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

Zephyr Holdings, a company resident in Country X, earns royalty from an Indian company. India's treaty with Country X taxes royalty at 10%, while the domestic rate applicable to such royalty is higher. Zephyr holds a valid tax residency certificate and satisfies treaty conditions. Under section 90(2) of the Income-tax Act, which rule governs the tax treatment in India?

The treaty rate of 10% applies. Under section 90(2), a non-resident assessee covered by a treaty can opt for the treaty provisions where they are more beneficial than the domestic law, subject to furnishing a tax residency certificate and the prescribed particulars. No averaging or advance ruling is needed.

  1. AThe domestic rate must apply because the Act overrides every treaty
  2. BThe treaty rate of 10% applies, since the assessee may choose the treaty if it is more beneficial than the ActCorrect
  3. CThe average of the treaty rate and domestic rate applies
  4. DThe treaty applies only if the Indian company obtains an advance ruling

Explanation

Under section 90(2), where India has a treaty with another country, the Act applies to the extent it is more beneficial to the assessee. Zephyr therefore can claim the lower treaty rate of 10%, provided it furnishes a tax residency certificate and other required details. No averaging or ruling is required.

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