My non-resident payees had no PAN and the treaty rate is ten per cent. The officer says s.206AA has a non obstante clause and overrides everything, so twenty per cent it is. Is there a Special Bench on this?
There is, and it is against the department. The Hyderabad Special Bench held that s.206AA will not have an overriding effect over all other provisions of the Act, and that treaty provisions, to the extent more beneficial, override s.206AA by virtue of s.90(2). It answered the question referred to it in the negative and in favour of the assessee, and held that the deductor could not be required to deduct at the higher of the s.206AA rates on payments to non-residents having taxable income in India despite their failure to furnish PANs.
Decided by the ITAT (Special Bench — Justice Dev Darshan Sud, President, D. Manmohan, Vice-President, and P.M. Jagtap, Accountant Member) on 2017-02-13, reported as I.T.A. Nos. 1187 and 1188/H/2014, assessment years 2011-12 and 2012-13 (ITAT Hyderabad Special Bench). It bears on section 206AA, section 90(2), section 90(2A), section 195, section 2(37A), section 139A, section 139A(8) of the Income Tax Act 1961, in TDS Defaults, How Tax Law Is Read and Residence & Treaty Benefit matters.
The department's argument in these cases is always the same and this is the reasoned answer to each limb of it. To the argument that the non obstante clause settles the matter, the Bench held that the scope of a non obstante clause is ascertained by reading it with the scheme of the enactment, that the Board's own Circular No. 5 of 2010 explained the purpose of s.206AA as strengthening the PAN mechanism, and that so limited a purpose cannot be read to override the treaty. To the argument that s.90(2) is itself subject to the Act, the Bench held that on the Supreme Court's decisions in Azadi Bachao Andolan and P.V.A.L. Kulandagan Chettiar, as explained by the Andhra Pradesh High Court in Sanofi Pasteur Holding SA, treaty provisions prevail over and override even the CHARGING provisions of domestic law — and it rejected the departmental representative's contrary proposition in terms. To the argument that a deductor's obligation under Chapter XVII-B is independent of the payee's ultimate liability, the Bench applied Eli Lilly and G.E. Technology Centre for the proposition that the Act is an integrated code and that TDS provisions cannot be applied independently of the charging provisions; from which it follows that a machinery provision in Chapter XVII-B cannot do what the charging provisions themselves cannot. And the Bench added a drafting point that is very hard to answer: when Parliament wanted a domestic provision to prevail over s.90(2) it said so expressly, by inserting s.90(2A) for Chapter X-A, and it made no such provision for s.206AA. Two further things to carry. The Bench also held, following the Karnataka High Court in Kaushallaya Bai, that s.206AA must be read down so as not to apply to a person under no obligation to obtain a PAN at all — a separate and independent ground. And it distinguished the Bangalore Bench decision in Bosch Limited, on which the department relied, on the footing that the treaty-override arguments had not been put to that Bench. This is a Tribunal decision, not a High Court one; but the Delhi High Court's decision in Danisco India, already in the library, is to the same effect, and the two should be cited together.
Binding on the AO and CIT(A) within the Tribunal's jurisdiction. Persuasive elsewhere.
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The assessee made payments to non-resident payees who did not furnish their permanent account numbers. Those payees had taxable income in India but were not obliged to obtain permanent account numbers by reason of section 139A(8) read with rule 114C. The assessee deducted tax at the rates provided in the relevant Double Taxation Avoidance Agreements, taking those as the rates in force by virtue of section 2(37A). The authorities below applied section 206AA and required deduction at the higher of the rates it prescribes, relying on its non obstante clause, and the departmental representative supported that before the Tribunal, arguing that section 206AA overrides all other provisions of the Act, that under section 90(2) the treaty does not override the Act but gets overridden, that the payer's role is confined to deducting under Chapter XVII-B and has nothing to do with the payee's eventual liability, and relying on the Bangalore Bench decision in Bosch Limited and on the Supreme Court's decision in Transmission Corporation of A.P. Limited. The matter was referred to a Special Bench for the assessment years 2011-12 and 2012-13.
