A PROJECT ON:

DOUBLE TAXATION AVOIDANCE AGREEMENTS IN INDIA

SUBMITTED TO:

MS. APOORVI SHRIVASTAVA

(Faculty of Corporate Tax)

SUBMITTED BY:

Kamaljeet Meena

Roll No.-173

Semester-VIII

DATE OF SUBMISSION:

April 4, 2016

HIDAYATULLAH NATIONAL LAW UNIVERSITY, RAIPUR (C.G.)

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 ACKNOWLEDGEMENTS

I would like to take this opportunity to express my deep sense of gratitude towards my course
teacher, Ms. Apoorvi Shrivastava for giving me constant guidance and encouragement
throughout the course of the project.

I would also like to thank the University for providing me the Internet and library facilities,
which were indispensable for getting relevant content on the subject, as well as subscriptions to
online databases, and journals, which were instrumental in writing relevant text.

Special thanks goes out to my seniors who have been relentless in their help and supporting
providing any material whenever required and my colleagues, who always stood by me,
irrespective of the decisions taken by me. Without their support this project would not have seen
the light of the day.

VIVEK GURNANI

B.A. LL.B. (HONS.)

HIDAYATULLAH NATIONAL LAW UNIVERSITY,

RAIPUR (CHHATTISGARH)

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Contents

INTRODUCTION ............................................................................................................................................. 4

RESEARCH QUESTIONS: ................................................................................................................................ 5

DOUBLE TAXATION AVOIDANCE AGREEMENT: AN ANALYSIS ...................................................................... 5

BACKGROUND AND HISTORY ........................................................................................................................ 6

DOUBLE TAXATION AVOIANCE AGREEMENT AND THE INCOME TAX ACT: A STUDY ................................... 7

DTAA AND JURISDICTIONAL ISSUE ................................................................................................................ 8

DOUBLE TAXATION AVOIDANCE AGREEMENT IN INDIA: HOW ITS WORK: AN ANALYSIS............................ 9

DOUBLE NON TAXATION AND TREATY SHOPPING: THE MISUSE OF DOUBLE TAXATION AVOIDANCE

AGREEMENT: AN ANALYSIS ........................................................................................................................ 13

Double Non Taxation .............................................................................................................................. 13

Treaty Shopping ...................................................................................................................................... 14

CONCLUSION............................................................................................................................................... 16

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INTRODUCTION

The double taxation avoidance agreement is an agreement, which helps the taxpayer to get relief
from double taxation on the same income. If India has signed any double taxation agreement
with any foreign country; it’s meant that the taxpayer of those countries does not have to pay the
tax on the same income in both the countries. So, double taxation avoidance agreement is a
useful tool which helps the taxpayer to avoid “double taxation”. In case of claiming relief under
double taxation avoidance agreement two important things are needed to find out. These are:

1. The country of residence.

2. The source country.

Here “the country of residence” means where the assessee resides and the source country is any
foreign country other than where he resides, but the asseesee earn some income from that foreign
state. In that case if the two countries does not sign any DTAA then the assess has to pay tax in
both the state i.e. the country of his residence as well as the source country, this is why double
taxation avoidance is so much important. In this project I will make a detail study on double
taxation avoidance agreement in India. I will divide this project into seven chapters. In first
chapter there will be introduction, research objective. In Second chapter I will make a detail
study on double taxation avoidance agreement wherein I will discuss the meaning and the
concept of double taxation and also the importance of double taxation avoidance agreement. In
third chapter there will be a detailed study on the history and background of the double taxation
avoidance agreement. In next chapter I will analyse those provisions of income tax act, 1961,
which are dealing with double taxation and will try to find out whether it is conflict with double
taxation avoidance agreement or not. In 5th chapter I will discuss jurisdictional issue regarding
double taxation avoidance. In chapter six, I will make a detail analysis on how double taxation
avoidance agreement works in India. In chapter seven I will discuss about the misuse of DTAA
where I will analyse double non taxation and treaty shopping. Finally last chapter will be
consisted of conclusion and suggestion part.

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RESEARCH QUESTIONS:

• What is the necessity of double taxation avoidance agreement and how DTAA works in India?

• What are the misuse of Double Taxation Avoidance Agreement?

DOUBLE TAXATION AVOIDANCE AGREEMENT: AN

ANALYSIS

In this chapter I will discuss the meaning and the concept of double taxation avoidance
agreement or “DTAA”. I will also analyze the effectiveness or importance of the DTAA.
Basically Double Taxation Avoidance Agreement is a “bilateral agreement” between two
countries to avoid “double taxation of same income”.

