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

Zeta Corp, a US resident, earns interest from an Indian borrower. The treaty provides that interest may be taxed in India at a maximum of 15%. India's domestic rate on such interest is 20% plus surcharge and cess. Zeta submits a tax residency certificate and Form 10F. What is the correct position regarding withholding by the Indian payer?

The payer should deduct tax at the 15% treaty rate. Since the treaty is more beneficial than the domestic rate and Zeta has furnished its tax residency certificate and Form 10F, it can claim treaty benefit. Deducting at the higher domestic rate or nothing at all would be incorrect.

  1. ADeduct at 20% plus surcharge and cess, ignoring the treaty
  2. BDeduct at 15% treaty rate, as the treaty is more beneficial and documents are furnishedCorrect
  3. CDeduct no tax as the interest is paid to a non-resident
  4. DDeduct tax at 30% since the payee is a foreign company

Explanation

With the required documents (TRC and Form 10F), the non-resident may claim the treaty rate of 15% as it is more beneficial than the domestic rate under section 90(2). Ignoring the treaty ignores the assessee's option. Nil deduction is wrong because India has the right to tax at up to 15%.

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