IS PAN MANDATORY for Tax Collection at Source (TCS)

[SPIC Ltd.]

PAN MANDATORY UNDER SECTION 206AA

As per section 206AA, furnishing of PAN by the persons entitled to receive any sum under chapter XVIIB of the Income Tax Act, 1961 (“Act”) is now mandatory w.e.f 01.04.2010 failing which TDS has to be deducted at the higher of the following rates 

(i) At the rate specified in the relevant provision of the Act or

(ii) At the rate or rates in force or

(iii) At the rate of twenty percent

This section was introduced into the statute book as a penal measure in order to compel the Non PAN assessees to obtain a PAN and bring more number of assessees into the tax net. As per section 206AA(6) the above provisions will be equally applicable for cases wherein the deductees are furnishing wrong PANs to the deductors.

If we look at section 206AA, it is evident that it is covering only the TDS provisions under chapter XVIIB of the Act (sections 190 to sec 206AA) and not applicable to sec 206C.

Section 206C is covered under chapter XVIIBB, which makes every person being a seller of the specified goods mentioned in the table appended to that section to collect tax from the buyer, at a specified percentage as income tax, which is known as tax collection at source. This tax has to be collected at the time of debiting the amount payable by the buyer to the account of the buyer or at the time of receipt of such amount from the said buyer in cash or by cheque or draft or by any other mode whichever is earlier by the seller. taxmanagementindia.com

TAX COLLECTION AT SOURCE ON LEASING OF CERTAIN FACILITIES

Further, as per section 206C(1C), every person who grants a lease or a license or enters into a contract or otherwise transfers any right or interest in whole or in part in any parking lot or toll plaza or mines or quarry to another person, other than a public sector Company (hereinafter referred as lessee or licensee) shall at the time of debiting of the amount payable by the licensee or lessee in cash or by cheque or draft or by any other mode whichever is earlier, collect tax at 2% of the amount receivable or received from the lessee or licensee.

WHETHER SECTION 206AA APPLIES TO SEC 206C

Now a question has arisen, whether furnishing of PAN of the buyers of the aforesaid scheduled goods or the lessees/licensees of the said facilities is mandatory in order to collect the tax at the applicable rates? If PANs are not furnished by the buyers, whether the provisions of section 206AA could be invoked and a higher rate of TCS @ 20% could be collected from the buyer towards income tax. It seems that certain TDS circles have invoked the provisions of section 206AA and issued notices to the persons collecting TCS to pay the differential tax along with interest u/s 206C(7) to the Central Govt. account by applying a rate of 20% on the sums collected by the sellers from the buyers. The department cannot initiate any such proceedings in view of the aforesaid legal position.

The legal sustainability of these notices have to be examined in the light of the question, whether sec 206AA could be applied on sec 206C without any legal sanction. Section 206AA clearly demonstrates that it is applicable only to the provisions covered under chapter XVII-B and therefore could not be applied to sec 206C which is covered under chapter XVII-BB.

TAXABILITY OF AMOUNTS IN SUBLEASING/LICENSING OF PARKING LOTS, MINES AND QUARRIES

Section 206C(1C) aims to collect tax on the sums payable by the lessees/licensees to the lessors/licensors at specified rates for leasing/licensing parking lots, Toll Plaza and mining and quarrying. These incomes per se take the character of lease rentals which are subject to TDS u/s 194I. In this kind of leasing/licensing transactions, subleasing/sub licensing is a common activity prevailing in the trade. Unfortunately the corresponding charging section viz 206C(1C) is silent on the point of collection of tax, when there are multiple transactions of the lease/contract/license of the said facilities. Precisely whether the tax has to be collected at the first point at the time of awarding the main lease of the said facilities or at all points till the last lessee/licensee has to be clarified. In the absence of specific provisions under law, it could be safely assumed that the tax has to be collected only at the first stage when the main lease/contract/license is awarded and the corresponding sums are debited or collected to/from the beneficiaries since sec 206C(1C) enables collection of tax only from “the licensee or lessee” of any such license, contract or lease and in as much as it is silent about sublease/sub contract/ sub license etc. CBDT may also examine this aspect and issue necessary circulars in this regard clarifying the correct position of law. 

TCS AT A LOWER RATE

Sections 206C(9) empowers the assessing officer to issue a certificate to the buyer or licensee or lessee on an application made by him for collection of tax at a lower rate than the relevant rate specified in sec 206C(1), if he is satisfied that the total income of the buyer/licensee/lessee justified such collection. For the purpose of issuance of such certificate, there is no requirement under the above section that the PAN of the beneficiaries have to be furnished.

Conversely, sec 206AA(4) stipulates that no certificate u/s 197 shall be issued by the assessing officer for deduction of tax at a nil / lower rate, unless the applications made under that section contains the Pan of the applicant. As there is a conflict between sec 206AA(4) and sec206C(1), it gives an impression that the scheme of lower rate of tax could be availed by the buyer/licensee/lessee even without furnishing their PANs to the assessing officer.

RECOMMENDATION

Finally it is suggested that with regard to furnishing of PAN by the buyers/lessees/licensees both the TDS and TCS provisions could be synchronized if sec 206AA is made applicable to chapter XVII-BB of the Act also by introducing a suitable amendment to the relevant section.