Does tax treaty override section 206AA

Hi 

I wish to make a payment to a company abroad. 
Treaty rate for withholding is 10%. But the company does not have PAN in India. 
Could you please confirm if taxes should be withheld at 10% or 20% as per section 206AA of Income Tax Act, 1961.
Asked 1 year ago in Income Tax from Delhi, Delhi
In our opinion 206AA will apply here . There are various judgement where both the views has been taken . The Section 206AA is not a overriding section which dilutes the beneficial provision of the DTAA , but it is only a machinery  provision regulating the gateway of DTAA .  Like TRC ( Tax residency certificate ) which is required under section 90  for a entity to claim the benefit of DTAA, this provision is exactly the same which ask the payee to have the PAN .  It is only a information sharing  of the payee and nothing else . It should be also noted that having a PAN does not mandate the payee to file the ITR in India .
Hence , even though there are various judgement like Pune tribunal , the provision of section 206AA will apply . 
Prakash Sinha
CA, Delhi
112 Answers
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TDS needs to be deducted at the rate applicable. However, in case the deductee do not have a PAN, then 20% or rate applicable whichever is higher. Thus, it would be 20% in your case.

Regards
Ankit Jain
ankit@ajsh.in
9810661322
Ankit Jain
CA, New Delhi
32 Answers
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Sec. 206AA Overrides whole Income Tax Act,1961.

But when Tax Treaty is applicable then assessee can choose the Provision which is More beneficial for him.

So therefore I think you can deduct 10% TDS.

Regards
CA Abhishek Chordiya
+91-9001686968
Abhishek Chordiya
CA, Nagaur
2 Answers
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After section 206A of the Income-tax Act, the following sec­tion shall be inserted with effect from the 1st day of April, 2010, namely:—
"206AA. Requirement to furnish Permanent Account Number.—(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 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.
(2) No declaration under sub-section (1) or sub-section (1A) or sub-section (1C) of section 197A shall be valid unless the person furnishes his Permanent Account Number in such declaration.
(3) In case any declaration becomes invalid under sub-section (2), the deductor shall deduct the tax at source in accordance with the provisions of sub-section (1).
(4) No certificate under section 197 shall be granted unless the application made under that section contains the Permanent Ac­count Number of the applicant.
(5) The deductee shall furnish his Permanent Account Number to the deductor and both shall indicate the same in all the corre­spondence, bills, vouchers and other documents which are sent to each other.
(6) Where the Permanent Account Number provided to the deductor is invalid or does not belong to the deductee, it shall be deemed that the deductee has not furnished his Permanent Account Number to the deductor and the provisions of sub-section (1) shall apply accordingly.".

As per the above tax has to be deducted @ 20% in case the deductee does not provide PAN.

However  Recently, the Pune Bench of the Income-tax Appellate Tribunal (Tribunal), in the case of Serum 
Institute of India Limited (Serum or Taxpayer), held that section 206AA of the Income-tax Act, 1961 
(the Act) would not override provisions of a Double Taxation Avoidance Agreement (DTAA) to the 
extent that the latter is more beneficial to a taxpayer.

Held in "Dy.DIT v. Serum Institute of India Limited [TS-158-ITAT-2015(PUN)]" 

 
Hence as per ITAT judgement tax treaty override section 206AA and tax has to be withhed @ 10% ( being most beneficial to the deductee in the present case).


 
Shyam Sunder Modani
CA, Hyderabad
955 Answers
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The payment referred by you relates to payment to a Non Resident who is not assessable to Income Tax in India and also, he is not having a Permanent establishment in India. It is true that treaty overrides provisions of the Income Tax Act, as Income Tax is applicable only to Indian territory and whereas treaty is applicable to both countries. Further, above payment as per the limited details is governed by Section 195A of Income Tax Act and hence when you make payment in terms of foreign currency you don't need to mention PAN No of Non Resident who is not governed by the provisions of the Income Tax Act. Unless further details about the nature of the payment and user of service it cannot be certainly stated what should be the rate of tax and this is an international transaction between a Resident and Non Resident governed by section 195A. 
Vijay N. Kale
CA, Hyderabad
248 Answers
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When there is treaty then always follow treaty rate because its important because this is done by the government for solving problems to do business with the Indians.

So deduct 10% TDS
Kavit Dilip Gadhia
CA, Mumbai
35 Answers
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It is a controversial issue. A tax treaty overrides the provisions of Section 206AA, as Section 206AA is not a charging section but only a procedural section for deduction at a higher rate in case the deductee has no PAN. This was the view taken by ITAT (Pune Bench) in a recent case.  However, ITAT (Bangalore) took a contrary view and held that Section 206AA over rides  other provisions of the Act.

Section 206AA overrides Section 90 also by using the phrase " Not withstanding anything contained in any other provisions of this Act....".  Further, u/s 206AA(7), " the provisions of this section shall not apply in respect of payment of interest..." and no exemption is given in any other case. Hence, it appears that tax is deductible u/s 206AA @ 20% only, if the deductee has no PAN.

It is advisable for the Non resident to obtain PAN and claim double taxation relief, as applicable. Further, if there is a short deduction of tax, you run the risk of dis-allowance of your expenditure also.  You also need to consider whether the Non Resident Company is having a PE in India and is assessable in India accordingly.
B Vijaya Kumar
CA, Hyderabad
290 Answers
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