DR.

RAM MANOHAR LOHIYA

NATIONAL LAW UNIVERSITY

Project work for Law of Taxation

Topic: Double Taxation Avoidance Agreement An

Overview.

SUBMITTED TO:
UNDER THE GUIDANCE OF:
Mr. ANIL SAIN
ASSISTANT PROFESSOR (LAW)

SUBMITTED BY:
SHIVAM KUMAR
VII SEM. BA.LLB (Hons.)
ENROLLMENT NO. 130101121
Dr. RML NATIONAL LAW UNIVERSITY, LUCKNOW

ACKNOWLEDGEMENT

I would like to take this opportunity to thank all the people who have helped me in the
completion of this project.

Firstly, I express my sincere gratitude towards my teacher, Mr. Anil Sain, Assistant Professor
(Law), who has helped me at every step, provided me with relevant study material for the
project, rectified my mistakes, and always guided me in my research. This project would not
have been possible without his help and guidance.

I also sincerely thank the library staff for co-operation and assistance during my research.

SHIVAM KUMAR

TABLE OF CONTENTS

INTRODUCTION: ................................................................................. 4
TYPES OF RELIEF:- ............................................................................. 5
DOUBLE TAXATION RELIEF PROVISIONS UNDER THE ACT: . 6
COUNTRIES WITH WHICH NO AGREEMENT EXISTS UNILATERAL AGREEMENTS: ........................................................ 10
CONCEPT OF PERMANENT ESTABLISHMENT: ......................... 12
CONCLUSION: ................................................................................... 13
BIBLIOGRAPHY ................................................................................ 15

INTRODUCTION:
India has a well-developed tax structure with a three-tier federal structure, comprising
the Union Government, the State Governments and the Urban/Rural Local Bodies. The power to
levy taxes and duties is distributed among the three tiers of Governments, in accordance with the
provisions of the Indian Constitution. The main taxes/duties that the Union Government is
empowered to levy are Income Tax (except tax on agricultural income, which the State
Governments can levy), Customs duties, Central Excise and Sales Tax and Service Tax. The
principal taxes levied by the State Governments are Sales Tax (tax on intra-State sale of goods),
Stamp Duty (duty on transfer of property), State Excise (duty on manufacture of alcohol), Land
Revenue (levy on land used for agricultural/non-agricultural purposes), Duty on Entertainment
and Tax on Professions & Callings. The Local Bodies are empowered to levy tax on properties
(buildings, etc.), Octroi (tax on entry of goods for use/consumption within areas of the Local
Bodies), Tax on Markets and Tax/User Charges for utilities like water supply, drainage, etc.
In the present era of cross-border transactions across the globe, the effect of taxation
isone of the important considerations for any trade and investment decision in othercountries.
One of the most significant results of globalization is the visible impact of on Countrys
domestic tax policies on the economy of another country. This has led to theneed for
continuously assessing the tax regimes of various countries and bringing aboutnecessary reforms.
Where a tax-payer is resident in one country but has a source ofincome situated in another
country it gives rise to possible double taxation. This arisesfrom the two basic rules that enable
the country of residence as well as the country where the source of income exists to impose tax
namely,
(i)

the source rule and

(ii)

(ii) the residence rule.

The source rule holds that income is to be taxed in the country in which it originates
irrespective of whether the income accrues to a resident or a non-resident whereas the residence
rule stipulates that the power to tax should rest with the country inwhich the taxpayer resides. If
both rules apply simultaneously to a business entity and it were to suffer tax at both ends, the
4|Page

cost of operating on an international scale wouldbecome prohibitive and would deter the process
of globalization. It is from this point ofview that Double Taxation Avoidance Agreements
(DTAA) become very significant. DTAAs lay down the rules for taxation of the income by the
source country and theresidence country. Such rules are laid for various categories of income, for
example,interest, dividend, royalties, capital gains, business income etc. Each such category is
dealt with by separate article in the DTAA.
Double taxation means taxing the same income twice in the hands of an assessee. InIndia,
a person is taxed on the basis of his residential status. Likewise, it may so happenthat he is taxed
on this basis or some other basis in another country on the same income.However, it is a
universally accepted principle that the same income should not besubjected to tax twice. In order
to take care of such situations, the Income-tax Act, 1961 has provided for double taxation relief.

