Section 90(2) vs Domestic Law: DTAA Treaty Rate Overriding Higher 20% Non-PAN TDS Rate under Section 206AA
Updated: 3 days ago
For multinational corporations, foreign institutional investors, foreign portfolio investors (FPIs), and Indian enterprises making outbound cross-border remittances, withholding tax under Section 195 has long been caught in a fierce battle between domestic anti-avoidance provisions and bilateral double taxation avoidance agreements (DTAAs).
At the epicenter of this friction is the clash between Section 90(2)—which enshrines the foundational principle that tax treaties override domestic law to the extent they are more beneficial to the assessee—and Section 206AA, which mandates a punitive flat withholding tax of 20% if the non-resident recipient does not furnish an Indian Permanent Account Number (PAN).
When an applicable DTAA prescribes a concessional withholding rate of 5%, 10%, or 15% for royalties, fees for technical services (FTS), interest, or dividend income, can the Indian tax administration invoke Section 206AA to force a 20% deduction merely because the foreign payee lacks an Indian PAN?
Following landmark rulings by the Special Bench of the Income Tax Appellate Tribunal (ITAT) in Serum Institute of India, multiple High Courts, and judicial consensus, the law is firmly established: tax treaties prevail over Section 206AA. However, securing this treaty protection requires strict adherence to statutory evidentiary conditions under Section 90(4), Rule 37BC, electronic Form 10F filing, and rigorous Form 15CA/15CB certification.
At PGT & Associates, our international tax and transfer pricing practice routinely structures cross-border royalty, software, and debt remittances for global conglomerates. Below is an authoritative technical masterclass dissecting Section 90(2) treaty override jurisprudence, Section 206AA exception frameworks, Rule 37BC compliance protocols, and practical FAQs for AY 2026-27.
1. The Statutory Conflict: Section 90(2) vs Section 206AA
Under Section 90(2) of the Income-tax Act, 1961:
"Where the Central Government has entered into an agreement with the Government of any country outside India... under sub-section (1) for granting relief of tax... then, in relation to the assessee to whom such agreement applies, the provisions of this Act shall apply to the extent they are more beneficial to that assessee."
Conversely, Section 206AA(1) dictates:
"Notwithstanding anything contained in any other provisions of this Act, any person entitled to receive any sum or income or amount, on which tax is deductible under Chapter XVIIB... shall furnish his Permanent Account Number to the person responsible for deducting such tax, failing which tax shall be deducted at the higher of: (i) at the rate specified in the relevant provision of this Act; (ii) at the rate or rates in force; or (iii) at the rate of twenty per cent."
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2. Landmark Judicial Precedents Governing Treaty Supremacy
The judicial landscape in India has consistently upheld the sanctity of international tax treaties:
Union of India v. Azadi Bachao Andolan [2003] 263 ITR 706 (SC):
The Supreme Court of India held that the provisions of an agreement entered into under Section 90 prevail over general provisions of the Income-tax Act. If a tax liability is created under domestic law but eliminated or reduced under a DTAA, the treaty prevails.
Serum Institute of India Ltd. v. CIT [2015] 56 taxmann.com 1 (Pune - Trib.) (Special Bench):
The Special Bench conclusively ruled that where the tax treaty rate is more beneficial to the non-resident, Section 206AA cannot override Section 90(2). The deductor is entitled to deduct tax at the beneficial treaty rate, even in the absence of a PAN from the non-resident payee.
Danisco India (P.) Ltd. v. Union of India [2018] 90 taxmann.com 295 (Delhi HC):
The Delhi High Court affirmed that Section 206AA cannot be read in a manner that overrides Section 90(2), reiterating that international tax treaties reflect reciprocal international obligations that cannot be breached through statutory interpretation of domestic procedural clauses.
CIT v. Air India Ltd. [2023] 454 ITR 182 (Bom HC):
The Bombay High Court held that where tax was deducted at the DTAA rate of 15% on lease rent payments made to a foreign entity without an Indian PAN, the assessing officer could not demand 20% under Section 206AA or treat the remitter as an assessee-in-default under Section 201.
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3. Statutory Relief: Rule 37BC & Electronic Form 10F Compliance
Recognizing the practical gridlock faced by foreign companies refusing to register for an Indian PAN for sporadic commercial transactions, the Central Board of Direct Taxes (CBDT) introduced Rule 37BC of the Income-tax Rules, 1962.
