Treaty override for non-resident withholding: DTAA rates prevail over the domestic PAN-related default deduction rate.

For payments to non-residents, the DTAA rate prevails where it is more beneficial under section 90(2), and section 206AA cannot override that treaty entitlement by forcing deduction at 20%. The withholding obligation under section 195 applies only to sums chargeable to tax, so the rate of deduction must follow the applicable treaty provisions when they are more favourable than domestic law. On that basis, the PAN-related default rate under section 206AA was held inapplicable, and tax could be deducted at the DTAA rate.

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Issues: Whether section 206AA of the Income-tax Act, 1961 overrides section 90(2) of the Income-tax Act, 1961 in the case of payments made to non-residents, and whether tax was required to be deducted at 20% despite the lower rate available under the applicable Double Taxation Avoidance Agreement.

Analysis: The issue was decided by applying the settled principle that, where the DTAA provides a more beneficial rate of tax, section 90(2) gives primacy to the treaty over the domestic law. Section 206AA is a procedural provision relating to tax deduction at source and cannot override the beneficial treaty rate applicable to non-resident recipients. The withholding obligation under section 195 also operates only on sums chargeable to tax, and the rate of deduction has to be determined in accordance with the more beneficial treaty provisions. The reasoning followed the jurisdictional view that the domestic PAN-related default rate cannot displace the treaty rate when the DTAA is more favourable.

Conclusion: Section 206AA does not override section 90(2), and the assessee was in deducting tax at the DTAA rate rather than 20% under section 206AA.

Ratio Decidendi: In cases of payments to non-residents, the DTAA rate applies where it is more beneficial, and section 206AA cannot be used to compel deduction at 20% so as to defeat the overriding effect of section 90(2).

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