Opinion Of Eminent Legal Luminaries On Controversial Issues

If Non-Resident Does Not Supply PAN, At What Rate Tax Has To Deducted?

QUERY: 1. Can section 206AA (higher TDS in case of non furnishing of PAN by payee) be taken as overriding the provisions of DTAA?
ANSWER: Section 206AA of the Income-tax Act, 1961, reads as under:

“(1) 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 as the higher of the following rates, namely :–

(i) at the rate specified in the relevant provision of the Act; or

(ii) at the rate or rates in force; or

(iii) at the rate of twenty per cent.”

Thus the section starts with “Notwithstanding”, which means, it overrides the other sections mentioned in the Act. So it overrides section 139A of the Act, which provides for obtaining the PAN. Hence, irrespective of whether a person has obtained PAN or not he has to furnish the PAN, otherwise, he shall be liable for higher TDS of the following :

(i) at the rate specified in the relevant provision of the Act; or

(ii) at the rate or rates in force; or

(iii) at the rate of twenty per cent.

Therefore on the basis of above, one can argue that, section 206AA also overrides section 2(37A) of the Act, which defines “rate or rates in force.” However, the scope of a non-obstante clause was explained in Vishin N. Khanchandani vs. Vidya Lachmandas Khanchandani [AIR 2000 SC 2747] in the following words:

“There is no doubt that by non-obstante clause the legislature devises means which are usually applied to give overriding effect to certain provisions over some contrary provisions that may be found either in the same enactment or some other statute. In other words such a clause is used to avoid the operation and effect of all contrary provisions. The phrase is equivalent to showing that the Act shall be no impediment to measure intended. To attract the applicability of the phrase, the whole of the section, the scheme of the Act and the objects and reasons for which such an enactment is made has to be kept in mind.”

Hence, the term ‘rate or rates in force’ as defined in section 2(37A) of the Act covers rates prescribed in agreement entered into by India under section 90 of the Act. It is clear from the above that the term ‘rates in force’ includes the rate prescribed under the relevant tax treaties. Hence, for the purpose of comparing the rates to choose the higher rate, the rates prescribed under the tax treaties should also be taken into account.

An argument that could be advanced in favour of the view that section 206AA of the Act should not prevail over the rates prescribed in tax treaties is that section 90(2) of the Act provides that the provisions of the Act should apply to the extent they are more beneficial to the assessees and, consequently, even section 206AA of the Act could apply only when it is more beneficial to the assessees. However, section 206AA of the Act starts overriding all the provisions of the Act, which includes section 90 of the Act. It is settled by aforesaid decision of the Supreme Court that a provision containing a non obstante clause should prevail. Hence, there is nothing in section 206AA of the Act to indicate that the non obstante clause does not extend over section 90 of the Act.

Therefore, on a combined analysis of section 2(37A) of the Act, and section 206AA of the Act, it can be concluded that if a non-resident does not furnish the PAN, then section 206AA of the Act would apply and would prevail over the rates prescribed in the tax treaties.

So, considering purpose and object of the section, it is clear that if a person does not submit PAN, then, deductor has to deduct tax @ 20%; as it overrides the provisions of DTAA.
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