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

Zephyr Ltd, a company resident in Country X, earns income from an Indian customer. India has a tax treaty with Country X, and the Income-tax Act would tax this income at a higher rate than the treaty does. Zephyr Ltd holds a valid tax residency certificate. Which statement correctly describes how Indian law treats this situation?

The assessee can opt for the more beneficial of the Income-tax Act and the treaty under section 90(2). Domestic law does not automatically override the treaty, and the treaty is not mandatory where the Act is more favourable. The non-resident therefore gets the lower tax outcome, subject to a tax residency certificate.

  1. AZephyr Ltd can choose whichever of the Act or the treaty is more beneficial to it, as per section 90(2)Correct
  2. BThe Act must always apply because domestic law overrides a treaty
  3. CThe treaty must always apply even if the Act is more beneficial
  4. DBoth the Act rate and the treaty rate are added together

Explanation

Under section 90(2), where India has a treaty with another country, the Act applies to the assessee only to the extent it is more beneficial than the treaty. The assessee therefore gets the more favourable of the two. Option B and C wrongly impose a fixed rule, and D has no basis in law.

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