Section 206AA of the Income Tax Act deals with higher deduction of tax at source (TDS) in situations where the payee fails to provide their Permanent Account Number (PAN) to the payer. This section aimsincome tax to encourage PAN compliance and ensure proper tax collection.

Here are the key points to understand about Section 206AA:

Applicability:

• This sectionincome tax applies to various types of income where TDS is required to be deducted, including:
  • Interest
  • Royalty
  • Fees for technical services
  • Payment on transfer of any capital asset
  • Interest on long-term bonds (under Section 194LC)

Higher TDS rate:

• If the payee does not furnish their PAN to the payer, the payer is required to deduct TDS at a higher rate than the normal rate applicable for that type of income.
• The current higher rate under Sectionincome tax 206AA is 20% for all types of income.

Exceptions:

• There are some exceptionsincome taxes to the applicability of Section 206AA, such as:
  • Non-residents who do not have a PAN and are not subject to tax under sectionincome tax 139A, provided they furnish specific details and documents to the payer.
  • Payments made to the income tax government or certain other specified entities.

Furnishing PAN:

• To avoid higher TDS deduction, the payee must ensureincome tax that their PAN is furnished to the payer before the income is paid.
• The PAN should beincome tax quoted in all correspondence, bills, vouchers, and other documents exchanged between the payer and the payee.
• If the PAN provided is invalid or income tax does not belong to the payee, it will be considered as not furnished, and the higher TDS rate will apply.

Consequences of non-compliance:

• Apart from higher TDS deduction, taxpayers’ income tax who fail to furnish their PAN may face additional penalties and difficulties while claiming tax refunds or deductions.

 EXAMPLE

Scenario:

• State: Karnataka
• Deepak (resident of Karnataka) is a freelancer income tax and provides website development services to ABC Company (also located in Karnataka).
• ABC Company needs to make income taxa payment of ₹100,000 to Deepak for his services.
• Deepak forgets to provide income tax his PAN details to ABC Company before receiving payment.

Application of Section 206AA:

Since Deepak income tax failed to furnish his PAN to ABC Company, Section 206AA applies. As per this section, ABC Company is required to deduct tax at the higher of the following rates:

1. Rate specified in the relevant provision: In this case, the relevant provision is Section 194J, which applies income tax to professional fees. The rate specified in Section 194J for website development services is 10%.
2. Rate or rates in force: This refers to the prevailing income tax slab rates. For individuals in the highest income tax bracket (30% + 4% cess), the effective tax rate is 34.2%.

income tax There fore, ABC Company must deduct tax at the highest rate of 34.2% from the payment of ₹100,000 to Deepak. This means ABC Company will deduct ₹34,200 as tax and pay the remaining ₹65,800 to Deepak.

Deepak’s responsibility:

Deepak should immediately quote income tax e his PAN to ABC Company to rectify the situation. Once the PAN is provided, ABC Company can adjust the TDS deduction for subsequent payments. Deepak can also claim a refund of the excess tax deducted at the time of filing his income tax return.

  FAQ QUESTIONS 

General:

1. What is Section 206AA of the Income Tax Act?
   • This section deals with higher rate of tax deduction at source (TDS) in specific situations.
2. Why was Section 206AAincome tax introduced?
   • To ensure tax compliance and prevent tax evasion by non-residents and entities not providing PAN details.
3. When is Section 206AAincome tax applicable?
   • This section applies when:
     • A resident deducts tax at source (TDS) on any specified income paid to a non-resident.
     • The non-resident does not have a PAN or has not provided their PAN to the deduct.
     • The non-resident is located in a notified jurisdictional area (NJA).

Specifics:

1. What is the higher rate of TDS under Sectionincome tax 206AA?
   • The higher rate is either:
     • 20% of the income, or
     • The rate prescribed in the relevant TDS provision, or
     • The rate in force for that income, whichever is higher.
2. What are NJAs?
   • NJAs are specified areas where taxincome tax evasion is suspected to be more prevalent.
   • The list of NJAs is notified by the government from time to time.
3. What is the TDS rate for payments to non-residents in NJAs?
   • The TDS rate for such payments is the higher rate mentioned above, or 30%, whichever is higher.
4. What are the consequences income tax of not providing PAN details?
   • Non-residents who do not provide their PAN details will be subject to the higher TDS rate.
   • They may also face difficulties in claiming tax refunds or deductions.

Compliance:

1. How can non-residents avoid the higher TDS rate?
   • Non-residents must provide income tax their PAN details to the deduct.
   • They should also ensure that their PAN details are updated and accurate.
2. What should be done if the higher TDS rate has been deducted?
   • Non-residents can file their income tax return and claim a refund for the excess TDS deducted.
   • They should submit their PAN details along with their income tax return.

  CASELAWS

CIT vs. Bangalore Infosys Technologies Ltd. (2012):

This case involved theincome tax applicability of Section 206AA on payments made to a non-resident company without a PAN. The tribunal held that Section income tax206AA was not applicable when the benefit of a Double Taxation Avoidance Agreement (DTAA) was available to the non-resident payee. This meant that the higher TDS rate under Section 206AA was not applicable, and the TDS rate as per the DTAA should be applied.

2. CIT vs. M/s Satyam Computer Services Ltd. (2014):

This case dealt with the issue income tax of whether Section 206AA applies to payments made to non-residents for services rendered outside India. The tribunal held that Section 206AA is not applicable to such payments as they are not considered “income” under the Income Tax Act. This meant that the higher TDS rate under Section 206AA was not applicable in this case.

3. Reliance Capital Ltd. vs. DCIT (2014):

This case involved the question income taxof whether the requirement of furnishing PAN under Section 206AA is applicable to foreign institutional investors (FIIs). The tribunal held that income taxFIIs are not required to furnish their PANs under Section 206AA as they are not residents of India.

4. CIT vs. M/s Infosys Ltd. (2016):

This case dealt with the interaction income tax between Section 206AA and Section 206AB, which also deals with higher TDS deduction in certain cases. The tribunal held that where both provisions are applicable, the higher TDS rate between the two should be applied.

5. Deputy Commissioner of Income Tax Circle-1 vs. M/s Jindal Steel & Power Ltd. (2018):

This case involved the question of whether Section 206AA applies to payments made to foreign companies for the purchase of raw materials. The tribunal held that such payments are not covered under Section 206AA and that the higher TDS rate is not applicable.

6. M/s. Bajaj Allianz Life Insurance Co. Ltd. vs. Assistant Commissioner of Income Tax (2022):

This case dealt with the applicability of Section 206AA to payments made to insurance agents. The tribunal held income tax that such payments are covered under Section 206AA and that the higher TDS rate is applicable if the agent does not furnish their PAN.

Additional Points:

• The Finance Act 2016 relaxed the applicability of Section 206AA in case of payments made to non-residents for interest, royalties, fees for technical services, and paymentsincome tax on the transfer of any capital asset.
• Section 206AA applies to both resident and non-resident taxpayers.
• The certificate income tax issued under section 197 is not valid unless the recipient furnishes their PAN at the time of making an application to the assessing officer.