What is the legal position on S.206AA! In this article, the provision of section 206AA, Tax Payers difficulties and CIT's probable response are discribed as under:
Where TDS has been deducted on the strength of the provisions of DTAAs and such rate is lower than 20%, the provisions of section 206AA of the Act cannot be invoked by the Assessing Officer to insist on the tax deduction @ 20% where non-resident deductee has not furnished his PAN.
Provision: The section 206AA provides (in simple words) that when an Indian resident makes any payment to any Non-Resident of India (NR) the NR should provide his Permanent Account Number (PAN). If the NR does not have a PAN, the Indian payer should deduct tax at the rate of 20% or the appropriate rate – whichever is higher.
Tax Payer difficulties: Generally, the NR service provider insists that the Indian tax has to be borne by the Indian payer. The NR is not concerned about Indian law. We have no jurisdiction over an NR. In any case, NR wants to avoid doing anything with Indian Income-tax department. How can we ask him to obtain PAN! If he does not obtain PAN, we have to suffer this tax @ 20%. This may be well beyond our profits in the business. We cannot afford to pay this tax.
CIT’s probable response: Well, if an Indian resident were to do business with a U.S., U.K. or German Company, can the he say that he does not want to do anything with the other country’s income-tax department! If some one wants to do business with India, he has to abide by the Indian law.