Tax treaty rate ceiling prevails for interest income, while TDS credit requires verification and fresh grant under law.

Where a tax treaty permits domestic-law taxation but caps the rate for specified income, the treaty ceiling prevails for that head of income and the domestic rate may still apply to other heads where the treaty allows it. On that basis, interest income was taxable at 15% under the India-USA treaty, and the objection that the assessee had adopted a pick-and-choose approach failed. TDS credit was treated as a consequential claim requiring verification by the Assessing Officer, with an opportunity of hearing, and the matter was restored for action in accordance with law.

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Issues: (i) Whether interest income was taxable at 15 per cent under the India-USA tax treaty instead of 20 per cent under the domestic law, and whether the assessee had impermissibly adopted a pick and choose approach by applying treaty and domestic rates to different streams of income; (ii) Whether credit for tax deducted at source should be granted in accordance with law.

Issue (i): Whether interest income was taxable at 15 per cent under the India-USA tax treaty instead of 20 per cent under the domestic law, and whether the assessee had impermissibly adopted a pick and choose approach by applying treaty and domestic rates to different streams of income.

Analysis: The treaty articles governing dividend, interest, and capital gains each contemplated taxation under domestic law, but with treaty ceilings in the case of dividend and interest and no ceiling for capital gains. The domestic rate for dividend income was lower than the treaty cap, so the domestic rate was correctly applied for that head of income. Capital gains were taxable under domestic law because the treaty imposed no rate restriction. For interest income, however, the treaty fixed an upper limit of 15 per cent, which prevailed over the higher domestic rate.

Conclusion: The assessee was entitled to taxation of interest income at 15 per cent, and the objection based on pick and choose treatment failed.

Issue (ii): Whether credit for tax deducted at source should be granted in accordance with law.

Analysis: The claim for TDS credit was treated as consequential and required verification by the Assessing Officer, with an opportunity of hearing to the assessee.

Conclusion: The matter was restored to the Assessing Officer for grant of TDS credit in accordance with law.

Final Conclusion: The appeal succeeded on the treaty-rate issue and the TDS credit issue was sent back for fresh verification, while the remaining ground did not survive for adjudication.

Ratio Decidendi: Where a tax treaty prescribes a domestic-law basis of taxation but caps the tax rate for a particular category of income, the assessee may apply the treaty ceiling for that category and the domestic rate for other categories where the treaty so permits, without attracting a pick and choose objection.

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