Both appeals were allowed and the question referred to the Special Bench was answered in the negative and in favour of the assessee. The Bench held that the provisions of section 206AA will not have an overriding effect for all other provisions of the Act, and that the provisions of the Treaty, to the extent they are beneficial to the assessee, will override section 206AA by virtue of section 90(2); and that the assessee therefore cannot be held liable to deduct tax at the higher of the rates prescribed in section 206AA on payments made to non-resident persons having taxable income in India, in spite of their failure to furnish permanent account numbers (paras 33 and 34). It held separately, applying the Karnataka High Court's decision in Smt. Kaushallaya Bai, that section 206AA is required to be read down so as to be inapplicable to non-resident payees who were under no obligation to obtain permanent account numbers (para 26).
The Bench took the two grounds in turn. On the first, it accepted that there is a clear contradiction between section 206AA and section 139A(8) read with rule 114C where the payee is under no obligation to obtain a permanent account number, and applied the analogy of Kaushallaya Bai, in which the Karnataka High Court had read down the overriding provisions of section 206AA and made them inapplicable to persons not required to obtain a number under section 139A (paras 25 and 26). On the second and principal ground, it set out the relationship between treaty and domestic law from Azadi Bachao Andolan — that once a treaty is notified under section 90 its provisions operate even if inconsistent with the Act, that in case of conflict the treaty prevails and is liable to be enforced, and that because the general principles of chargeability under sections 4 and 5 are subject to the provisions of the Act, treaty provisions automatically override the Act in the matter of chargeability and computation of total income — and from P.V.A.L. Kulandagan Chettiar, as both were explained by the Andhra Pradesh High Court in Sanofi Pasteur Holding SA (paras 27 and 28). It rejected in terms the departmental representative's contention that under section 90(2) the treaty gets overridden rather than overriding, as completely contrary to the proposition propounded by the Supreme Court (para 28). It then met the argument that the deductor's obligation is independent of the payee's assessability by applying Eli Lilly and G.E. Technology Centre, in which the Supreme Court held that TDS provisions cannot be read de hors the charging sections, that the Act is to be read as an integrated code, and that Chapter XVII and the charging provisions form one single inseparable code (para 29). From those two strands it drew the conclusion at para 30: charging provisions control and override machinery provisions dealing with tax deduction at source; treaty provisions by virtue of section 90(2) override even the charging provisions; and section 206AA, falling in Chapter XVII-B, is therefore overridden by the treaty irrespective of its non obstante clause, and is to be read down to that extent. It added an independent basis at para 31: when Chapter X-A on the General Anti-Avoidance Rule was inserted with its own non obstante clause in section 95, Parliament simultaneously inserted section 90(2A) to provide expressly that Chapter X-A applies even if not beneficial to the assessee, and made no corresponding provision for section 206AA, which shows the legislative intention was not to give section 206AA an override over section 90(2); the Bench supported this by the treatment of the same argument in Sanofi Pasteur Holding SA and by Bharat Hari Singhania on the construction of non obstante clauses, and by the Board's own Circular No. 5 of 2010 explaining the purpose of section 206AA as strengthening the PAN mechanism. Finally, at para 32, it distinguished Bosch Limited on the footing that the treaty-override and non obstante arguments had not been placed before that Bench, and approved the Pune Bench decision in Serum Institute of India Limited, which had considered them and had held that section 206AA cannot override section 90(2).
In view of the above discussion, we are of the view that the provisions of section 206AA of the Act will not have a overriding effect for all other provisions of the Act and the provisions of the Treaty to the extent they are beneficial to the assessee will override section 206AA by virtue of section 90(2).
