DTAA override in tax withholding: higher PAN-default rate cannot displace a more beneficial treaty rate for non-resident payments.

Section 90(2) gives overriding effect to a more beneficial DTAA rate for tax deduction at source on payments to non-residents, so the higher rate under section 206AA for non-furnishing of PAN cannot be used to replace the treaty rate. The withholding mechanism under section 195 must operate consistently with the treaty framework, and where the DTAA prescribes a lower rate, tax may be deducted at that rate. A demand based on the difference between 20% and the treaty rate was therefore not sustainable.

---

---

Issues: Whether section 206AA of the Income-tax Act, 1961 could be invoked to require deduction of tax at 20% from payments made to non-residents who had not furnished PAN, even where the applicable Double Taxation Avoidance Agreement prescribed a lower rate of tax.

Analysis: Section 206AA is a provision relating to tax deduction at source and prescribes a higher rate where PAN is not furnished. The dispute concerned payments to non-residents on which tax was deducted at the concessional rate available under the relevant Double Taxation Avoidance Agreements. Section 90(2) gives overriding effect to treaty provisions where they are more beneficial to the assessee. The applicable treaty rates governed the tax deduction on the impugned payments, and section 206AA, being a procedural withholding provision, could not be used to override the beneficial treaty rate. The domestic withholding mechanism under section 195 must operate in harmony with the treaty framework and the principle that treaty benefits prevail where more favourable.

Conclusion: Section 206AA could not be applied to compel deduction at 20% in preference to the lower treaty rate. The assessee was entitled to deduct tax at the DTAA rate, and the demand based on the difference between 20% and the rate actually applied was not sustainable.

Ratio Decidendi: Where a Double Taxation Avoidance Agreement provides a rate more beneficial to the assessee, section 90(2) prevails and section 206AA cannot be invoked to substitute the treaty rate with the higher rate prescribed for non-furnishing of PAN.

---