Payment to a non resident towards -206AA

[vaakili]

Brief Facts: Payment is being made by a resident to a non resident for deputing its engineer for rendering services in India for about a short period of ten days. The foreign entity does not have any operations in India and also no PAN in India. Also, the payment is to be made net of taxes in India. There is AADT between India and the country of the foreign entity, as per which the rate of tax for fee for technical services is 10%. 

Queries:  1. What rate should be applied for TDS, is it as per AADT or as per Section 206AA ?

2. If it is as per AADT at 10%, is 10% to be applied or are SC,EC and SHEC have also to be considered ?

Request to consider following observation: In case it is as per Section 206AA, there would be a substantial burden and undue hardship on the payer.  It is a common practice to obtain technical services from entities abroad which do not have PAN in India. In such cases, if 20.6% is applicable and the same is grossed up, the rate would be a substantial higher of 25.95% resulting in substantially higher  liability in the hands of the payer.

[camanojgupta]

 It is a contentious issue.
Section 90(2) 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) 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.

Section 206AA  overrides all other provisions of the Act and it is being later enactment hence it will prevail and tax will have to be deducted at 20 percent plus applicable cess.
But CBDT vide circular no. 333 dt. 2-4-1982 has clarified as under
1. It has come to the notice of the Board that sometimes effect to the provisions of double taxation avoidance agreement is not given by the Assessing Officers when they find that the provisions of the agreement are not in conformity with the provisions of the Income-tax Act, 1961.

2. The correct legal position is that where a specific provision is made in the double taxation avoidance agreement, that provisions will prevail over the general provisions contained in the Income-tax Act.  In fact that the double taxation avoidance agreements which have been entered into by the Central Government under section 90 of the Income-tax Act, also provide that the laws in force in either country will continue to govern the assessment and taxation of income in the respective countries except where provisions to the contrary have been made in the agreement.

3. Thus, where a double taxation avoidance agreement provides for a particular mode of computation of income, the same should be followed, irrespective of the provisions in the Income-tax Act.  Where there is no specific provision in the agreement, it is basic law, i.e., the Income-tax Act, that will govern the taxation of income.

This circular has been approved in CIT v. Davy Ashmore India Ltd. [1991] 190 ITR 626 (Cal.),  and again in Azadi Bachao Andolan Case.
As per this circular tax shall be deducted at 10 percent plus cess.

[srinivasan]

Even cess need not be added if data provides for the rare of tas

[priyaawasthi]

See the process for getting a PAN is not necessarily too much of a hassle nowadays. As Indians we need to respect our own rules first and then expect others to. 10 days is sufficient for getting a PAN. Next time try doing that instead of scrambling to save tax later. And Sec 206AA clearly states that the tax applicable to the deductee in such cases is either 20%, or the applicable rate as per the provisions made in the Income Tax Act or whichever are in force.

Regards
Priya Awasthi

[Pritesh Jain]

Give me your email will send an article and kar HC case-law that will surely help you out in this regard

[pawansingla]

High court has struck down the section 206A from the Act itsself having held that it is consitutionally ultra vires to the ART-14 of the consitution. Further taking of PAN is too easy these days. You can apply online also.