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Handle my notice → Ask a CA on WhatsAppThere is, and it is against the department. The Hyderabad Special Bench held that s.206AA will not have an overriding effect over all other provisions of the Act, and that treaty provisions, to the extent more beneficial, override s.206AA by virtue of s.90(2). It answered the question referred to it in the negative and in favour of the assessee, and held that the deductor could not be required to deduct at the higher of the s.206AA rates on payments to non-residents having taxable income in India despite their failure to furnish PANs. This was decided by the ITAT (Special Bench — Justice Dev Darshan Sud, President, D. Manmohan, Vice-President, and P.M. Jagtap, Accountant Member) and bears on section 206AA, section 90(2), section 90(2A), section 195, section 2(37A), section 139A, section 139A(8) of the Income Tax Act 1961. It is reported as I.T.A. Nos. 1187 and 1188/H/2014, assessment years 2011-12 and 2012-13 (ITAT Hyderabad Special Bench). The department's argument in these cases is always the same and this is the reasoned answer to each limb of it. To the argument that the non obstante clause settles the matter, the Bench held that the scope of a non obstante clause is ascertained by reading it with the scheme of the enactment, that the Board's own Circular No. 5 of 2010 explained the purpose of s.206AA as strengthening the PAN mechanism, and that so limited a purpose cannot be read to override the treaty. To the argument that s.90(2) is itself subject to the Act, the Bench held that on the Supreme Court's decisions in Azadi Bachao Andolan and P.V.A.L. Kulandagan Chettiar, as explained by the Andhra Pradesh High Court in Sanofi Pasteur Holding SA, treaty provisions prevail over and override even the CHARGING provisions of domestic law — and it rejected the departmental representative's contrary proposition in terms. To the argument that a deductor's obligation under Chapter XVII-B is independent of the payee's ultimate liability, the Bench applied Eli Lilly and G.E. Technology Centre for the proposition that the Act is an integrated code and that TDS provisions cannot be applied independently of the charging provisions; from which it follows that a machinery provision in Chapter XVII-B cannot do what the charging provisions themselves cannot. And the Bench added a drafting point that is very hard to answer: when Parliament wanted a domestic provision to prevail over s.90(2) it said so expressly, by inserting s.90(2A) for Chapter X-A, and it made no such provision for s.206AA. Two further things to carry. The Bench also held, following the Karnataka High Court in Kaushallaya Bai, that s.206AA must be read down so as not to apply to a person under no obligation to obtain a PAN at all — a separate and independent ground. And it distinguished the Bangalore Bench decision in Bosch Limited, on which the department relied, on the footing that the treaty-override arguments had not been put to that Bench. This is a Tribunal decision, not a High Court one; but the Delhi High Court's decision in Danisco India, already in the library, is to the same effect, and the two should be cited together. If it applies to you, the first step is this: Plead s.90(2) as the primary answer and s.206AA(7) with rule 37BC as the alternative; the two are independent and the rule route, where it applies, avoids the argument altogether.
The assessee made payments to non-resident payees who did not furnish their permanent account numbers. Those payees had taxable income in India but were not obliged to obtain permanent account numbers by reason of section 139A(8) read with rule 114C. The assessee deducted tax at the rates provided in the relevant Double Taxation Avoidance Agreements, taking those as the rates in force by virtue of section 2(37A). The authorities below applied section 206AA and required deduction at the higher of the rates it prescribes, relying on its non obstante clause, and the departmental representative supported that before the Tribunal, arguing that section 206AA overrides all other provisions of the Act, that under section 90(2) the treaty does not override the Act but gets overridden, that the payer's role is confined to deducting under Chapter XVII-B and has nothing to do with the payee's eventual liability, and relying on the Bangalore Bench decision in Bosch Limited and on the Supreme Court's decision in Transmission Corporation of A.P. Limited. The matter was referred to a Special Bench for the assessment years 2011-12 and 2012-13. The matter was decided on 2017-02-13 by the ITAT (Special Bench — Justice Dev Darshan Sud, President, D. Manmohan, Vice-President, and P.M. Jagtap, Accountant Member). On those facts the ITAT held as follows. Both appeals were allowed and the question referred to the Special Bench was answered in the negative and in favour of the assessee. The Bench held that the provisions of section 206AA will not have an overriding effect for all other provisions of the Act, and that the provisions of the Treaty, to the extent they are beneficial to the assessee, will override section 206AA by virtue of section 90(2); and that the assessee therefore cannot be held liable to deduct tax at the higher of the rates prescribed in section 206AA on payments made to non-resident persons having taxable income in India, in spite of their failure to furnish permanent account numbers (paras 33 and 34). It held separately, applying the Karnataka High Court's decision in Smt. Kaushallaya Bai, that section 206AA is required to be read down so as to be inapplicable to non-resident payees who were under no obligation to obtain permanent account numbers (para 26).
