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CA Final · Direct Tax Laws & International Taxation · Application and Interpretation of Tax Treaties

Alpha Ltd, an Indian company, pays royalty to Beta GmbH, a German resident with no permanent establishment in India. The domestic rate on such royalty is higher than the rate in the India-Germany DTAA. Beta GmbH holds a valid tax residency certificate. Under section 90(2) of the Income-tax Act, which rate applies to the royalty?

The DTAA rate applies. Section 90(2) lets a non-resident assessee choose between the Act and the treaty, whichever is more beneficial. Because the treaty rate on royalty is lower than the domestic rate, Beta GmbH is taxed at the treaty rate, provided it furnishes the required residency certificate.

  1. AThe DTAA rate, because the treaty is more beneficial to the assesseeCorrect
  2. BThe domestic rate, because domestic law always overrides a treaty
  3. CThe average of the domestic and treaty rates
  4. DThe DTAA rate only if the Central Government issues a separate notification for each payment

Explanation

Section 90(2) provides that where India has a treaty with another country, the provisions of the Act apply to the extent they are more beneficial to the assessee. Since the treaty rate is lower, it prevails. The claim that domestic law always overrides is wrong because the beneficial-provision rule allows the assessee to choose the treaty.

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