Treaty deductions do not override section 40A(5) where no real conflict exists in computing permanent establishment income.

The India-France tax treaty prevails over the Income-tax Act only where there is a real conflict, but Article III(3) did not displace the domestic limits in section 40A(5). Article III(3) permitted deduction of expenses reasonably allocable to the permanent establishment, while section 40A(5), read with section 40A(1), restricted deductible remuneration and perquisites in computing business income. The non obstante clause in section 40A made that restriction operative notwithstanding other income-computation provisions, so the treaty and the statute were not treated as irreconcilable. The treaty objection was rejected and section 40A(5) remained applicable.

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Issues: Whether section 40A(5) of the Income-tax Act, 1961 could be applied to disallow executive and administrative expenses in computing the profits of a permanent establishment in India in light of Article III(3) of the Double Taxation Avoidance Agreement between India and France.

Analysis: The treaty was accepted to prevail over the Income-tax Act where there is a real conflict, but the decisive question was whether Article III(3) created such a conflict. Article XIX preserved the domestic law except where the agreement expressly provided otherwise. Article III(3) allowed deduction of expenses reasonably allocable to the permanent establishment, whereas section 40A(5), read with section 40A(1), imposed statutory restrictions on deductible remuneration and perquisites in computing business income. The Tribunal held that the treaty provision and the statutory restriction were not in conflict in a manner that displaced the domestic restriction, because the non obstante clause in section 40A made the limitation operative notwithstanding other provisions applicable to business income computation.

Conclusion: The objection based on the Double Taxation Avoidance Agreement was rejected and section 40A(5) was held applicable against the assessee.

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