DTAA governs dividend taxability: treaty allocation prevailed over domestic law and excluded Indian taxation of Malaysian dividend income.

DTAA allocation of taxing rights governed the taxability of dividend income received from a Malaysian company. The controlling principle was that, where the India-Malaysia treaty conflicts with the Income-tax Act, the treaty prevails to the extent of the inconsistency. On that basis, dividend income was treated as taxable only in the contracting State where it accrued, which excluded Indian taxation in the assessee's hands. Additional questions raised by the Department did not change the result because they were not independently decisive once the main treaty-based taxability issue was resolved against the Revenue.

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Issues: Whether dividend income received from a Malaysian company was taxable in India in view of the Double Taxation Avoidance Agreement between India and Malaysia, and whether the Department's appeals could succeed on that question.

Analysis: The controlling question was whether the treaty provisions governed the taxability of dividend income from Malaysia. The earlier decisions relied upon had held that, where the DTAA and the Act are in variance, the treaty prevails to the extent of the inconsistency. On that basis, dividend income was treated as taxable only in the contracting State where it accrued, and not in India. The additional questions raised did not alter that conclusion, because they were either not independently decisive or became unnecessary once the main taxability issue was answered against the Revenue.

Conclusion: The dividend income was not taxable in India in the hands of the assessee, and the issue was decided in favour of the assessee.

Final Conclusion: The appeals failed because the substantive dispute on taxability stood concluded against the Revenue by the governing treaty-based rule.

Ratio Decidendi: Where a DTAA allocates taxing rights in respect of dividend income to the State where the income accrues, that treaty allocation prevails over the domestic law to the extent of inconsistency and excludes Indian taxation of such income.

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