Treaty residence rule governs airline profits, leaving ticket and allied receipts taxable only in Bhutan.

Article 8 of the India-Bhutan DTAA is described as giving exclusive taxing rights over profits from aircraft operations in international traffic to the State where the place of effective management is situated. On the stated facts, that place was found to be Bhutan, so the treaty applied in preference to section 9 of the Income-tax Act, 1961 under section 90(2). The analysis states that sale proceeds from tickets and allied airline receipts were covered by the treaty rule, and the income was therefore taxable only in Bhutan and not in India.

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Issues: Whether the assessee-airline's income from sale of tickets and allied receipts in India was taxable in India under section 9 of the Income-tax Act, 1961, or taxable only in Bhutan under Article 8 of the India-Bhutan Double Taxation Avoidance Agreement by reference to the place of effective management.

Analysis: The assessee was an airline enterprise and the decisive treaty provision was Article 8, which provides that profits derived from the operation of aircraft in international traffic are taxable only in the Contracting State where the place of effective management is situated. The statutory scheme under section 90(2) of the Income-tax Act, 1961 gives primacy to the treaty to the extent it is more beneficial to the assessee. On the facts, the place of effective management was found to be in Bhutan. The Revenue's attempt to tax the income under section 9 of the Income-tax Act, 1961 could not prevail once the treaty applied, and the treaty-based rule covered the profits from airline operations, including the sale of tickets and related receipts.

Conclusion: The income was taxable only in Bhutan under Article 8 of the DTAA, and not in India under section 9 of the Income-tax Act, 1961. The issue was decided in favour of the assessee.

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