TDS Return Default for Foreign Party Without PAN – Need Guidance, Income Tax

[Ramanathan Seshan]

Dear Experts,

We have a case involving a foreign vendor who does not have a PAN. While filing the quarterly TDS return (Form 27Q) using the NSDL FVU utility, we encountered an error that prevented the generation of the FVU file—even though we provided the vendor’s email ID, Tax Identification Number (TIN), contact number, and address.

To proceed, we selected "C – Higher Rate of TDS may be applicable due to non-availability of PAN" under the remarks column. This allowed us to generate the FVU file. However, as per provisions of the Act higher deduction does not apply to non-residents without PAN. As a result of we tagging "C", we received a default in the TDS return for short deduction of TDS.

Now, when we try to remove the remark through the TRACES portal, it does not allow us to make the change, and the default still persists.

Has anyone faced a similar issue? Is there any way to resolve this—perhaps by submitting a written representation to the department? If so, to whom should it be addressed?

Regards,

S Ram

Posts / Replies

[YAGAY andSUN]

Yes, this is a known issue encountered by many deductors while filing Form 27Q for non-resident payments where the payee does not have a PAN. Let's break down your situation and provide a practical resolution strategy:

✅ Background Summary of the Problem

• You made payments to a non-resident vendor without a PAN.

• You provided email, TIN, contact, and address—as required under Rule 37BC of the Income Tax Rules, 1962.

• While filing Form 27Q, NSDL's FVU utility rejected the file unless you selected Remark “C” (higher TDS due to no PAN).

• But Section 206AA does not apply at higher rate for non-residents, provided the details under Rule 37BC are furnished.

• By tagging "C", the system assumes TDS at 20%, leading to a default for short deduction if you deducted at DTAA or applicable rate.

• Now, TRACES portal does not permit rectifying or removing the "C" remark post-filing—default still persists.

📌 Legal Position: What the Law Says

Section 206AA requires higher TDS (20%) if PAN is not available.
However, Rule 37BC specifically relaxes Section 206AA for non-residents for certain payments (interest, royalty, fees for technical services, dividend, etc.) if they provide:

• Name, email ID

• Contact number

• Address in the country of residence

• Tax Residency Certificate (TRC)

• Tax Identification Number (TIN)

This means: 👉 Higher deduction of TDS is not applicable if Rule 37BC conditions are met.

🛠️ Why the Problem Happens Technically

• The NSDL FVU validation does not consider the Rule 37BC relaxation while checking for PAN.

• Hence, forcing “C” remark becomes the only way to generate the file.

• Once remark “C” is selected, TRACES treats it as liable for 20% TDS.

• TRACES default generation does not check Rule 37BC compliance, hence defaults for short deduction are raised.

✅ Resolution Steps

Unfortunately, the TRACES portal currently doesn’t allow removing or editing “C” tag once submitted, but you can follow this practical approach:

🔄 Step 1: File a Correction Return (Form 27Q Revised)

• Download Consolidated File (Conso File) from TRACES.

• Prepare a correction return using RPU.

• Remove Remark “C” (leave remarks blank or use correct DTAA details).

• Mention the TIN, country, TRC, etc., correctly in the payee details.

• Regenerate FVU file and upload correction return through NSDL portal.

This corrects the return only if the FVU allows validation without PAN using updated RPU version.

⚠️ If FVU still insists on “C”, then move to Step 2.

📝 Step 2: File a Justification Submission / Online Dispute on TRACES

Once the demand is raised for short deduction:

• Go to TRACES → Defaults → Request for Justification Report.

• Download the justification report and identify the defaults for the non-resident entry.

• Use “Default Justification Submission” option on TRACES to:

  • Upload all supporting documents:

    • Copy of TIN, TRC, email ID, contact, invoice/payment proof.

    • Copy of Rule 37BC.

  • Mention that Section 206AA does not apply due to compliance with Rule 37BC.

  • Attach a covering letter explaining the FVU limitation.

This acts as an online reply to dispute the demand.

✉️ Step 3: If Portal Route Fails, Write to the Jurisdictional AO (TDS)

• Submit a manual letter to your TDS Assessing Officer enclosing:

  • Copy of Form 27Q

  • Proof of Rule 37BC compliance

  • Copy of default raised

  • Explanation that software did not allow return filing without selecting remark “C”

• Ask the AO to nullify the default demand manually or mark it as non-default in the back end.

