Treaty non-discrimination protects a foreign permanent establishment from higher tax than comparable domestic enterprises.

Section 90(2) gives overriding effect to a tax treaty where it is more beneficial than the Income-tax Act, and Article 24(2) of the India-Japan DTAA prohibits less favourable taxation of a permanent establishment than that applied to comparable domestic enterprises. On that basis, a Japanese enterprise's Indian permanent establishment could not be taxed at a higher rate merely because it was not a domestic company; it had to receive the same rate as a domestic company carrying on similar activities.

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Issues: Whether the permanent establishment of a Japanese enterprise in India could be taxed at a rate higher than the rate applicable to a domestic company carrying on similar activities under the applicable double taxation avoidance agreement and Section 90 of the Income-tax Act, 1961.

Analysis: Section 90(2) gives effect to a tax treaty to the extent it is more beneficial to the assessee. Article 24(2) of the India-Japan agreement requires that the taxation of a permanent establishment in the other contracting State shall not be less favourably levied than the taxation on enterprises of that State carrying on the same activities. On that footing, the permanent establishment could not be subjected to a higher rate merely because it was not treated as a domestic company, and it had to receive the same rate as comparable Indian entities.

Conclusion: The rate of tax applicable to the assessee was not 65% and had to be the rate applicable to a domestic company carrying on similar activities.

Ratio Decidendi: Where a tax treaty contains a non-discrimination clause and is more beneficial than the domestic law, Section 90(2) requires the treaty to prevail, and a permanent establishment must be taxed on terms no less favourable than those applicable to comparable domestic enterprises.

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