TYPES OF RELIEF:-

Relief from double taxation can be provided in mainly two ways:

(i)

Bilateral Relief; and

(ii)

Unilateral relief.

Bilateral Relief:Under this method, the Governments of two countries can enter into an
agreement to provide relief against double taxation by mutually working out thebasis on which
the relief is to be granted. India has entered into agreements for relief against or avoidance of
double taxation with about 50 countries which include Sri Lanka,Switzerland, Sweden,
Denmark, Japan, Federal Republic of Germany, Greece, etc. Bilateral Relief may be granted in
either one of the following methods:
(a) Exemption method, by which a particular income is taxed in only one of the
twocountries;
(b) Tax relief method, under which, an income is taxable in both countries in
accordancewith their respective tax laws read with the double taxation avoidance agreement.
However, the country of residence of the tax payer allows him credit for the tax charged thereon

5|Page

in the country of source. In India, double taxation relief is provided by a combination of the two
methods.
Unilateral Relief:This method provides for relief of some kind by the homecountry even
where no mutual agreement has been entered into be the two countries.

DOUBLE TAXATION RELIEF PROVISIONS UNDER THE ACT:

Sections 90 and 91 of the Income tax Act, 1961 provide for double taxation relief in
India:Agreement with foreign countries or specified territories - Bilateral relief:
Section 90 (i) Sub-section (1) of new section 90 provides that the Central Government
may enter intoan agreement with the Government of any country outside India or specified
territory outside India,
(a) for the granting of relief in respect of
(i) income on which income-tax has been paid both in India and in that country or specified
territory; or
(ii) income-tax chargeable under this Act and under the corresponding law in forcein that country
or specified territory to promote mutual economic relations, trade and investment; or
(b) for the avoidance of double taxation of income under this Act and under the corresponding
law in force in that country or specified territory; orAccordingly, the Central Government has
notified that where such an agreement provides that any income of a resident of India may be
taxed in the othercountry then, such income shall be included in his total income chargeable
totax in India in accordance with the provisions of the Income-tax Act, 1961, and relief shall be
granted in accordance with the method for elimination oravoidance of double taxation provided
in such agreement.

6|Page

(c) for exchange of information for the prevention of evasion or avoidance of income-tax
chargeable under this Act or under the corresponding law in force in that country or specified
territory or investigation of cases of such evasion or avoidance; or
(d) for recovery of income-tax under this Act and under the corresponding law in force in that
country or specified territory. The Central Government may, by notification in the Official
Gazette, make such provisions as may be necessary for implementing the agreement. (ii) Where
the Central Government has entered into such an agreement with the Government of any country
outside India or specified territory outside India for granting relief of tax, or for avoidance of
double taxation, then, in relation to the assessee to whom such agreement applies, the provisions
of this Act shall apply to the extent they are more beneficial to that assessee. (iii) Any term used
but not defined in this Act or in the agreement referred to above shall have the same meaning as
assigned to it in the notification issued by the Central Government in the Official Gazette in this
behalf, unless the context otherwise requires, provided the same is not inconsistent with the
provisions of this Act or the agreement. (iv) The charge of tax in respect of a foreign company at
a rate higher than the rate at which a domestic company is chargeable, shall not be regarded as
less favourable charge or levy of tax in respect of such foreign company.
The position of law is that the double taxation avoidance treaties entered into by the
Government of India override the domestic law. This has been clarified by the CBDT vide
circular no.333 dated April 2, 1982, which provides that a specific provision of the DTAA will
prevail over the general provisions of the Income-tax Act. Therefore, where a DTAA provides
for a particular mode of computation of income, this mode will take precedence over the Incometax Act. However, where there is no specific provision in the treaty, then the Income-tax Act will
apply.
The Honble Supreme Court had an occasion to examine the DTAA entered into with the
Government of Mauritius in the case of Union of India v. AzadiBachaoAndolan.1Under the
DTAA, capital gains accruing in India to a resident of Mauritius is not liable to tax in India
subject to certain exceptions. This was clarified by the CBDT by Circular No.682 dated 30.3.94
by stating that capital gains of any resident of Mauritius by alienation of shares of an Indian

(2003)132 Taxman 373.

