Tax treaty rate differential excludes surcharge where the convention measures the permitted gap by the basic tax rate.

Under the India-United States tax convention, the permitted 15 percentage-point difference in Article 14(2) had to be measured by reference to the basic income-tax rate, not by including surcharge. The treaty, operating through section 90 of the Income-tax Act, prevails to the extent of inconsistency, and surcharge retained a separate identity in the tax scheme unless the convention expressly included it. On that basis, the Assessing Officer was justified in applying the rate without surcharge, and the Commissioner's revision under section 263 could not be sustained. The revisional orders for the relevant assessment years were set aside.

---

---

Issues: Whether, for the assessment years in question, the difference in tax rates under Article 14(2) of the India-United States tax convention had to be computed by excluding surcharge, and whether the Commissioner was justified in revising the assessment under section 263 of the Income-tax Act, 1961.

Analysis: The treaty entered into under section 90 of the Income-tax Act, 1961 prevails over the Act to the extent of inconsistency. The expression "existing difference of 15 percentage points" in Article 14(2) had to be understood in the context of the tax structure prevailing when the convention was signed. At that time, the differential between domestic companies and foreign companies was 15 per cent on income-tax rates, and surcharge was treated as an additional levy distinct from the basic rate of tax. Although surcharge forms part of income-tax in a broader sense, it retains a separate identity in the statutory and constitutional scheme, and the convention did not intend surcharge to be included while measuring the permitted differential.

Conclusion: The restriction in Article 14(2) applied to the rate of tax excluding surcharge, and the Assessing Officer was in restricting the tax rate accordingly; the order under section 263 could not be sustained.

Final Conclusion: The assessee succeeded, and the Commissioner's revisional orders for the relevant assessment years were set aside.

Ratio Decidendi: Where a tax treaty fixes an allowable differential in tax rates, the differential must be computed according to the basic rate of tax contemplated by the treaty context, and an additional levy such as surcharge is not to be included unless the treaty expressly so provides.

---