DTAA Rate vs. Section 206AA: Where a beneficial treaty rate exists, that rate must apply-even if the non-resident does not have a PAN
Delhi High Court in the case of CIT (Intl. Tax)-1 v. Air India Ltd., [2023] 456 ITR 117) was dealing with the DTAA Rate vs. Section 206AA. The issue was “whether in the case of a non-resident without a PAN, Section 206AA (requiring 20% TDS) overrides the beneficial tax rate prescribed under an applicable DTAA, particularly when the case is not covered under exceptions in Section 206AA(7)”.
The court has held that Section 206AA does NOT override a DTAA. Where a beneficial treaty rate exists, that rate must apply-even if the non-resident does not have a PAN.
The Court followed its earlier ruling in Danisco India Pvt. Ltd. v. Union of India (2018) 90 taxmann.com 295, and affirmed that the DTAA overrides the domestic withholding mandate under Section 206AA
Analysis:- Air India paid lease rentals for aircraft engines to a Netherlands-based lessor (ELFC). Key facts:
• ELFC = tax resident of Netherlands, no PE in India, no PAN in India.
• Payments were treated as equipment rental, not “royalty” under Article 12.
• DTAA India–Netherlands provided a 10% withholding rate.
• AO invoked Section 206AA, insisting on 20% TDS due to absence of PAN.
The ITAT held in favour of Air India. The Revenue appealed.
2. Arguments of the Revenue
A. Section 206AA is a non-obstante provision
… and therefore overrides all other provisions, including Section 90(2).
1.Benefit of DTAA under Section 90(2)
… applies only for “charge of tax”, not for “deduction of tax at source”.
1.Under 206AA read with Section 2(37A)(iii)
… “rates in force” for withholding must be the higher of:
1. rate in the Act
2. rate in DTAA
3. . 20% under 206AA
Thereby making PAN mandatory for lower treaty rate.The High Court rejected all these arguments.
3. Delhi High Court’s Reasoning:
A. Section 90(2) gives DTAA primacy
Section 90(2) explicitly states:
Where the DTAA provisions are more beneficial to the assessee, the assessee shall be governed by the DTAA.
This applies not only to assessment but also to TDS obligations.
B. Section 206AA is a procedural (TDS) provision
206AA is not a charging section. It cannot override:
1. Section 90(2)
2. Sections 4 & 5 (charging and scope)
3. DTAA provisions
The Court accepted the reasoning of the ITAT: If even charging sections are subordinate to Section 90(2), procedural TDS provisions like 206AA cannot override DTAA.
C. Parliament itself “corrected” Section 206AA
The Court relied on the amendment to Section 206AA(7) (post-2016):
Government inserted exceptions for non-residents (no PAN needed if certain conditions met).
Shows legislative intention not to penalize foreign assessees.
D. Danisco India principle applied :Section 206AA must be read down in cases of non-residents to allow withholding at DTAA rates.The Delhi High Court dismissed the Revenue’s appeal:
Held: TDS to be deducted at DTAA rate of 10% and not 20% u/s 206AA.
DTAA overrides Section 206AA.
5. Supreme Court:- The Revenue filed SLP against the Delhi High Court judgment. The Supreme Court dismissed the SLP, reported in 456 ITR 139 (SC)
The copy of the order is as under:
updated_judgment_case (1)