7|Page

company shall be taxable only in Mauritius and the same will not be liable to tax in India.
Subsequently, the issue of treaty shopping by non-resident foreign companies to avoid capital
gains tax on transfer of shares in Indian companies arose. In order to clarify the situation, the
CBDT issuedCircular No.789 dated 13.4.2000 stating that a certificate of residence issued by
Mauritiusauthority will be conclusive proof of residential status and beneficial ownership
inMauritius for the purpose of applying the DTAA.
The Delhi High Court in Shiva Kant Jha v. Union of India2held thatCircular No.789 dated
13.4.2000 was invalid because the Circular did not show that it hadbeen issued under section
119 of the Income-tax Act and as such it would not be legallybinding on the revenue. The Court
observed that the CBDT could not issue anyinstruction which would be ultra vires the provisions
of the Income-tax Act, 1961. CircularNo.789, having directed the income-tax authorities to
accept certificate of residenceissued by the authorities of Mauritius as sufficient evidence as
regards residential statusand beneficial ownership in Mauritius, would be ultra vires the powers
of the CBDT. TheCourt held that the ITO was entitled to lift the corporate veil in order to see
whether acompany was actually resident of Mauritius or not or whether the company was
payingincome-tax in Mauritius or not and this function of the ITO was quasi judicial. Any
attemptby the CBDT to interfere with the exercise of this quasi judicial power was contrary to
theintendment of the Income-tax Act. The Court held that treaty shopping by which theresident
of a third country takes advantage of a fiscal treaty between States was illegal and thus
necessarily forbidden. The Supreme Court reversed the above decision of the Delhi High Court
and made wide-ranging observations on many matters including tax planning considerations. The
Court held that the judicial consensus in India has been that section 90 is specifically intendedto
enable and empower the Central Government to issue a notification for implementation of the
terms of a DTAA. Therefore, the provisions of such an agreement would operate even if
inconsistent with the provisions of the Income-tax Act. Circular 789 is a circular within the
meaning of section 90, therefore, it must have the legal consequences contemplated by section
90(2). In other words, the circular shall prevail even if it is inconsistent with the provisions of the
Income-tax Act, insofar as assessees covered by the provisions of DTAA are concerned. The
Court observed that many developed countries tolerate or encourage treaty shopping, even if it

(2002) 256 ITR 536

8|Page

is unintended, improper or unjustified, for other non-tax reasons,unless it leads to significant loss
of tax revenue. The Court cannot judge the legality oftreaty shopping merely because one
section of thought considers it improper. The court cannot characterize the act of incorporation
under the Mauritian law as a sham or adevice actuated by improper motives. The Court held that
the impugned circular wasissued under section 119 and hence valid. The Supreme Court
recognized that the Treaties are negotiated and entered into atpolitical level and have several
considerations as their bases.
The Court observed that if it was intended that a national of a Third State should
beprecluded from the benefits of a DTAA, then a suitable limitation to that effect must findplace
in the DTAA itself. In the absence of a limitation specifically provided in the DTAA,the same
cannot be read into it.The Supreme Court observed that not only is the principle in IRC v. Duke
of Westminister3alive and kicking in England, but it also seems to have acquired
judicialbenediction of the Constitutional Bench in India, notwithstanding the temporary
turbulence created in the wake of McDowell &Co. Ltd. v. CTO4. The Supreme Court held that if
notwithstanding a series of legal steps taken by anassessee, the intended legal result has not been
achieved, the Court might be justified in overlooking the intermediate steps, but it would not be
permissible for the Court to treat the intervening legal steps as non-established upon some
hypothetical assessment of the real motive of the assessee.Certain terms used in the DTAAs
have not been defined either in the agreements or in the Income-tax Act. In order to address the
problems arising due to conflicting interpretations of such terms, sub-section (3) empowers the
Central Government to define such terms byway of notification in the Official Gazette.
However, the charge of tax in respect of a foreign company at a rate higher than the rate
at which a domestic company is chargeable, shall not be regarded as less favourablecharge or
levy of tax in respect of such foreign company.
The Apex Court in CIT v. P.V.A.L. KulandaganChettiar5observed the following:-

