Sandeep Ahuja & Co.

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Thursday, February 9, 2017

Relaxation from deduction of tax at higher rate under section 206AA

Section 206(7)(ii) & Rule 37BB & 37BC: No Mandatory requirement of PAN for Non Residents.

Finance Act 2016 has liberalized the provisions of Section 206AA by inserting provisions of Section 206(7)(ii) which provides that provisions of Section 206AA shall not apply to Non residents  subject to such conditions as may be prescribed. Such amendment was made with the intension of  simplifying the taxation for NRIs,  Foreign Companies  and Foreign Nationals.
This is a very welcome provision and Rule 37BC being effective retrospectively has relieved the assesses making payments to Non residents for deduction of Tax at Source at a lower rate as specified in DTAA  and not as per overriding section 206AA where rate of withholding tax is @20% in case of no PAN.
Section 206AA shall apply notwithstanding anything contained in other provisions of the 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.
Non Applicability of Certificates u/s 197 for non deduction or deduction of TDS at a lower rate:
Form 15G/15H for lower deduction/ NIL As per Section 197, no Certificate [15G/15H] shall be granted unless the application form for such Certificate u/s 197  contains the PAN of the applicant.
Therefore, in the absence of PAN  no Form 15G or 15H u/s 194 can be issued to a deductee
Invalid PAN to be treated as if no PAN has been provided by the Deductee & provisions of Section 206AA shall be applicable.
Provisions Before 24th June 2016:
Before 24 June 2016, the provisions of Section 206AA apply uniformly in respect of all the persons whether resident or non resident who were to receive income on which Tax is deductible at source.
In case of failure to furnish PAN by such deductees,  a higher rate of tax upto 20% was deducted as described above.
Confusion between Tax rate as per DTAA & Section 206AA
Section 206AA covered both Residents as well as non residents for tax deduction at source. However, No clarification was provided as to whether Rate of Tax as per DTAA or Tax rate as per Section 206AA were to be applicable for payments to Non Residents. 
Further, Mandatory requirement of obtaining PAN in India drew negative response from International Business Community since Non residents were also required to Obtain Pan in India.
Section 206AA as amended by CBDT Notification No. 53/2016 read with rule 37BC inserted w.e.f. 24 June 2016.
For the purpose of eliminating above mentioned anamolies , providing necessary clarifications & Pursuant to recommendation of first report of Income Tax simplification Committee, Finance Act 2016 has liberalized the provisions of Section 206AA by inserting provisions of Section 206(7)(ii) which provides that provisions of Section 206AA shall not apply to Non residents  subject to such conditions as may be prescribed.
The provision of Section 206AA shall not apply to a Non resident, not being a company, or to foreign company in respect of :
Section 206(7)(ii) provides that provisions of Section 206AA shall not apply to payments to Non Residents which is not a Company or Foreign Company in respect of:

 (i)  Payment of interest on Long Term Bonds as referred in Section 194LC:  There is no requirement to provide PAN No. where income is taxable under section 194LC.

(ii)  Any other payments subject to such conditions as may be prescribed:  For this purpose Rule 37BC has been inserted.

Rule 37BC  inserted w.e.f. 24th June 2016.

As per this rule, Provisions of Section 206AA shall not be apply to Non Residents except "Company" or "Foreign Company". Payments on which Section 206AA shall not be applicable has also been defined as follows:
a)         Payment in the nature of Interest,
b)         Payment in the nature of Royalty
c)         Payment in the nature of Technical services.
d)        Payment for transfer of Capital asset.
Apart from above payments, Section 206AA shall continue to apply to other type of payments such as Salary, Pension, Business profits, director remuneration, fees of sports persons etc.

Documentary Requirements under Rule 37BC.
However, following information needs to be submitted by non Resident deductee for the purpose of claiming the benefit bestowed upon Non residents by Rule 31BC:
a)         Tax Residency Certificate of Non Resident in any country outside India.
b)        Tax Identification No. of the country in which such person is the resident or any other Unique identification no. by which such person is identified by the Government of that country.
c)         Name ,Email , Contact No. & Address of the Nonresident in the territory outside India.

Section 206AA shall continue to apply in case of failure to furnish the abovementioned information by the Non resident deductee.

Clarification: Benefit of Rule 37BC is available only in case where Non Resident does not have a PAN. However, If the non resident having a valid PAN but does not furnish the same, then benefit of Rule 37BC shall not be available.  

Retrospective Applicability of Rule 37BC:
Rectification of TDS Demands relating to lower deduction TDS due to non availability of PAN:
Rule 37BC has been made applicable with retrospective effect. Accordingly, Deductors whose TDS demands have been outstanding in respect of Deduction of TDS at a lower rate prior to 24 June 2016, may now get their demands rectified by claiming the benefit of Rule 37BC subject to fulfillment of conditions as mentioned above.

PAN still required for filing return:
However, the current position is that while PAN is not required at tax withholding stage (i.e. Section 206AA shall not apply even if Non Resident does not have PAN) but Return Filing requirement for  Non Residents still exists & Income Tax Return cannot be filed without PAN.

Thus, while PAN is not required at tax withholding stage, PAN is still required for filing Income Tax Return by Non Residents & Failure to file return attracts penalty u/s 271F & prosecution u/s 266CC.

ITR Filing by Non Residents Redundant: Normally TDS deducted is the final tax payable by Non Residents & information regarding payments to no residents is transmitted on a real time basis to Income Tax Deptt.on real time basis through compliance u/s 195(6) & Rule 33BB 915CA/CB) & therefore Return filing by Non residents does not serve any real purpose for the Revenue authorities.

The real benefit of Rule 37BC shall only  be available to Non Residents only if Government relieves the Non residents from Filing of Income Tax Return in cases where payer has deducted TDS & has also reported the same in Form 3CA & 3CB. 

Contributed by : Tanveer Alam CA Finalist at Sandeep Ahuja & co

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