Treaty exemption for cross-border dividends prevails where source-state taxation under the India-Brazil tax treaty applies.

Dividend received by an Indian company from a Brazilian company was treated as exempt in India under the India-Brazil Double Taxation Avoidance Agreement. The dividend was paid out of post-tax profits, and the material before the lower authorities showed Brazilian tax had been paid in accordance with Brazilian law. Under Article 10, Brazil could tax the dividend up to the treaty limit, and under Article 23(3), India was required to exempt such dividend income where it was taxable in Brazil under Article 10(2). The treaty position prevailed over the domestic tax treatment relied on by the Revenue, and the treaty claim was accepted.

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Issues: Whether dividend received by an Indian company from a Brazilian company was taxable in India or exempt under the India-Brazil Double Taxation Avoidance Agreement.

Analysis: The dividend arose from post-tax profits of the Brazilian company, and the material placed before the lower authorities showed that Brazilian tax had been paid in accordance with Brazilian law. Under Article 10 of the treaty, dividends may be taxed in Brazil up to the treaty ceiling, and under Article 23(3), where such dividends may be taxed in Brazil under Article 10(2), India is required to exempt them from tax. The treaty arrangement, therefore, prevailed over the domestic tax treatment relied upon by the Revenue, and the lower appellate authority rightly accepted the assessee's treaty claim.

Conclusion: The dividend was not taxable in India and the Revenue's objection failed.

Final Conclusion: The appeal was dismissed as the treaty exemption applied to the dividend income received from Brazil.

Ratio Decidendi: Where a treaty specifically provides that dividends taxable in the source State shall be exempt in the residence State, the residence State cannot tax such dividend income despite the domestic law position.

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