(1936) AC 1
(1985) 154 ITR 148 (SC).
5
(2004) 137 Taxman 460.
4

9|Page

(1) Section 90(2) of the Income-tax Act, 1961 makes it clear that in case of any conflict between
the provisions of Double Taxation Avoidance Agreement(DTAA) and the Income-tax Act, 1961,
the provisions of the DTAA would prevail lover the provisions of the Act.
(2) The tax liability arising in respect of a person residing in both the contracting States has to be
determined with reference to that State with which his personal and economic relations are
closer. The person shall be deemed to be aresident of that contracting State in which he has an
habitual abode.
(3) The immovable property in question (i.e. Rubber Plantations) is situated inMalaysia and
income was derived from that property. Further, there was nopermanent establishment (PE) in
India in regard to the business of rubberplantations. Therefore, the business income from rubber
plantations could notbe taxed in India because of closer economic relations between the
assesseeand Malaysia, being the place where
(a) the property is located and
(b) the PE has been set up. These two factors go to determine the fiscal domicile.
(4) If an assessee is deemed to be a resident of a contracting State where hispersonal and
economic relations are closer, then in such a case, the fact that heis a resident in India to be taxed
in terms of sections 4 and 5 would becomeirrelevant, since the DTAA prevails over sections 4
and 5. Therefore, in this case, the contention of the Assessing Officer is not correct.

Countries with which no agreement exists - Unilateral Agreements:

[Section 91] :In the case of income arising to an assessee in countries with which Indiadoes not
have any double taxation agreement, relief would be granted under Section 91provided all the
following conditions are fulfilled: (a) The assessee is a resident in India during the previous year
in respect of which theincome is taxable.

10 | P a g e

(b) The income accrues or arises to him outside India.

(c) The income is not deemed to accrue or arise in India during the previous year.
(d) The income in question has been subjected to income-tax in the foreign country in the hands
of the assessee.
(e) The assessee has paid tax on the income in the foreign country.
(f) There is no agreement for relief from double taxation between India and the other country
where the income has accrued or arisen.
In such a case, the assessee shall be entitled to a deduction from the Indian incometaxpayable by him. The deduction would be a sum calculated on such doubly taxed incomeat the
Indian rate of tax or the rate of tax in the said country, whichever is lower, or at theIndian rate of
tax if both the rates are equal.
Sub-section (2) provides that where a person who is resident in India in any previous
yearhas any agricultural income in Pakistan in respect of which he has paid the income tax
payable in that country, he shall be entitled to a deduction from the Indian income-tax payable by
him to the following extent:
(i) of the amount of tax paid in Pakistan on such income which is liable to tax under this
Act, also; or
(ii) of a sum calculated on that income at the Indian rate of tax, whichever is less.
Sub-section (3) provides for relief to a non-resident assessee in respect of his share in the
income of a registered firm assessed as resident in India in any previous year,provided all the
following conditions are fulfilled
(i) The share income from the firm should include income accruing or arising outside
India during that previous year;
(ii) Such income should not be deemed to accrue or arise in India;

11 | P a g e

(iii) The income should accrue or arise in a country with which India has no agreementunder
section 90 for the relief or avoidance of double taxation;
(iv) Theassessee should have paid income-tax in respect of such income according to the law in
force in that country.
In such a case, the assessee will be entitled to a deduction from the Indian income-tax payable by
him. The deduction will be a sum calculated on such doubly taxed income so included, at the
Indian rate of tax or the rate of tax of the said country, whichever is lower, or at the Indian rate of
tax, if both the rates are equal.

