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

Zenith Holdings, a company resident in Country X, earns royalty from an Indian company. The India–X tax treaty restricts royalty tax to 10%, while the domestic Income-tax Act rate on such royalty is 20% (before surcharge and cess). Zenith holds a valid tax residency certificate and has no permanent establishment in India. How should the royalty be taxed in India?

The royalty is taxed in India at 10%. Section 90(2) lets a non-resident assessee choose between the Income-tax Act and the applicable treaty, whichever is more beneficial. Since the treaty rate of 10% is lower than the domestic 20%, Zenith can claim the treaty rate, supported by its residency certificate.

  1. AAt 20% because domestic law always overrides a treaty
  2. BAt 10% because the assessee may opt for the treaty if it is more beneficial than the ActCorrect
  3. CAt 30% because a foreign company is taxed at a higher rate
  4. DIt is exempt from tax in India because the recipient is a non-resident

Explanation

Under section 90(2), where a DTAA applies, the assessee can choose the provisions of the Act or the treaty, whichever is more beneficial. The treaty rate of 10% is lower than 20%, so Zenith can claim 10%. Option A is wrong because the treaty can override the Act when it is more beneficial to the assessee.

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