The Bench took the two grounds in turn. On the first, it accepted that there is a clear contradiction between section 206AA and section 139A(8) read with rule 114C where the payee is under no obligation to obtain a permanent account number, and applied the analogy of Kaushallaya Bai, in which the Karnataka High Court had read down the overriding provisions of section 206AA and made them inapplicable to persons not required to obtain a number under section 139A (paras 25 and 26). On the second and principal ground, it set out the relationship between treaty and domestic law from Azadi Bachao Andolan — that once a treaty is notified under section 90 its provisions operate even if inconsistent with the Act, that in case of conflict the treaty prevails and is liable to be enforced, and that because the general principles of chargeability under sections 4 and 5 are subject to the provisions of the Act, treaty provisions automatically override the Act in the matter of chargeability and computation of total income — and from P.V.A.L. Kulandagan Chettiar, as both were explained by the Andhra Pradesh High Court in Sanofi Pasteur Holding SA (paras 27 and 28). It rejected in terms the departmental representative's contention that under section 90(2) the treaty gets overridden rather than overriding, as completely contrary to the proposition propounded by the Supreme Court (para 28). It then met the argument that the deductor's obligation is independent of the payee's assessability by applying Eli Lilly and G.E. Technology Centre, in which the Supreme Court held that TDS provisions cannot be read de hors the charging sections, that the Act is to be read as an integrated code, and that Chapter XVII and the charging provisions form one single inseparable code (para 29). From those two strands it drew the conclusion at para 30: charging provisions control and override machinery provisions dealing with tax deduction at source; treaty provisions by virtue of section 90(2) override even the charging provisions; and section 206AA, falling in Chapter XVII-B, is therefore overridden by the treaty irrespective of its non obstante clause, and is to be read down to that extent. It added an independent basis at para 31: when Chapter X-A on the General Anti-Avoidance Rule was inserted with its own non obstante clause in section 95, Parliament simultaneously inserted section 90(2A) to provide expressly that Chapter X-A applies even if not beneficial to the assessee, and made no corresponding provision for section 206AA, which shows the legislative intention was not to give section 206AA an override over section 90(2); the Bench supported this by the treatment of the same argument in Sanofi Pasteur Holding SA and by Bharat Hari Singhania on the construction of non obstante clauses, and by the Board's own Circular No. 5 of 2010 explaining the purpose of section 206AA as strengthening the PAN mechanism. Finally, at para 32, it distinguished Bosch Limited on the footing that the treaty-override and non obstante arguments had not been placed before that Bench, and approved the Pune Bench decision in Serum Institute of India Limited, which had considered them and had held that section 206AA cannot override section 90(2). In the words reproduced by the source cited on this page: "In view of the above discussion, we are of the view that the provisions of section 206AA of the Act will not have a overriding effect for all other provisions of the Act and the provisions of the Treaty to the extent they are beneficial to the assessee will override section 206AA by virtue of section 90(2)." The decision followed or applied Union of India v. Azadi Bachao Andolan — applied; CIT v. P.V.A.L. Kulandagan Chettiar — applied; Sanofi Pasteur Holding SA v. Department of Revenue (Andhra Pradesh High Court) — relied on and followed; CIT v. Eli Lilly and Co. (India) P. Limited — applied; G.E. India Technology Centre (P) Limited — applied; Smt. Kaushallaya Bai and Others (Karnataka High Court) — analogy applied to read down section 206AA; Mullapudi Venkatarayudu v. Union of India (Andhra Pradesh High Court) — relied on for the proposition that failure to file a return connotes an obligation to file; Bharat Hari Singhania — applied on the construction of a non obstante clause; DDIT v. Serum Institute of India Limited (ITAT Pune) — approved; Bosch Limited (ITAT Bangalore) — distinguished, the relevant arguments not having been placed before that Bench; CBDT Circular No. 5 of 2010 — relied on for the purpose of section 206AA.
