How non-residents can avail beneficial Income tax rates under DTAA when receiving Indian income, based on Section 90(2) and key judicial precedents.
The non-resident assessee receiving dividends or royalties from India often faces a dilemma while determining their tax rate, as they must navigate a complex interplay between the rates prescribed in the domestic law and the tax treaties. Section 155A of the Income Tax Act prescribes special tax rates for certain incomes, like dividends and royalties earned by non-residents. The question of whether a non-resident can opt for the beneficial tax rate—choosing between the domestic rate and that under the relevant Double Taxation Avoidance Agreement (DTAA)—is both practically important and legally nuanced.
The non-resident has authority to select the beneficial tax rate is rooted in Indian Judicial interpretation and statutory provisions, particularly Section 90(2) of the Income Tax Act. This section states that if India has a DTAA with another country, the provisions of the Act or the treaty, whichever are more beneficial to the assessee, will apply. The general principle with respect to the overriding effect of the provisions of the tax treaty was clearly enunciated by the Hon’ble Supreme Court in Union of India v. Azadi Bacho Andolan [2003] 132 Taxman 373 (SC), wherein it was clarified that an assessee who is covered by the provisions of the tax treaty is entitled to seek the benefits under the said treaty even if the provisions of the Income Tax Act are inconsistent with the same. On a similar note, ITAT Delhi in ACIT v. Paradigm Geophysical Pty. Ltd. [2008] 25 SOT 94 (Delhi) and ITAT Mumbai in JCIT v. American Express Bank Ltd. [2012] 24 taxmann.com 50 both held that the provisions of the Income Tax Act or the tax treaty, whichever is more beneficial to the assessee, shall be applied.
Furthermore, there are various judicial precedents wherein tribunals and high courts have consistently held that the assessee can compare the rates under the Act and the DTAA and opt for the beneficial tax rate. The Hon’ble Karnataka High Court in the case of Director of Income Tax v. IBM World Trade Corporation [2020] 120 taxmann.com 151, affirmed the order of ITAT Bangalore in IBM World Trade Corporation v. Deputy Director of Income Tax [2012] 20 taxmann.com 728, wherein it was held that the assessee is justified in computing their tax liability on the basis of beneficial tax rate available in the the domestic law or DTAA. The Court observed that the same is permissible on account of Section 90(2) of the Act, which permits the assessee to select the provisions of the domestic law or the treaty, whichever is beneficial to them.
Similarly, ITAT Pune in Piaggio & C.S.P.A v Director of Income Tax [2019] 102 taxmann.com 135, observed that the Assessee received royalty on account of its technology license agreement. The tax rate under Section 115A was 20% plus surcharge, whereas the rate under the India-Italy DTAA was 20%. The Assessee was allowed to select the beneficial tax rate. Following the same principle in the context of TDS liability, ITAT Bangalore in DCIT v. Infosys BPO Ltd. [2015] 60 taxmann.com 465, held that the TDS rate cannot be more than the rate prescribed under DTAA or the Act, whichever is lower.
To summarize, non-resident assessees receiving Indian-source income are entitled to the more beneficial tax rate—whether under domestic law or the relevant DTAA—thanks to the overriding force of Section 90(2) of the Income Tax Act and settled judicial precedent. However, this entitlement is conditional on compliance with Indian filing obligations. Non-filing of income tax returns not only exposes the non-resident to penalties, interest, and possible prosecution but also denies them the ability to carry forward losses or claim refunds, thus undermining the benefits available under tax treaties. Proper compliance and proactive tax planning are therefore essential for non-residents with Indian income streams to fully realise treaty benefits and avoid unintended liabilities.
Author Bio
