The interaction between treaty rates and Section 206AA has long generated uncertainty in cross-border withholding. One of the most common queries was whether non-furnishing of a PAN would necessarily result in compulsory 20 per cent deduction, despite being at variance with the net DTAA rate. This aspect has been clarified by the Delhi High Court in CIT (International Tax)-1 vs. Air India Ltd., ITA No. 626/2019, judgment dated 18th July 2023 to state that the rate under the DTAA cannot be displaced merely because non-resident does not have PAN. The Revenue’s appeal later dismissed by the Supreme Court reported at 108 taxmann (reported at (2023) 456 ITR 139 (SC)), thereby affirming the High Court’s approach.
The facts in Air India typify contemporary aircraft leasing arrangements. Air India had leased aircraft engines from ELFC, a Netherlands tax-resident entity with no permanent establishment in India. Under the India–Netherlands DTAA, the lease rentals were taxable in India at 10 per cent. The only impediment arose from ELFC not having a PAN. The Assessing Officer invoked Section 206AA and directed withholding at 20 per cent. The Tribunal disagreed, and the Revenue carried the matter to the High Court. Before the High Court, the Revenue relied principally on the non-obstante clause in Section 206AA, contending that it superseded all other provisions, including Section 90(2).It sought to differentiate between the taxpayer’s final charge—admittedly governed by treaty provisions—and the act of withholding, which it characterised as a domestic procedural requirement unconnected with treaty rights. On this basis, it argued that “rates in force” must be interpreted to permit the higher rate where a PAN is not furnished.
The Court rejected this argument on both statutory and doctrinal grounds. It reaffirmed that Section 90(2) constitutes an explicit legislative mandate: where the taxpayer qualifies for a treaty benefit, the DTAA prevails over domestic law to the extent it is more favourable. This doctrine applies not only to assessment but also to withholding, a position consistently recognised by the Supreme Court in Union of India v. Azadi Bachao Andolan (2003) 263 ITR 706 (SC) and GE India Technology Centre (2010) 327 ITR 456 (SC).
The Court underscored that Section 206AA is purely procedural—it deals with how tax is collected, not with creating or determining the tax liability itself. A procedural rule, it said, cannot override a substantive right available under a tax treaty. It also pointed to the 2016 amendment to Section 206AA(7), which removed the PAN requirement for certain non-residents, noting that this clarified Parliament’s intent and weakened the Revenue’s stance. Relying on its earlier decision in Danisco India Pvt. Ltd. v. Union of India, the Court again made it clear that when a taxpayer qualifies for DTAA benefits, not having a PAN cannot lead to applying the 20 per cent rate. The Revenue’s appeal was therefore rejected, and the 10 per cent treaty rate was allowed to stand.With the Supreme Court declining to intervene, the position in law now stands conclusively settled.
A later development before the Supreme Court shows that the Court has continued to follow the same approach. In CIT & Anr. v. Manthan Software Services Pvt. Ltd., the respondents pointed out that the issues were already settled by the Air India ruling. The Bench took note of this and listed the matter for final disposal. In a connected set of petitions, the Court found that no tax liability remained and closed the matters along with all pending applications. Though concise, these orders indicate the Court’s unwillingness to reopen an issue that has already been resolved in principle.
Taken together, these decisions represent a coherent judicial approach: once a non-resident furnishes valid proof of residence and qualifies for treaty protection, the DTAA rate governs. The absence of PAN does not warrant application of the 20 per cent rate under Section 206AA.
By,
Ajay Kumar Agarwal, FCA
Sr. Partner
Ajay K. Agarwal & Associates Chartered Accountants, New Delhi
(N.B: All statements, opinions, and analysis presented in this article represent the independent personal views of the author and do not necessarily reflect the views of publication or its editorial team.)