Hypothetical example:

If there is a double taxation avoidance agreement between India and other foreign country then it
restricts taxation of the same income in both countries.

India has double taxation avoidance agreement with 84 countries. It means a person does not
give tax of the same income in India or any of those countries.

DTAA is an essential tool to avoid double taxation of the same income in different countries.
The effectiveness of DTAA can be explained by using a hypothetical example:

Hypothetical example:

A person who lives in a foreign country and maintains an NRO account (non resident ordinary
account) in India; so the interest he gets from this NRO account is appearing as “NRIs income
originated in India”. If India and this foreign country where the person lives are binding with a

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Double taxation avoidance agreement then this income will be taxed according to the specified
rate prescribed in the DTAA.

So the main purpose of the DTAA is to provide benefit to the assesses. When two countries
entering into Double taxation avoidance agreement then the provisions which are laid down in
DTAA overrides the provisions of Tax Law of particular country. In India also the provision of
DTAA overrides the income tax provisions. According to section 90 (2) of the income tax act ,
assessee can choose whether he will go with the DTAA provisions or with the Income Tax act.
Assessee can decide whichever is more beneficial .

Article 265 of the Indian constitution stated that “no tax shall be levied or collected except by
authority of law”. To avoid any confusion The Income Tax Act, 1961 enacted clear provisions to
confer “the power of the central government to enter into agreements with foreign countries for
the avoidance of Double taxation as contained in Chapter 9 of the Income tax Act.” Section 90
and section 91 of the income tax act, 1961, these two provisions deals with double taxation.
Section 90 and section 91 are very helpful provision in this regards which save taxpayers from
double taxation. Section 90 of the Income Tax Act, 1961 talking about “those taxpayers who
have paid the tax to a country with which India has signed DTAA” . On the other hand section
91 is talking about “those taxpayers who have paid tax to a country which does not have any
double taxation avoidance agreement with India. That is how Indian income tax act takes care of
these two different types of taxpayers. When India enters into a double taxation avoidance
agreement with any foreign country, by such agreement they mutually determined the tax rate . It
protects the interest of taxpayers.

BACKGROUND AND HISTORY

In 1899 Prussia and Austro Hungarian Empire for the first time entered into the double taxation
avoidance agreement. In the 13th century first time the double taxation relating issue was raised
among France and Italy. The issue was “the property to be taxed was situated in one state but the
owner of the property was a resident of the state.” The concept of providing the relief from

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double taxation comes on the scene in 1939 when the income-tax (double taxation relief) (Indian
states) rules were framed.

It was felt that the necessity to have a model agreement which can be a good reference in
framing double taxation avoidance agreement between two foreign states. That is how The
League of Nations introduced the first model bilateral convention in 1928 10. After that in 1943
the model convention of Mexico and in 1946 the London model convention was getting
introduced. 11 Later in 1956 the council of the organization for European economic cooperation
established a fiscal committee to formulate a model convention. In 1963 for the very first time
the first draft “double taxation convention on income and capital was enacted. Finally in 1977
OECD model convention and commentaries come into existence. In 1992 OECD published
model convention 12.

DOUBLE TAXATION AVOIANCE AGREEMENT AND THE

INCOME TAX ACT: A STUDY

The main aim of double taxation avoidance agreement is to provide relief to the taxpayer from
double taxation. A country entered into a DTAA with a foreign state so that; by this agreement it
can prevent double taxation of same income in different country. In India, section 90 and section
91 of the income tax act deals with the double taxation avoidance agreement. Now in this chapter
I will try to find out what happened when any of the provisions of the Double taxation avoidance
agreement clash with any section of the Income tax act and which provisions should prevail over
another?

Section 90 (2) of the Income Tax Act, 1961 explain that if India has a DTAA with any other
foreign country then it is the assessee who will decide that which provision is more beneficial for
them and that provision will apply accordingly. In the famous case CIT vs. VISAKHAPATNAM
PORT TRUST first time “the rule under section 90 (2)” was recognised by Andhra Pradesh High
Court. After that in the famous case UNION OF INDIA vs. AZADI BACHAO ANDOLON, the
supreme court of India recognised the same. Now here the main issue comes. According to sec
90 (2) the provisions which are beneficial for the assessee will apply on him then the question is

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whether an assessee can choose income tax act for his one types of income and DTAA for
another types of income?

