DTAA Rate vs. Section 206AA – Whether 206AA Overrides a Treaty Rate When Non-Resident Has No PAN ?(Delhi High Court: CIT (Intl. Tax)-1 v. Air India Ltd., [2023] 456 ITR 117)**

 

Core Issue:  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).

 

Holding:-The Delhi High Court 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.

 

The Supreme Court dismissed the Revenue’s SLP, thus making the legal position final (reported in 456 ITR 139 (SC)).

 

Detailed Analysis

1. BackgroundAir 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

Revenue contended that:

A. Section 206AA is a non-obstante provision

… and therefore overrides all other provisions, including Section 90(2).

B. Benefit of DTAA under Section 90(2)

… applies only for “charge of tax”, not for “deduction of tax at source”.

 

C. 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.

Supported by:

                Azadi Bachao Andolan (263 ITR 706) (SC)

                GE India Technology (327 ITR 456) (SC)

                Eli Lilly (312 ITR 225) (SC)

 

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.

This “corrective amendment” indicated that DTAA benefit must prevail.

 

D. Danisco India principle applied

The Court reiterated the ratio in Danisco:

Section 206AA must be read down in cases of non-residents to allow withholding at DTAA rates.

This judgment has also been consistently followed by tribunals across India.

 

4. Result 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)

 

Note :-Another Instance:- 2025 Supreme Court Order – Manthan Software Services Pvt. Ltd. (SLP(C) No. 21435/2023, Order dated 24 November 2025)**

The Supreme Court passed a detailed procedural and substantive order reinforcing the Air India ratio.

1. SLP (C) 21435/2023 and connected matters. The Supreme Court recorded:

Respondent’s senior counsel pointed out that the issue in these SLPs was squarely covered by the Court’s earlier judgment in CIT (International Taxation) v. Air India Ltd. [(2023) 153 taxmann.com 181 (SC)].

Outcome:

“These Special Leave Petitions are disposed of as the lis between the parties no longer survives for consideration. All pending applications including application for delay shall stand disposed of.”

 

 

References :

 Danisco India (P.) Ltd. vs. Union of India [2018] 90 taxmann.com 295 (Delhi), wherein it has been held as under:-

“6. After hearing the counsel for the parties, it is quite apparent that the issue urged has been rendered largely academic on account of corrective amendment made by the Parliament-which substituted pre-existing Sub-section (7) with the present Section 206AA (7). The amendment is mitigating to a large extent, the rigors of the pre-existing laws. The law, as it existed, went beyond the provisions of DTAA which in most cases mandates a 10% cap on the rate of tax applicable to the state parties. Section 206AA (prior to its amendment) resulted in a situation, where, over and above the mandated 10%, a recovery of an additional 10%, in the event, the non- resident payee, did not possess PAN.

 

 ITAT in Serum Institute of India discussed this very issue in some detail and stated, as follows:

"..................The case of the Revenue is that in the absence of furnishing of PAN, assessee was under an obligation to deduct tax @ 20% following the provisions of section 206AA of the Act. However, assessee had deducted the tax at source at the rates prescribed in the respective DTAAs between India and the relevant country of the non-residents; and, such rate of tax being lower than the rate of 20% mandated by section 206AA of the Act. The CIT(A) has found that the provisions of section 90(2) come to the rescue of the assessee. Section 90(2) provides that the provisions of the DTAAs would override the provisions of the domestic Act in cases where the provisions of DTAAs are more beneficial to the assessee. There cannot be any doubt to the proposition that in case of non-residents, tax liability in India is liable to be determined in accordance with the provisions of the Act or the DTAA between India and the relevant country, whichever is more beneficial to the assessee, having regard to the provisions of section 90(2) of the Act. In this context, the CIT(A) has correctly observed that the Hon'ble Supreme Court in the case of Azadi Bachao Andolan and Others v. UOI, MANU/SC/1219/2003 : (2003) 263 ITR 706 (SC) has upheld the proposition that the provisions made in the DTAAs will prevail over the general provisions contained in the Act to the extent they are beneficial to the assessee. In this context, it would be worthwhile to observe that the DTAAs entered into between India and the other relevant countries in the present context provide for scope of taxation and/or a rate of taxation which was different from the scope/rate prescribed under the Act. For the said reason, assessee deducted the tax at source having regard to the provisions of the respective DTAAs which provided for a beneficial rate of taxation.

 

Hon'ble Supreme Court in the case of Azadi Bachao Andolan and Others v. UOI, MANU/SC/1219/2003 : (2003) 263 ITR 706 (SC) has upheld the proposition that the provisions made in the DTAAs will prevail over the general provisions contained in the Act to the extent they are beneficial to the assessee.

 

 Hon'ble Supreme Court in the case of CIT v. Eli Lily & Co., MANU/SC/0487/2009 : (2009) 312 ITR 225 (SC) observed that the provisions of tax withholding i.e. section 195 of the Act would apply only to sums which are otherwise chargeable to tax under the Act. The Hon'ble Supreme Court in the case of GE India Technology Centre Pvt. Ltd. v. CIT, MANU/SC/0688/2010 : (2010) 327 ITR 456 (SC) held that the provisions of DTAAs along with the sections 4, 5, 9, 90 & 91 of the Act are relevant while applying the provisions of tax deduction at source. Therefore, in view of the aforesaid schematic interpretation of the Act, section 206AA of the Act cannot be understood to override the charging sections 4 and 5 of the Act. Thus, where section 90(2) of the Act provides that DTAAs override domestic law in cases where the provisions of DTAAs are more beneficial to the assessee and the same also overrides the charging sections 4 and 5 of the Act which, in turn, override the DTAAs provisions especially section 206AA of the Act which is the controversy before us