Treaty rate prevails over PAN-based higher withholding, and section 206AA cannot override section 90(2).

Where a Double Taxation Avoidance Agreement prescribes a more beneficial withholding rate for non-residents, section 90(2) prevails over section 206AA. The provision in section 206AA is procedural and cannot displace the statutory scheme governing chargeability and treaty benefits under sections 4, 5 and 90(2). Accordingly, tax deducted at the treaty rate cannot be compelled up to 20% merely because the non-resident payee did not furnish PAN. The legal question was answered in favour of the assessee and against the Revenue.

---

---

Issues: Whether section 206AA of the Income-tax Act, 1961 could compel deduction of tax at 20% from non-residents who had not furnished PAN, despite the assessee having deducted tax at the treaty rate under the relevant Double Taxation Avoidance Agreements and section 90(2) of the Income-tax Act, 1961.

Analysis: The Court noted that the payments were made to non-residents and tax had been deducted at the rates prescribed under the relevant Double Taxation Avoidance Agreements, which were more beneficial than the rate under section 206AA. It accepted the view that section 90(2) gives primacy to the treaty where its provisions are more beneficial, and that this treaty override is not displaced by section 206AA. The Court also accepted that section 206AA is a procedural provision relating to tax deduction at source and cannot override the scheme of sections 4, 5 and 90(2) governing chargeability and the application of treaty benefits. On that basis, the higher 20% deduction could not be insisted upon merely because PAN was not furnished by the non-resident deductees.

Conclusion: Section 206AA does not override section 90(2), and the assessee was not liable to deduct tax at 20% where deduction had been made at the beneficial treaty rate. The question of law was answered in favour of the assessee and against the Revenue.

Ratio Decidendi: Where a Double Taxation Avoidance Agreement prescribes a more beneficial rate, section 90(2) prevails and section 206AA cannot be invoked to insist on deduction at 20% merely because the non-resident payee has not furnished PAN.

---