Treaty withholding rate prevails over higher domestic PAN-based deduction where the tax treaty is more beneficial.

Where a tax treaty prescribes a more beneficial withholding rate for remittance to a non-resident, section 90(2) gives effect to the treaty rate and the higher domestic rate under section 206AA cannot override that entitlement merely because PAN was not furnished. The cited reasoning relied on the primacy of treaty provisions over conflicting domestic withholding rules and on the CBDT's recognition that specific treaty provisions prevail where more beneficial. On the stated facts, the applicable treaty rate applied, so deduction at the higher domestic rate was not justified.

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Issues: Whether tax deducted at source on remittance to a non-resident without furnishing of Permanent Account Number was to be computed at the higher rate under section 206AA or at the beneficial rate prescribed under the applicable Double Taxation Avoidance Agreement.

Analysis: The dispute turned on the interplay between the domestic withholding provision requiring deduction at the higher rate where PAN is not furnished and the treaty rate applicable under the India-Czech Republic tax arrangement. The provisions of the treaty were held to prevail to the extent they were more beneficial, in view of section 90(2) of the Income-tax Act, 1961. The reasoning was supported by the CBDT circular recognizing the primacy of specific treaty provisions over the general provisions of the Act, and by the principle affirmed in the cited Supreme Court decision that treaty benefits cannot be denied by invoking the domestic higher-rate provision. On the facts, the applicable treaty prescribed a lower rate, and the absence of PAN did not justify applying the higher domestic rate.

Conclusion: Section 206AA could not be invoked to insist on deduction at 20% where the applicable treaty prescribed deduction at 10%; the assessee's deduction at the treaty rate was upheld.

Ratio Decidendi: Where a tax treaty prescribes a more beneficial withholding rate, section 90(2) gives effect to the treaty rate and the higher rate under section 206AA cannot override that treaty entitlement merely because the deductee has not furnished PAN.

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