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The initiation by the Government to introduce PAN (Permanent Account Number) is a successful attempt to prevent tax evasions. The PAN mechanism links all financial dealings in case of particular individual or entity, so the Income Tax Department collects all such records through it. Residents & Non-Residents (defined as per income tax act 1961), OCI (Overseas Citizen of India) cardholders, PIO’s (Persons of Indian Origin) as well as foreigners who come under the purview of Income tax Act 1961 are eligible to apply for a PAN CARD. Firms, Companies, Governments & minors too can apply for a PAN CARD. Every person having source of income & files income tax return or having financial transaction in India is asked to quote PAN. On this footing a foreign national working in India & having taxable income is mandated to have PAN. A person, not quoting PAN, will attract TDS at a higher rate of tax. More so there is a complete restriction on the certain specified transactions for not quoting PAN, a few are listed below: 1. Sale & purchase of Motor Vehicle 2. Issue of credit/debit card 3. Payment of bill to hotels & restaurants exceeding rupees fifty thousand 4. Payment of mutual fund for purchase of units exceeding rupees fifty thousand 5. Payment for purchase of foreign currency in cash exceeding rupees fifty thousand with regard to foreign travel 6. Payment being in the nature of premium on the life Insurance Policy exceeding rupees fifty thousand 7. Sale /purchase of immovable property exceeding ten lakh rupees

To the best of my findings, there is no previous research work on this topic.

Implications of Section 206aa in The Hands of Non-Resident

The introduction of Section 206AA in Income Tax Act 1961 directs the payee to reveal PAN to the payer & set out the results in the event of not quoting the PAN. In disobedience to the mandate of quoting PAN,  as per the ruleTDS (Tax deducted at source) is deducted, at rates as applicable to the Act or at the rates in force or at flat rate of 20% by Income Tax Authorities.

These mandatory requirements give rise to an impediment for non-resident. Most of the MNC’s have only single transaction with Indian company for provision of goods & services, not requiring the provision of withholding tax or withholding tax at a rate lower than 20% under the relevant DTAA. As the transaction being single in nature, MNC may not have obtained PAN. Failure to furnish PAN attracts tax at a much higher rate, as per the Act, causing hardship in terms of increasing administration costs of obtaining PAN & filing return of income in India. This cost ultimately becomes part of cost of supplies to the Indian buyer.

Undoubtedly, the Government‘s objective in introducing this provision was to strengthen the PAN mechanism. The goal could be improving compliance with the provisions of quoting PAN through TDS Regime. This was initiated as a regulatory measure persuading compliance with statutory provision by providing regressive consequences for default.

In the recent past, the same provision has received some adverse reaction. In the judgement of Smt A. Kowsalya Bai v. Union of India, the Hon’ble High Court of Karnataka has held that “provision of Section206 AA are unconstitutional & observed that intention of the legislation while introducing this provision was to bring maximum people within the ambit of the Act & the Act itself provides for a mechanism for exemptions. Therefore, insisting furnishing of PAN in cases where in the income is below the taxable limit is harsh, stringent & unjust.”[1]

More so, a writ petition was also filed in the High Court of Karnataka demanding the rationality of pertinency of Section 206AA on payments. It has been assailed vide the writ petition that Section 206AA is ultra-virus qua the provisions of Section 139A, Rule 114 C & Section 90 of the Act. The petitioner has expressly submitted “that Section 206AA being a non obstante clause, suggesting that any interpretation in the Act is contrary to the provisions of the said section shall be precluded, is only confined to furnishing of PAN and not for the purposes of obtainment and that if the Legislature intended to do so, the same would have been specifically provided for.”[2]

Amidst all the differences regarding this Section, the Hon’ble Pune Bench of Income Tax Appellate Tribunal (ITAT) in the case of Dy. DIT (IT-II) v. Serum Institute of India Ltd has delivered decision relating to the interpretation of the overriding nature of the said provision. The facts as reported in the said judgement suggest that Serum Institute of India Limited is in the business of manufacture, sale & export of vaccines. The said company paid for interest, royalty & fee for technical services in the year 2010-11 to non-resident. Necessary tax at source was withheld in accordance with the beneficial rates specified in DTAA with the respective countries to which exports were made even in circumstances where no PAN was quoted by the payee. However, during the assessment proceeding, the Assessing officer raised a demand for the difference between withholding tax of 20% & the rates as prescribed in the treaty.

