Skip to content

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

Lotus Infra Ltd, an Indian company, pays Brightwave Pte Ltd, a Singapore company, interest of Rs 50,00,000 in a year. Assume the treaty caps tax on interest at 15% in the source state. Domestic rate under section 115A is 20% plus applicable surcharge and cess. Brightwave has a TRC and no PE in India. Ignoring surcharge and cess, and assuming the treaty is more beneficial, what is the maximum tax India can levy, and what happens if the rates differ in favor of the Act?

Maximum tax is Rs 7,50,000, being 15% of Rs 50,00,000 under the treaty, because it is lower than the domestic 20% rate giving Rs 10,00,000. Section 90(2) lets the assessee choose the more beneficial provision, so the treaty rate applies, ignoring surcharge and cess.

  1. ARs 7,50,000 under the treaty; the assessee may opt for the Act only if it is lower, which it is not hereCorrect
  2. BRs 10,00,000 because domestic rate overrides the treaty
  3. CRs 7,50,000 plus Rs 10,00,000 as both apply
  4. DRs 2,50,000 being the difference between the two rates

Explanation

Treaty tax = 15% × 50,00,000 = Rs 7,50,000, against domestic 20% × 50,00,000 = Rs 10,00,000. Under section 90(2) the assessee chooses the more beneficial, so Rs 7,50,000. Rs 10,00,000 ignores the beneficial rule, and the difference of Rs 2,50,000 is only the saving.

Did you get it right without looking?

One question tells you little. A timed set on Application and Interpretation of Tax Treaties shows your real accuracy, how long you take and where you lose marks.

Practise Application and Interpretation of Tax TreatiesFree diagnostic mock

More Application and Interpretation of Tax Treaties questions