Case: Deputy Director of Income-tax vs. Serum Institute of India Ltd.
Where NR does not furnish PAN, TDS on payment shall be deducted as per rate prescribed in DTAA and section 206AA cannot be invoked to insist on tax deduction at the rate 20%.   
Facts:
The assessee was a company incorporated under the provisions of the Companies Act, 1956. It was engaged in the business of manufacture and sale of vaccines, and was a major exporter of the vaccines.
In the course of its business activities, assessee made payments to non-residents on account of interest, royalty and fee for technical services during the financial year 2010-11. The aforesaid payments were subject to withholding tax u/s 195 of the Act. The assessee deducted tax at source on such payment in accordance with the tax rates provided in the Double Taxation Avoidance Agreements (DTAAs) with the respective countries. The tax rate so provided in the DTAAs was lower than the rate prescribed under the Act and therefore in terms of the provisions of section 90(2) of the Act, the tax was deducted at source by applying the beneficial rate prescribed under the relevant DTAAs.
In the assessment proceedings, the Department noted that some of the non-residents recipients did not have Permanent Account Numbers. The AO treated the said payment as ‘short deduction’ of tax in terms of the provisions of section 206AA of the Act. Thus, demands were raised on the assessee for the short deduction of tax and also for interest under section 201(1A) being difference between rate prescribed in Act and actual tax rate deducted by the assessee.
The Commissioner (Appeals) deleted the demand raised.
Appeal to the Tribunal was made.
Held:
The Tribunal highlighted certain provisions of the Act:
Section 206AA prescribes that where PAN is not furnished to the person responsible for deducting tax at source then the tax deductor would be required to deduct tax at the higher of the following rates, namely, at the rate prescribed in the relevant provisions of this Act; or at the rate/rates in force; or at the rate of 20 per cent.
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.
It was clear 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. 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 the present case, the rate of taxation as per DTAA was more beneficial than the rate prescribed by the ACT. Thus, the assessee deducted the tax at source having regard to the provisions of the respective DTAAs which provided for a beneficial rate of taxation.
Therefore, where the tax has been deducted on the strength of the beneficial provisions of DTAAs, the provisions of section 206AA cannot be invoked by the AO to insist on the tax deduction at the rate 20 per cent, having regard to the overriding nature of the provisions of section 90(2).
Hence, higher TDS rate shall not be attracted for non furnishing of PAN by NR where DTAA being more beneficial.

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