It was decided by the ITAT on 2017-02-13 and is reported as I.T.A. Nos. 1187 and 1188/H/2014, assessment years 2011-12 and 2012-13 (ITAT Hyderabad Special Bench). Binding on the AO and CIT(A) within the Tribunal's jurisdiction. Persuasive elsewhere. A Tribunal decision binds the assessing officer and the Commissioner (Appeals) within that Tribunal's jurisdiction, and is persuasive before other benches. It is not binding on a High Court, and a contrary co-ordinate bench decision will be argued against you, so check whether the point has been taken the other way before you build a reply around it. On section 206AA, section 90(2), section 90(2A), section 195, section 2(37A), section 139A, section 139A(8), the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. Both appeals were allowed and the question referred to the Special Bench was answered in the negative and in favour of the assessee. The Bench held that the provisions of section 206AA will not have an overriding effect for all other provisions of the Act, and that the provisions of the Treaty, to the extent they are beneficial to the assessee, will override section 206AA by virtue of section 90(2); and that the assessee therefore cannot be held liable to deduct tax at the higher of the rates prescribed in section 206AA on payments made to non-resident persons having taxable income in India, in spite of their failure to furnish permanent account numbers (paras 33 and 34). It held separately, applying the Karnataka High Court's decision in Smt. Kaushallaya Bai, that section 206AA is required to be read down so as to be inapplicable to non-resident payees who were under no obligation to obtain permanent account numbers (para 26). It arises in TDS Defaults, How Tax Law Is Read and Residence & Treaty Benefit matters, on section 206AA, section 90(2), section 90(2A), section 195, section 2(37A), section 139A, section 139A(8) of the Income Tax Act 1961, and was decided by Special Bench — Justice Dev Darshan Sud, President, D. Manmohan, Vice-President, and P.M. Jagtap, Accountant Member. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Meet the non obstante point head-on with the Bench's reasoning: the scope of the clause is read with the scheme, and CBDT Circular No. 5 of 2010 states the purpose of s.206AA as strengthening the PAN mechanism. Take the s.90(2A) drafting point — Parliament inserted a specific override for Chapter X-A and inserted none for s.206AA — which is the argument the Bench found most persuasive after the treaty authorities. Where the payee was under no obligation to obtain a PAN, run the reading-down argument from Kaushallaya Bai as a separate and independent ground, not as part of the treaty argument. If the department cites Bosch Limited, point to para 32 of this order, where the Special Bench recorded that the treaty-override and non obstante arguments were not argued before that Bench. Pair this order with the Delhi High Court's judgment in Danisco India P. Ltd. v. Union of India, since a High Court decision carries further than a Special Bench. Keep the treaty documentation — tax residency certificate and Form 10F — because the whole argument depends on the beneficial rate being available in the first place.