Electronic Form 10F Mandatory Requirement
Under Section 90(4), obtaining a TRC from the home government is mandatory to claim treaty benefits. Where the TRC does not contain all particulars specified in Rule 21AB(1) (such as status, nationality, country of incorporation, or period of residency), the foreign entity must furnish Form 10F.
Crucial Electronic Filing Mandate: The Directorate of Income Tax (Systems) mandated that Form 10F must be generated and electronically filed through the Indian Income Tax e-filing portal using a foreign digital signature certificate (DSC) or Electronic Verification Code (EVC). For non-residents without a PAN, the CBDT has provided a dedicated electronic portal mechanism to generate Form 10F without requiring a permanent Indian tax registration.
4. The Form 15CA & 15CB Outbound Remittance Framework
Before any Indian bank or Authorized Dealer (AD Category-I) can process an outward foreign exchange remittance under FEMA, the remitter must satisfy the statutory reporting requirements under Section 195(6) and Rule 37BB:
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5. Frequently Asked Questions (FAQs): Section 90(2) & Section 206AA
Q1. If a foreign vendor refuses to provide an Indian PAN, can we apply the 10% DTAA rate?
Yes. Under the Special Bench ruling in Serum Institute and CBDT Rule 37BC, you can apply the beneficial 10% DTAA treaty rate provided the foreign vendor provides: (1) Tax Residency Certificate (TRC), (2) Form 10F, (3) No Permanent Establishment (No-PE) certificate, and (4) Tax Identification Number (TIN) from their home country.
Q2. Does the non-obstante clause in Section 206AA override bilateral DTAAs?
No. Judicial consensus from the Supreme Court (Azadi Bachao Andolan) and various High Courts confirms that Section 206AA operates within the domestic Income-tax Act. Because treaties are entered into under sovereign powers and Section 90(2) grants statutory primacy to beneficial treaty provisions, domestic procedural requirements cannot nullify international treaty concessions.
Q3. What happens if the foreign payee does not have a TRC?
Under Section 90(4), furnishing a valid Tax Residency Certificate (TRC) issued by the tax authorities of the foreign government is a mandatory statutory condition precedent for claiming any DTAA benefits. If the foreign payee cannot produce a TRC, treaty relief cannot be granted, and tax must be withheld under domestic law (Section 115A / Section 195) at the full applicable rate.
Q4. Are education cess and surcharge applicable on DTAA withholding tax rates?
No. Unlike domestic tax rates which are enhanced by surcharge and Health and Education Cess (4%), DTAA rates are gross, all-inclusive maximum ceiling rates agreed between sovereign states. Unless specifically stated otherwise in the treaty, no surcharge or cess can be added to the DTAA rate (CIT v. Sunil V. Motwani [2013]).
Q5. Can an Indian company face Section 40(a)(i) disallowance if it withholds at treaty rates without a payee PAN?
No. As long as the company has obtained Form 15CB certification from a Chartered Accountant along with the vendor's TRC, Form 10F, and No-PE certificate satisfying Rule 37BC, the deduction at the treaty rate is valid in law. Assessing officers cannot make a 100% expense disallowance under Section 40(a)(i) or treat the company as an assessee-in-default under Section 201.
Q6. Is Form 15CA/15CB required for remittances made by an Indian subsidiary to its US parent for management charges?
Yes. Management charges typically qualify as Fees for Included Services (FIS) or Fees for Technical Services (FTS) under Article 12 of the India-US DTAA. Form 15CB certification by a Chartered Accountant and electronic submission of Form 15CA (Part C) are legally mandatory prior to bank remittance.
6. Strategic Cross-Border & Corporate Tax Synergies
Cross-border withholding intersects directly with transfer pricing documentation, international remittance protocols, and tax audit compliance. Explore our related expert analyses:
Clause 21(b) of Form 3CD: Section 40(a) TDS Disallowance Guide: 100% non-resident disallowance mechanics under Section 40(a)(i).
Transfer Pricing Audit Form 3CEB: Section 92E Deadlines & Safe Harbour Rules: Arm's length pricing and documentation for cross-border group transactions.
US-India Dual Taxation for NRIs: PFIC Pitfalls & Form 67 Foreign Tax Credits: Mitigating IRS excess distribution taxes and claiming bilateral treaty credits.
NRI Returning to India: RNOR Tax Status & FEMA Section 6(4) Asset Retention: Foreign asset disclosures in Schedule FA and RFC account structuring.
Section 194-IB TDS on High-Value Rent: Form 26QC & Tenant Liabilities: Domestic withholding rules vs non-resident landlord deductions under Section 195.
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