An Indian Tax Tribunal has recently held that a taxpayer – making payments to recipients that did not have a PAN (Permanent Account Number) – correctly applied the withholding tax rate according to the double taxation treaties but not as per domestic law. However, PAN regulations are still in force. Non-residents whose income is subject to withholding tax in India benefiting from a double tax treaty reduction still have to obtain a PAN.
Requirement of PAN registration
As per Indian law, if a non-resident does not have an Indian tax registration (legally called a “Permanent Account Number” also known as “PAN”), then the withholding tax rate on remittances to the non-resident would be the higher of the following:
- withholding tax rate prescribed by the domestic law
- withholding tax rate prescribed by the relevant tax treaty
The above provisions are normally applicable where the remittances are subject to withholding tax in India either under Indian law or the applicable tax treaty. The above rates may have to be appropriately “grossed-up” in case of “net-of-tax” agreements.
In light of the above, it would appear that where the domestic law/tax treaty provide for a withholding tax rate of 10% on say royalty/technical service fees, still, in the absence of PAN, the withholding tax rate ought to be 20% being the higher of (1) to (3).
Indian Tax Tribunal case
However, an Indian Tax Tribunal has recently held that in the above example, the withholding tax rate for payment made to a non-resident should be that under the tax treaty (e.g. 10%) and not 20%. A news flash on this decision can be found here.
In this particular case, some non-residents recipients to whom the Indian taxpayers made royalty payments and fee payments for technical services, did not have a PAN. The Tribunal held that for these non-residents, tax liability in India may be determined in accordance with the provisions of the Income Tax Act (the “Act”) or the tax treaty, whichever is more beneficial to the taxpayer. Furthermore, the Tribunal referred to the Supreme Court that held that the tax treaties will prevail over the general provisions contained in the Act to the extent they are beneficial to the taxpayer.
The Act provides that tax treaties override domestic law in cases where the provisions of tax treaties are more beneficial to the tax payer. Therefore, where the tax has been deducted on the basis of the beneficial provisions of the tax treaties, the provisions of the Act cannot be invoked by the tax authorities to insist on the tax deduction at 20%, given the overriding nature of the provisions of the Act. Thus, the Tribunal stated that the taxpayer correctly applied the tax rate prescribed under the tax treaties and not as per the Act when making payments to non-residents, because the provisions of the tax treaties are more beneficial.
Despite of the above-mentioned Tribunal decision, PAN regulations are still in force. Further, as per official position taken by the Indian KPMG firm, the Tribunal decision, although favorable to the taxpayer, has missed several important perspectives and hence, the Tribunal decision does not necessarily reflect the correct legal position. While it is speculative at the moment, the tax authorities may appeal against the Tribunal decision to the higher court. At best, the Tribunal decision can be used by clients to defend against “penalties” that could be imposed by the tax authorities for past withholding tax/PAN defaults. However, in the future, affected non-residents should not take a position on this basis, which is why it is recommended for non-residents earning royalties or fee for technical services from an Indian resident to still have a PAN registration in place.
- Tax Flash News: Non-residents whose income is subject to withholding tax in India benefiting from a double tax treaty reduction still have to obtain a PAN.