Google Ad-sense is perfectly legal in India. You can surely receive payments in US dollars or any other currency as long as it comes from existing valid banking channels.
PAN is necessary when you have to file your income tax returns (and also for various other reasons like opening a bank account, etc.). It is not necessarily for receiving money from abroad. But even if you have low income, there are six crietrias. Its called One by six scheme. If you fall under any one of them, you will have to file your return. These criterias are:
1. Mobile Phone
2. Credit Card
3. Club Membership
4. Foreign Travel
5. Owning a motor vehicle (not a two wheeler)
6. Occupying an immovable property as an owner or a tenant of specified area. Specified area differs from city to city.
I have applied on dad's name for my 2 blogs. I too am a student(only 16). You just have to give out all ur info once ur application is approved and state that u have nothing to do with the US. Thats all , they cant tax you.
well me too was getting this message though the amount was meagre.
Anyways for this warning to go away you need to confirm somewhere once you log in (Dont rem will check and tell you) that you are not a US citizen and your business is not based in US. Once you do this the message goes off.
I strongly recommend you to read the rules and regulations and online help as its got most answers.