Assessee justified in withholding Tax at lower rate specified in DTAA upon payment to non-resident; Section 90(2) overrides Section 206AA: Gujarat High Court

CIT vs. Adani Wilmar Limited [2025] 175 taxmann.com 909 (Gujarat)

Facts:

• The assessee deducted tax at source on royalty and fees for technical services (FTS) paid to non-residents in accordance with the rates prescribed under the applicable DTAA or the Income-tax Act, whichever was more beneficial to the payee, despite the non-furnishing of PAN by the non-residents. The Revenue contended that tax was liable to be deducted at the rate of 20% u/s 206AA, in the absence of PAN.

• The CIT(A) held that the assessee was not liable to deduct tax at a higher rate, as section 90(2) provides that the provisions of the DTAA shall override the domestic law if they are more beneficial to the assessee. The ITAT affirmed this view of CIT(A).

High Court Observation and Ruling

• The Gujarat HC placed reliance on the judgment of the Delhi HC in Danisco India (P.) Ltd. v. UOI [2018] 404 ITR 539 (Delhi), which in turn had affirmed the observations made by the ITAT Pune in the case of DDIT v. Serum Institute of India (ITA No. 792/PN/2013). These observations, now confirmed by the Gujarat High Court, are as follows:

 Primacy of Section 90(2):
• Even the charging provisions of the Act, i.e., sections 4 and 5, are subject to section 90(2), as held by the SC in case of Azadi Bachao Andolan. Therefore, the provisions of Chapter XVII-B, including section 206AA (which is procedural and not a charging provision), are also subordinate to section 90(2) of the Act.

 Reliance on Supreme Court Precedents:
• In the case of CIT v. Eli Lily & Co. (2009) 312 ITR 225 (SC), the SC held that section 195 is not a charging provision and applies only to sums otherwise chargeable to tax under the Act.

• In GE India Technology v. CIT (2010) 327 ITR 456 (SC), the SC held that provisions of DTAA and sections 4, 5, 9, 90, and 91 must be considered when applying TDS provisions.

• Accordingly, the Gujarat HC following the above decisions held as under:

 Section 206AA, being a procedural provision and not a charging provision, cannot override the Section 90(2) of the Act.

 Where the deductee is a tax resident of a country having a DTAA with India, the applicable TDS rate shall be as per the DTAA, if such rate is more beneficial to the assessee , as the DTAA provisions prevail even over non-obstante clauses such as those in section 206AA

 Hence, the assessee was justified in deducting TDS on royalty/FTS payments to NR at the DTAA rates, even though they were lower than the 20% rate prescribed u/s 206AA.

Conclusion

This judgment reinforces the well-settled principle that the provisions of a DTAA override conflicting provisions of domestic law when more beneficial to the taxpayer. Even in the absence of PAN, a non-resident is entitled to the lower withholding tax rates under DTAA. Section 206AA, being procedural in nature, cannot be invoked to deny such treaty benefits. The decision upholds India’s commitment to treaty obligations and provides clarity for cross-border payments, ensuring certainty for both taxpayers and tax deductors.

Article is written by CA Ankit Karanpuria and CA. Ankush Karanpuria The author can be reached at karanpuriaankit@gmail.com

The views expressed in the above article are personal and for information purpose. The reader is required to take decision based on his own judgment and analysis. Writer shall not be responsible for any decision taken by the reader in the subject matter.