Treaty rate versus lower domestic tax rate for technical fees, with section 90(2) favouring the more beneficial rate.

Fees for technical services paid to a non-resident were treated as taxable at the more beneficial 10% domestic rate under section 115A(1)(b), rather than 15% under the India-USA DTAA, because the remittance was permitted under the RBI framework and no separate approval was shown to be required. On that basis, section 90(2) was applied to prefer the lower domestic rate. The separate issue of health and education cess was resolved against the assessee, and cess was upheld over the treaty rate. The principal rate dispute therefore went in the assessee's favour, but only partial relief followed because the cess challenge failed.

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Issues: (i) Whether the assessee was entitled to be taxed at 10% under section 115A(1)(b) of the Income-tax Act, 1961 instead of 15% under the India-USA DTAA on fees for technical services. (ii) Whether health and education cess could be levied over and above the treaty rate of tax.

Issue (i): Whether the assessee was entitled to be taxed at 10% under section 115A(1)(b) of the Income-tax Act, 1961 instead of 15% under the India-USA DTAA on fees for technical services.

Analysis: The receipts were held to be fees for technical services, and the domestic law provided a lower rate of tax than the treaty. The conditions attached to section 115A(1)(b) were treated as substantially satisfied because the remittance was permitted under the RBI framework and no separate approval was shown to be required for the transaction. The more beneficial domestic provision therefore prevailed under section 90(2).

Conclusion: The assessee was entitled to taxation at 10% under section 115A(1)(b), and the application of 15% under the treaty was not sustainable.

Issue (ii): Whether health and education cess could be levied over and above the treaty rate of tax.

Analysis: The levy of education cess on the tax computed under the treaty rate was treated as settled against the assessee.

Conclusion: The levy of education cess was upheld against the assessee.

Final Conclusion: The addition was deleted on the principal rate issue, but the separate challenge to education cess failed, resulting in only partial relief to the assessee.

Ratio Decidendi: Where the domestic law prescribes a more beneficial rate for fees for technical services and the transaction is permitted under the governing regulatory framework without any separate approval being required, the assessee may invoke the lower domestic rate under section 90(2) of the Income-tax Act, 1961.

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