The aggrieved company appealed to the first Appellate Authority, Commissioner of Income Tax, Appeals (CIT (A)) on two grounds. First argument was that Sec 206AA is not applicable to payments made to Non-Resident & supported its argument by laying down the provisions of Section 139A(8) of the Act along with the Rule 114C(1) of the Income Tax Rules 1962 which stipulates that Non-Resident do not require to apply for PAN. The second argument raised by the aggrieved company was that the tax rates specified under Section 206AA of the Income Tax Act cannot prevail over the tax rate prescribed in the relevant tax treaties as they were beneficial. To support this argument, they cited Section 90(2) of the Act which says that the provisions of the Act are applicable to the extent they are more beneficial to the assesse. In accordance with the thoughts & considerations, the CIT (A) held that the ground taken by the company that Non-Resident recipient did not require to obtain PAN is baseless & does not hold good. Moreover, it was also observed, that Section 90 of the Income Tax Act 1961 holds sanctity & importance over Section 206AA. So the demand raised by the Assessing Officer was set aside.

However, the decision was contested by the Revenue Authorities before the Second Appellate Authority being ITAT. ITAT held “that Section 206AA of the Act is not a charging Section but is part of the procedural provisions dealing with collection & deduction of tax at source. Where tax has been deducted on the strength of the beneficial provisions of the tax treaties, Section 206AA could not be invoked by tax authorities taking into scrutiny the overriding nature of Section 90 of the Act.”[3]

The above decision gave clarity that DTAA or tax treaties are framed with the primary aim of promoting international trade by eliminating international double taxation.

Section 139A (8) of the Act, empowers CBDT to exempt class or classes of persons from PAN provisions. Accordingly, Rule 114C (1) (b) states that Section 139A does not apply to a Non-Resident. To put it in other words, Non-Residents are not required to apply for PAN.

However, the CBDT vide a press release stated that Section 206AA is applicable to Non-Resident receiving remittances which are subject to withholding taxes in India. The relevant extracts of the press release suggests as under:

“A new provision relating to tax deduction at source (TDS) under the Income Tax Act, 1961 will become applicable with effect from 1^st 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. As per the new provisions, certificate for deduction at lower rate or no deduction shall not be given by the Assessing Officer under Section 197, or declaration by deductee under Section 197A for non- deduction of TDS on payments shall not be valid, unless the application bears PAN of the applicant/deductee.”[4]

So, this suggests that the law must be read as a whole & the real intention of the legislative shall be judged by reading the entire Section as a whole. In other words, if conflict or inconsistency persists in the interpretation of two provisions, a sincere attempt is required to reconcile them.

Keeping the said statutory principle of interpretation in sight, it can be deduced that Section 206AA is applicable only in cases where there is an obligation to obtain PAN.

Where Section 139A is clear & capable of clear interpretation on a plain & grammatical construction, then Section 206AA cannot cut down the construction & restricts the scope of its operation.

Section 139A & 206AA operate in different field & Section 206AA cannot be said to be over & above Section 139A. So it cannot demand a person, not required to have PAN to furnish it & incase the same is not furnished, it cannot prescribe higher rate of deduction of tax at source.

The aim of Section 206AA is to ensure compliance of PAN mechanism & to streamline the process of processing returns & granting credits. The object is not to increase the burden on the tax payer by demanding compulsory attainment of PAN in situation where it is not required.

PAN mechanism & Section 206AA should not be made applicable where:

1. Non-Residents have already paid taxes in the form of withholding tax.

2. The contract with the Indian resident is net of taxes & the tax is borne by the Indian resident.

3. A threshold should be prescribed for Non-Resident, below which Section 206AA would not be applicable.

4. A foreign entity having tax registration number in the home country furnishes self-certified copy of the same & uploads it on income tax website, quoting the TAN, should be exempted from PAN requirement.

1. https://taxguru.in/income-tax/section-206aa-mandatory-requirement-furnishing-pan-tds.html 2. https://cleartax.in/s/section-206aa-tds-without-pan 3. https://taxguru.in/income-tax/section-206aa-mandatory-requirement-furnishing-pan-tds.html 4. www.pwc.in 5. https://scripbox.com/tax/section-206aa/

1. (2012) 22taxmann.com 157/208Taxmann208/346ITR156.
2. Page Industries Ltd v. Union of India (writ petition NOS. 10263 & 10264/2014-(T-IT)
3. (2012) 22 taxmann.com 157/208 Taxmann 208/346 ITR 156.
4. Press Release: 402/92/2006 – MC January 20, 2010