In case of payment made by a resident to Non-resident (NR), who doesnot have PAN or doesnot produce PAN, generally the NR would not like to bear TDS Amount. Otherwise the NR has to obtain PAN, file Return in respect of Income earned in India and claim TDS. So the Payer/Resident has to bear TDS and the Amount payable to NR is grossed up as per section 195A using the Rate in force and on that amount TDS is deducted. Ultimatelt NR would get 100% amount without TDS Deduction.
Again as per section 206AA (1)
Notwithstanding anything contained in any other provisions of the Act, any person entitled
to receive any sum or income or amount, on which tax is deductible under Chapter XVIIB shall
furnish his Permanent Account Number to the person responsible for deducting such tax, failing
which tax shall be deducted at the higher of the following rates, namely:—
i. at the rate specified in the relevant provision of this Act; or
ii. at the rate or rates in force; or
iii. at the rate of twenty per cent.
For the purposes of deduction of tax u/s 195 of the Act, the rate or rates in force is defined u/s
2(37A)(iii) read with Circular No 728 30/10/1995 of the Act, to mean:- the rate or rates of income-tax
specified in this behalf in the Finance Act of the relevant year or the rate or rates of income-tax
specified in an agreement entered into by the Central Government u/s 90 or an agreement notified
by the Central Government under section 90A, whichever is applicable by virtue of the provisions
of section 90, or section 90A, as the case may be.
Now For Example.
Suppose, A resident has to make paymet of Rs. 1,00,000/- to a NR subject to TDS. Now to Gross up this amount Rate in force is to be used. As per Finance Act Rate is 15% and As per DTAA, Rate is 10%. Rate 10% is to used for grossing up. Accordingly Grossed up Amount is Rs.1,11,111/- (i.e.100000*100/90) on which TDS is to deducted. But NR is concerned about getting Rs. 1,00,000/- only.
Now coming to section 206AA,
The provisions of section 206AA begin with a non obstante clause. Accordingly, it has an
overriding effect over all other provisions of the Act, Thus, tax may be deducted on such
amount so grossed up, at higher of the following:-
Rate prescribed under the relevant provisions of the Act i.e. Section 115A which
requires deduction of tax at the rate of 15% in respect of payments
Rate or rates in force u/s 2(37A)(iii) i.e. 10% being:-
i. 15% as per the Finance Act or
ii. 10% as per the DTAA or
At the rate of 20%
Accordingly tax may be deducted at 20% of Rs 1,11,111/- being Rs 22,222/-.
Now Net amount payable is Rs.(1,11,111-22,222) i.e. Rs.88,889/- but NR has to get Rs.1,00,000/-
Now my query is who will bear the excess amount deducted (i.e.1,00,000-88,889=11,111)
Either Payer has to pay full Rs. 1 Lakh to NR and bear the above excess amount OR,
NR has to accept Rs. 88,889/- and file Return to claim above excess.
Please Suggest.
CAclubindia