CONCEPT OF PERMANENT ESTABLISHMENT:

In order to determine the taxability of business income of foreign enterprises operating
inIndia, it is important to determine the existence of a Permanent Establishment (PE).Article
5(1) of the DTAA provides that for the purpose of this convention the term Permanent
Establishment means a fixed place of business through which the business ofan enterprise is
wholly or partly carried on. The term Enterprise has been defined insection 92F.
According to Article 5(2), which enumerates various instances of PE, the term PE
includes(a) a place of management; (b) a branch; (c) an office; (d) a factory; (e) a workshop; (f) a
sales outlet; (g) a warehouse; (h) a mine, an oil or gas well, a quarry or other place of extraction
of natural resources (but not exploration).
1) Permanent establishment means a fixed place of business through which the business of an
enterprise is wholly or partly carried on.
2) Every DTAA has a specific clause, which will deal with an explanation of permanent
establishment for the purpose of such DTAA.
3) Business Income of a non-resident will not be taxed in India, unless such non-resident has a
permanent establishment in India.
12 | P a g e

CONCLUSION:
Double taxation refers to a situation where the same income becomes taxable in the hands of the
same company or individual (tax-payer) in more than one country. Such a situation arises due to
different rules for taxation of income in different countries. The two main rules of income tax
which may lead to double taxation are:- (i) Source of income rule, under which the income of a
person is subjected to taxation in the country where the source of such income exists i.e. where
the business establishment is situated or where the assets/property is located irrespective of
whether the income earner is a resident in that country or not; and (ii) Residential status rule,
under which the income earner is taxed on the basis of his/her residential status in that country.
Hence, if a person is resident of a country, he/she may have to pay tax on any income earned
outside that country as well. Thus, the same person may be taxed in respect of his/her income on
the basis of source of income rule in one country and on the basis of residence in another country
leading to double taxation. In other words, the problem of double taxation may arise on account
of any of the following reasons:

A company or a person may be resident of one country but may derive income from other
country as well, thus he/ she becomes taxable in both the countries.

A company or a person may be subjected to tax on his/ her world income in two or more
countries, which is known as concurrent full liability to tax. One country may tax on the
basis of nationality of tax-payer and another on the basis of his/ her residence within its
border. Thus, a person domiciled in one country and residing in another may become
liable to tax in both the countries in respect of his/ her world income.

A company or a person who is non-resident in both the countries may be subjected to tax
in each one of them on income derived from one of them. For example, a non-resident
person has a permanent establishment in one country and through it he/ she derives
income from the other country.
In India, the liability under the Income tax Act arises on the basis of the residential status

of the assessee during the previous year. Hence, if the assessee is resident in India, he/she has to
13 | P a g e

pay tax not only on the income which is received in India but also on that income this accrues,
arises outside India or received outside India. Thus he/ she becomes liable to pay double taxes.
This puts unnecessary and prohibitive burden on the tax-payer.

14 | P a g e

BIBLIOGRAPHY
BOOKS:

Income tax laws Central Sales Tax covered,by T.N. Manoharan

Income Tax Law,by Chaturvedi and Pithisaria

Direct Tax Law and Pactice,by Vinod K. Singhania

URLs
www.taxmann.com
http://blogs.sulekha.com/tags/tag.aspx?tag=double%20taxation%20relief

http://business.gov.in/doing_business/double_taxation.php

http://business.gov.in/doing_business/bilateral_relief.php

http://en.wikipedia.org/wiki/Double_taxation

http://business.mapsofindia.com/india-tax/

http://www.tradechakra.com/indian-economy/taxation/indirect-tax/index.html

http://taxguru.in/income-tax/how-to-get-relief-from-double-taxation.html#

15 | P a g e