Treaty withholding rate prevails over section 206AA where a non-resident has DTAA protection despite no PAN

Where a non-resident recipient is covered by a valid DTAA, the more beneficial treaty rate governs tax deduction at source under section 90(2), and section 206AA cannot be used to impose a higher domestic default rate merely because PAN was not furnished. The Tribunal treated section 206AA as a procedural withholding provision that must be read down in treaty cases, so the India-USA DTAA rate for fee for technical services prevailed over the domestic rate. The Revenue's challenge to the relief granted by the Commissioner (Appeals) therefore failed, and the treaty rate applied to the impugned payments.

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Issues: Whether the higher withholding rate under section 206AA of the Income-tax Act, 1961 could override the lower treaty rate applicable under the India-USA DTAA for payments of fee for technical services made to a non-resident recipient without PAN.

Analysis: The dispute turned on the interaction between section 206AA, which prescribes a higher deduction rate in the absence of PAN, and section 90(2), which gives effect to the more beneficial treaty provision. The payments were made to a U.S. resident entity, and the treaty rate under Article 12 was lower than the domestic rate. The Tribunal followed the settled position that section 206AA is a procedural provision for tax deduction and cannot override the treaty entitlement where the recipient is covered by a valid DTAA. The Tribunal also relied on the view that section 206AA must be read down in such cases, so that deduction is governed by the treaty rate and not the higher domestic default rate.

Conclusion: Section 206AA did not override the India-USA DTAA rate, and the Revenue's challenge to the relief granted by the Commissioner (Appeals) failed.

Final Conclusion: The Revenue's appeals were rejected and the treaty rate prevailed for tax deduction on the impugned payments to the non-resident recipient.

Ratio Decidendi: Where a non-resident recipient is covered by a DTAA, the more beneficial treaty rate governs tax deduction at source and section 206AA cannot be invoked to compel deduction at a higher domestic default rate merely because PAN was not furnished.

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