions 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 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. However, where the income is chargeable to tax irrespective of the residential status of the recipients, every assessee is required to obtain the PAN and this provision is brought in to ensure that there is no evasion of tax by the foreign entities.

…In the case of Smt. A. Kowsalya Bai (supra) the recipients of the interest were residents of India and their total income was less than the taxable limit prescribed by the relevant Finance Act. It was in these facts and circumstances that the Hon'ble High Court has held that where the recipients of the 'interest income' were not having income exceeding taxable limits, it was not required to obtain the PAN. But in the case before us, the assessees are non-residents and admittedly the income exceeds the taxable limit prescribed by the relevant Finance Act. In the circumstances, the recipients are bound and are under an obligation to obtain the PAN and furnish the same to the assessee. For failure to do so, the assessee is liable to withhold tax at the higher of rates prescribed u/s 206AA of the Income-tax Act i.e. 20%....”

In a recent decision of the Pune Bench of the Tribunal in DDIT v. Serum Institute of India Ltd. [2015] 56 taxmann.com 1 (Pune - Trib.) the second question, i.e., if tax can be deducted at the rates prescribed in the treaties even if the non resident has not obtained PAN, came up for consideration. In that case the first question, i.e., if a non resident was at all required to apply for PAN, was decided against the assessee by the CIT (A) and it did not come up before the Tribunal. After considering the scheme of the Act in so far as section 90(2) is concerned, the Hon’ble Tribunal held as follows:

“…The CIT(A), in our view, correctly inferred that section 206AA of the Act does not override the provisions of section 90(2) of the Act and that in the impugned cases of payments made to non-residents, assessee correctly applied the rate of tax prescribed under the DTAAs and not as per section 206AA of the Act because the provisions of the DTAAs was more beneficial…

We are now faced with two decisions of the Tribunal with differing views on the issue, whether tax could be deducted at the rate prescribed in a treaty even when the non resident does not have a PAN. Whether the non resident is at all required to apply for PAN is decided against the assessee by the Bangalore Bench while the Pune Bench did not have an occasion to deal with this issue. The assessees, particularly those who are paying to non residents and face the adverse consequence of disallowance under Section 40(a)(i) and demand under Section 201 for alleged short deduction, are still staring at uncertainty. Perhaps some assessee may challenge the applicability of section 206AA to non residents by invoking writ jurisdiction of a High Court. Or, perhaps the legislature may make the law clearer.

[The author is Executive Partner, Direct Tax Practice, Lakshmikumaran & Sridharan, Delhi]

Browse articles