Treaty rate prevails over section 206AA for non-resident payments, and PAN absence cannot force higher withholding.

Section 206AA is procedural and cannot displace the beneficial treaty rate under section 90(2) or the special withholding rate under section 115A(1)(b) for payments to non-residents. The article states that PAN non-furnishing does not justify deduction at 20% where the applicable DTAA or section 115A prescribes a lower rate, because a withholding provision cannot override the treaty framework or the specific statutory rate. It also notes that, on the recorded facts, the material was sufficient to support application of the treaty or special-rate provisions, so a residual demand based only on further verification was not justified.

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Issues: (i) Whether section 206AA of the Income-tax Act, 1961 could be invoked to require deduction of tax at 20% on payments made to non-residents covered by section 115A(1)(b) of the Income-tax Act, 1961 or by the applicable Double Taxation Avoidance Agreement under section 90(2) of the Income-tax Act, 1961; (ii) whether the demand sustained for want of verification of the agreement or treaty rate could stand.

Issue (i): Whether section 206AA of the Income-tax Act, 1961 could be invoked to require deduction of tax at 20% on payments made to non-residents covered by section 115A(1)(b) of the Income-tax Act, 1961 or by the applicable Double Taxation Avoidance Agreement under section 90(2) of the Income-tax Act, 1961.

Analysis: The statutory scheme of section 206AA is procedural and prescribes a higher withholding rate where PAN is not furnished, while section 115A(1)(b) separately fixes the tax rate for royalty and fees for technical services in specified cases and section 90(2) gives primacy to treaty provisions when they are more beneficial. The Tribunal followed coordinate bench decisions holding that the treaty rate or the special rate under section 115A, as applicable, cannot be displaced by section 206AA because a withholding provision cannot override the charging and treaty framework. The demand created only because PAN was not available was therefore unsustainable.

Conclusion: Section 206AA could not be applied to insist on deduction at 20% where tax was deducted at the beneficial rate under section 115A(1)(b) or the applicable DTAA.

Issue (ii): Whether the demand sustained for want of verification of the agreement or treaty rate could stand.

Analysis: The record showed that the payments were consistently made through banking channels for identified services, the recipients were non-residents without permanent establishment in India, and the deductor had applied the relevant treaty or special-rate provisions. In these circumstances, the Tribunal held that the existing material was sufficient and that the residual demand sustained merely on the ground of further verification was not justified.

Conclusion: The demand sustained for want of verification was deleted.

Final Conclusion: The assessees were held entitled to deduction of tax at the treaty rate or the rate under section 115A, and the short-deduction demand based on section 206AA was set aside in full.

Ratio Decidendi: A non-furnishing of PAN does not authorize application of section 206AA to override the beneficial treaty rate under section 90(2) or the special rate under section 115A(1)(b) for withholding tax on payments to non-residents.

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