Still good law. Four later decisions cite this Special Bench and the leading one is a genuine application. In DCIT (International Taxation)-I v Adani Wilmar Ltd (ITAT Ahmedabad, 20 January 2023) the Bench reproduced the Special Bench reasoning — including that 'there is no merit in the arguments raised by the department that the relevant treaties do not provide for deduction of tax at source at the rate which is lower than the rate applied by the Assessing Officer by invoking the provisions of section 206AA' — and made it a ground of its own conclusion, dismissing all eighteen Revenue appeals. DDIT v Serum Institute of India Ltd (ITAT Pune, 5 April 2017) and DCIT v Infosys Ltd (ITAT Bangalore, 24 June 2021) are to the same effect. Nothing overruling or doubting the Special Bench was found, and no appellate proceeding against it was traced. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
What was and was not read. The copy used begins part-way through, so the text available runs from paragraph 25 continuously to paragraph 34 and the signature block; paragraphs 1 to 24, which would carry the facts, the question referred in its own words and the parties' full submissions, have not been read. The wording of the question referred could not be recovered, so this entry states the answer to it, which is quoted, and does not purport to state its wording. The facts below are reconstructed from what paragraphs 25 to 34 themselves record — payments to non-resident payees having taxable income in India who did not furnish permanent account numbers, for assessment years 2011-12 and 2012-13 — and the amounts, the payees' countries and the treaties in issue are not known. The Bench is a Special Bench of three, comprising the President, a Vice-President and an Accountant Member. The order at paragraph 27 refers at one point to 'the higher rate as provided in section 206', which is plainly a slip for section 206AA. Case names are given as the order gives them, including 'Ili Lilly' at paragraph 30 for the Eli Lilly decision named correctly at paragraph 29, with one deliberate exception: paragraph 29 prints 'Transportation Corporation of A.P. Limited' for the decision the departmental representative relied on, which is plainly the Supreme Court's decision in Transmission Corporation of A.P. Ltd., and this entry gives the corrected name. None of the decisions the Bench relies on has been read here, and what they are said to hold is what this order records. Two points about the order's reach. It is a Special Bench decision and binds other benches of the Tribunal, but it is not a High Court decision, and the two grounds it rests on are independent: the treaty-override ground under s.90(2), and the reading-down ground drawn from s.139A(8) and the Karnataka High Court's decision in Kaushallaya Bai. A payee who is under an obligation to obtain a permanent account number, or who has taxable income in India on a footing to which no treaty applies, is outside the second ground and has to rely on the first. And the decision is about the rate at which a deductor must deduct under s.195 read with s.206AA. It does not decide the payee's own liability, it does not touch the definition of rates in force in s.2(37A), and it does not address the case where a treaty benefit is claimed without the documents the treaty machinery requires. A deductor relying on it should have the residence certificate and the treaty analysis on his file before the rate is applied. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
Both appeals were allowed and the question referred to the Special Bench was answered in the negative and in favour of the assessee. The Bench held that the provisions of section 206AA will not have an overriding effect for all other provisions of the Act, and that the provisions of the Treaty, to the extent they are beneficial to the assessee, will override section 206AA by virtue of section 90(2); and that the assessee therefore cannot be held liable to deduct tax at the higher of the rates prescribed in section 206AA on payments made to non-resident persons having taxable income in India, in spite of their failure to furnish permanent account numbers (paras 33 and 34). It held separately, applying the Karnataka High Court's decision in Smt. Kaushallaya Bai, that section 206AA is required to be read down so as to be inapplicable to non-resident payees who were under no obligation to obtain permanent account numbers (para 26).
TaxSphere, “Nagarjuna Fertilizers and Chemicals Ltd v ADIT (International Taxation)-II, Hyderabad”, https://taxnotice.vittsphere.com/caselaw/case/nagarjuna-fertilizers-special-bench-206aa-cannot-override-treaty/ (validity last checked 2026-09-08)
The judgment itself is a government work and may be quoted freely. The summary, the validity note and the reasoning on this page are this library's own writing: quote them with attribution, and please do not present either as the words of the court — this page keeps the two apart and so should a quotation of it.
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My client is a treaty resident and the treaty plainly gives him the better of it. The department is invoking Chapter X-A anyway. Can it, when s.90(2) says the more beneficial provision applies?
I hold a Mauritius TRC. Can the department still deny me treaty relief on the capital gains?
My non-resident payee has no PAN. Must I deduct at twenty per cent, and is there any prescribed alternative?
My income is below the taxable limit and I filed Form 15G, but the finance company says it cannot act on it without a PAN. Can section 206AA be applied to me?
