Double Taxation Avoidance Agreements prevail over Section 206AA for non-residents

The Tribunal held that the provisions of section 206AA do not override the beneficial provisions of Double Taxation Avoidance Agreements (DTAAs). Therefore, the assessee is not required to deduct tax at the higher rate of 20% under section 206AA for non-residents who do not furnish their PAN but are residents of countries with which India has DTAAs. The Tribunal allowed the appeals of the assessee for the assessment years 2011-12 and 2012-13.

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Issues Involved:
1. Whether the provisions of section 206AA of the Income Tax Act, 1961 override the Double Taxation Avoidance Agreements (DTAAs) and other provisions of the Act.
2. Whether the assessee is required to deduct tax at the higher rate of 20% as prescribed under section 206AA in case of non-residents who do not furnish their Permanent Account Numbers (PAN).

Issue-Wise Detailed Analysis:

1. Overriding Effect of Section 206AA:
The core issue was whether section 206AA, which mandates a higher tax deduction rate of 20% for non-residents not furnishing PAN, overrides the provisions of DTAAs and other sections of the Income Tax Act. The Tribunal concluded that the provisions of section 206AA do not override the beneficial provisions of DTAAs. The Tribunal reasoned that DTAAs, being expressions of sovereign policy, prevail over domestic laws, including section 206AA, as per section 90(2) of the Act. This principle is supported by various judicial pronouncements, including the Supreme Court's decisions in Union of India & Another vs. Azadi Bachao Andolan & Another and CIT vs. P.V.A.L. Kulandagan Chettiar, which held that treaty provisions override domestic law provisions to the extent they are more beneficial to the assessee.

2. Requirement to Deduct Tax at Higher Rate:
The Tribunal examined whether the assessee was required to deduct tax at the higher rate of 20% under section 206AA for non-residents not furnishing PAN. The Tribunal noted that the non-residents in question were residents of countries with which India had DTAAs, and the tax was deducted at the rates specified in the relevant DTAAs. The Tribunal held that the beneficial provisions of the DTAAs, which prescribe lower tax rates, should be applied. The Tribunal emphasized that section 206AA is a machinery provision meant to strengthen the PAN mechanism and cannot override the beneficial provisions of DTAAs. The Tribunal also referred to the Karnataka High Court's decision in the case of Smt. Kaushallaya Bai & Others, which read down the overriding provisions of section 206AA in cases where the assessees were not required to obtain PAN under section 139A.

Conclusion:
The Tribunal concluded that the provisions of section 206AA do not override the beneficial provisions of DTAAs. Therefore, the assessee is not required to deduct tax at the higher rate of 20% under section 206AA in case of non-residents who do not furnish their PAN but are residents of countries with which India has DTAAs. The Tribunal allowed the appeals of the assessee for the assessment years 2011-12 and 2012-13.

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