Section 206AA – The Payments to Non-Residents Controversy

Sanjeeva Narayan – [2021] 132 taxmann.com 199 (Article)

The Finance (No. 2) Act, 2009 had (w.e.f. 1-4-2010) inserted section 206AA to the Income-tax Act, 1961 (“the Act”) with a view to strengthen the PAN Mechanism and also to deal with the problems created in granting tax credits and processing of returns which led to delays in the issue of refunds. The section makes it mandatory for the deductee (i.e. the person whose receipts are subject to deduction of tax at source) to provide his PAN failing which the deductor shall deduct tax at source at the higher rates.

Initially there was some confusion on the applicability of this section to payments made to non-residents, the CBDT in a press release issued on 20th January, 2010, i.e. just a couple of months after introduction of section 206AA, clarified that it would also apply to non-residents in respect of payments/remittances liable to TDS thereby widening its scope and bringing virtually all payments within its ambit. Be that as it may, in the entire scenario, certain critical and crucial factors seem to have been ignored and given the short-shrift.

The purpose of this Article is to analyse the provisions of section 206AA with reference to payments made to non-residents, particularly when they are governed by the DTAA’s entered into between two Sovereign States in the light of certain related provisions of the Act, and judicial pronouncements on the issue.

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