✅ Proactive Tip for Future Returns

To avoid recurrence:

• Always maintain full documentation under Rule 37BC for non-residents.

• Check for the latest RPU/FVU version from NSDL website, which may improve validations.

• Use “blank remark” instead of “C” if FVU accepts it in future updates.

🧾 Final Note

You’re not alone—this issue is frequently faced by deductors dealing with foreign vendors. The only current workaround is to justify the short deduction through TRACES dispute mechanism or with AO support, as systemic validation overrides legal relaxation.

 

Disclaimer

This revert is not an legal opinion and only meant for a healthy discussion on the aforesaid matter for understanding the issue in a better manner and to explore the possible solution within the frame work of applicable legal provision. Consult with your Statutory Auditor/CA/Taxation Expert for digging out an appropriate answer to this issue.

*** 

[YAGAY andSUN]

Below is a template for a justification letter that you can use to submit to the TDS Assessing Officer or upload as part of your default justification on TRACES for a non-resident case where PAN is not available, but Rule 37BC has been complied with:

[On your official letterhead]
Date: [DD/MM/YYYY]

To,
The TDS Assessing Officer
[Address of the Jurisdictional TDS Ward/Circle]
[City, State, PIN Code]

Subject: Justification for Short Deduction of TDS – Non-Resident Payee Without PAN – Compliance with Rule 37BC – Request for Rectification of Demand

Reference:

• TAN: [Your TAN]

• Form 27Q – Quarter [Q1/Q2/Q3/Q4] of FY [YYYY–YY]

• Challan Identification Number: [Insert CIN]

• TRACES Default Intimation Ref. No.: [If available]

• Name of Payee: [Foreign Vendor Name]

• Country: [Country of Residence]

Respected Sir/Madam,

We are writing to bring to your kind attention a default raised on the TRACES portal regarding short deduction of tax on a payment made to a non-resident party, [Vendor Name], during the above-mentioned quarter under Form 27Q.

The non-resident payee does not have a PAN, but we have duly complied with Rule 37BC of the Income-tax Rules, 1962, and have obtained and furnished the following information/documents:

1. Name and Address of the payee in the country of residence

2. Email ID and Contact Number of the payee

3. Tax Identification Number (TIN) in the country of residence

4. Tax Residency Certificate (TRC) issued by the foreign tax authority

5. Payment covered under Section [Insert applicable section, e.g., 195], subject to DTAA rate of [X%]

Due to validation restrictions in the NSDL FVU utility, we were compelled to select Remark “C” (indicating higher TDS due to non-availability of PAN) in the e-TDS return filing, even though as per Section 206AA read with Rule 37BC, higher TDS is not applicable to such non-resident payees where the prescribed details have been furnished.

As a result of selecting “C”, the system has treated the applicable TDS rate as 20%, thereby flagging a short deduction, which is not legally valid in our case.

We respectfully submit that:

• The deduction has been made correctly as per DTAA or the applicable Income Tax provisions.

• Rule 37BC clearly provides relief from Section 206AA where the specified conditions are fulfilled.

• The default has arisen solely due to technical limitations in the return filing utility, not due to actual non-compliance.

📎 Enclosures (for your reference):

1. Copy of TRC from foreign tax authority

2. Copy of foreign TIN and address proof

3. Copy of payment advice/invoice

4. Copy of Form 27Q filed and related challan

5. Justification Report from TRACES showing default

6. Copy of NSDL FVU validation forcing use of Remark “C”

We kindly request your good office to:

• Rectify the default raised on TRACES.

• Acknowledge compliance with Rule 37BC.

• Treat the TDS deducted as correctly applied as per applicable provisions.

We remain available to provide any further clarification or documentation as may be required.

Thanking you,

Yours sincerely,
[Authorized Signatory Name]
[Designation]
[Company Name]
[Email ID] | [Phone No.]
[TAN]

[Ramanathan Seshan]

Dear Yagay and sun-sir,

Thanks for your reply, please help me to figure out this:

Default Justification Submission- Can you please guide how to do this on the portal, as im unable to see any options of the same.

Jurisdictional AO(TDS)- how do we find out who is our TDS AO ? 

Regards,

S Ram