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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 income from an Indian company. India and Country X have a tax treaty, and the domestic law of India taxes this royalty at a rate higher than the treaty rate. Zenith Holdings holds a valid tax residency certificate. Under section 90(2) of the Income-tax Act, 1961, which of the following statements is correct?

The assessee may choose between the Act and the treaty, whichever is more beneficial. Section 90(2) says the Act applies only to the extent it is more beneficial, so the lower treaty rate on royalty can be claimed, subject to the tax residency certificate and other conditions.

  1. AThe assessee may choose the Act or the treaty, whichever is more beneficial to itCorrect
  2. BThe Act must be applied because domestic law always overrides a treaty
  3. CThe treaty must be applied even if it is less beneficial than the Act
  4. DBoth the Act and the treaty rates are added and the average is applied

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. The assessee can therefore choose the treaty rate if it is lower. The claim that domestic law always overrides is wrong because the beneficial provision prevails.

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