TDS on Non-resident – No PAN – What’s the rate?

Section 206AA starts with the words “Notwithstanding anything contained in any other provisions of this Act”. This is a non-obstante clause which means that the provisions of section 206AA shall override other provisions of the Act. If we go through Section 90(2), it provides that ‘Where the Central Government has entered into an agreement with the Government of any country outside India or specified territory outside India, as the case may be, under sub-section (1) of section 90, for granting relief of tax, or as the case may be, avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, the provisions of this Act shall apply to the extent they are more beneficial to that assessee. Does this mean that new section 206AA overrides section 90(2), so that, notwithstanding the provisions of section 90(2), deduction of TDS shall be at the rate of 20% wherever the non-residents have not obtained/furnished PAN? The DTAAs are entered into by the Executive with the power and rights given under Article 73 of the Constitution. So far, the law has been clear that Article 73 will have the effect of the DTAA overriding the Act, as the Executive has to exercise jurisdiction keeping in mind DTAA obligations and commitments made. This proposition has been also been reiterated in CIT Vs. Davy Ashmore Ltd (190 ITR 626 CAL), CIT Vs. R.M.Muthiah (202 ITR 508 KAR), CIT Vs. VR.S.R.M.Firm (208 ITR 400 MAD), Arabian Express Ltd of United Kingdom and Others Vs. UOI (212 ITR 31 GUJ) and CIT Vs. Visakhapatnam Port Trust (144 ITR 146 AP)

In a recently reported judgement of the Bombay High Court in CIT Vs. Siemens Aktiongesellschaft (310 ITR 320), Their Lordships while interpreting the provisions of the Act in relation to Double Taxation Avoidance Agreements held that “The rule of referential incorporation or incorporation cannot be applied when dealing with a treaty between two sovereign nations. Though it is open to a sovereign Legislature to amend its laws, a DTAA entered into by the Government in exercise of the powers conferred by section 90(1) of the Income tax Act, 1961, while considering section 90(2) has to be reasonably construed”. The CBDT has also clarified in Circular No: 333 dated 02-04-1982 as follows “The correct legal position is that where a specific provision is made in the DTAA, that provision will prevail over the general provisions contained in the Income Tax Act, 1961. In fact the DTAA which have been entered into by the Central Government under section 90 of the Income tax Act, 1961 also provide that, the laws in force in either country, will continue to govern the assessment and taxation of income in the respective country, except where provisions to the contrary have been made in the agreement”.

Meanwhile, the CBDT Chairman has made it clear that there was “no legal lacuna” in stipulating a higher TDS rate of 20 per cent on payments made to non-residents who do not have or furnish PAN to the deductor. The CBDT Chairman could have elaborated a bit more and specified the grounds on which he felt that there was no legal lacuna in the amendment. For the Non-residents the choice appears to be, (a) either obtain and furnish PAN to avoid 20% TDS or (b) suffer 20% TDS, then obtain PAN, file the Income tax Return and get the excess tax if any refunded! I am sure every one would prefer the first option.