Hypothetical Example:

If MR. A has a certain amount of income which is derived from business and he wants to pay tax
on this particular income according to the provision of income tax law and also MR A has to
give tax for his another types of income i.e. capital gain. In this case if he chooses to follow the
provisions of DTAA.

Here the question comes is it possible? It can be argued that if we follow the language of the
section 90 (2) of income tax act then it should be allowed a person to go with income tax act for
a certain types of income and also can go with DTAA provision for another types of income.

DTAA AND JURISDICTIONAL ISSUE

The main jurisdictional issue regarding double taxation avoidance agreement comes when the
question arises that “who can tax the income”? It means it is essential first to find out which
country should tax a particular income. If one country has entered into a double taxation
avoidance agreement with another foreign country then the question is who will tax the particular
income:

1. The country from where the income comes.

2. The country where the taxpayer resides.

If it is provided in the DTAA that in case of immovable property; the country where the property
was located, has the right to tax. Here the question comes that the country where the owner lives
can also tax the same income. In such case the owner of the property shall have to claim “credit
in the country where he resides for the tax paid in the country where the property is located”.

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In case of “business profits”, “the country of residence” has a right to tax the profit which is
derived from the business house; unless it is doing business in other source state and having a
permanent established located therein.

The Madras high court in CIT vs. V.R.S .R.M Firm & Others and the Karnataka High Court in
the case CIT vs. R. M. Muthaiah in both these cases it was held that when it is stated that tax can
be charged for a certain income by one state then the other contracting state has no right to tax on
the same income.

In general case both the contracting state has a right to tax income in respect of “dividend and
interest”; but the taxation right is vested in the state where the party resides but it’s also stated
that such income “also” be taxed in the source state. In OECD model convention there are two
articles 23A and 23B in this regard.

DOUBLE TAXATION AVOIDANCE AGREEMENT IN INDIA:

HOW ITS WORK: AN ANALYSIS

In this chapter I will discuss how double taxation avoidance agreement works in the Indian
context. To save a taxpayer from being doubly taxed in respect of the same income, the concept
of double taxation avoidance agreement got introduced. If two countries have signed in double
taxation avoidance agreement both countries tax payers get benefit from it. India is not an
exception to it. Currently India has signed double taxation avoidance agreement with 87
countries. This agreement is very effective for the taxpayer who has income in another foreign
country other than where he resides. By the help of this agreement taxpayer can be protected
from giving tax of the same income in two times. The double taxation can be avoided by
following manners:

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1. The country where the taxpayer resides, can exempt the income which is coming from
foreign countries. Or,

2. The country where the taxpayer resides, “grant the credit for the tax paid in another

foreign country”.

The rules of the agreement depend on the mutual agreement of the two states, so the DTAA
provision will apply in the countries who have signed the same agreement. DTAA can be
different from one country to another.

In the general case when two countries have signed the Double Taxation Avoidance Agreement
then the “source country” gets the right to tax by using the relevant provisions of the taxation law
of that country and thereafter “the country of residence” grants “credit” for tax also apply low tax
rate.

Hypothetical example:

Suppose in our country (India) the tax rate applies on the long term capital gain is 20% and the
tax rate of the country where the assesee resides is 30% then in that case only 10% tax will be
charged on that income.

Procedure for taxing different income under DTAA

SOURCE OF INCOME HOW IT IS TAXED

SALARY Most of the DTAA provides if a person lives

less than 183 days in India in a year can get
the exemption.
INCOME FROM BUSINESS According to most of the DTAA, business
/PROFESSION profits can be taxed only when it comes from

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 a permanent establishment.
DIVIDEND In case of dividend, the source country has a
right to tax. DTAA could not help much in
that case.
INTEREST In India in case of interest which is earned
from bank deposit then tax can be applied on
the basis of tax slab. In case of NRI who is
getting the interest from deposits then in that
case tax is withheld at 30%. According to
DTAAs interest receive from bank deposits
should be taxed at a “concessional rate” of
10-15 %.
ROYALTY AND FEE FOR TECHNICAL In India in this case the tax rate is 25% but in
SERVICE case DTAA the tax rate will be applied at the
rate of 10-15%.
CAPITAL GAIN Most of the country does not provide any
relief regarding capital gain.
exception is there eg: double
agreement with Mauritius, Singapore and
Cyprus. In case of capital gain generally the
country of residence grants credits for the tax
paid for capital gain in the “source country”
INCOME FROM IMMOVABLE In case of rent earn from immovable property
PROPERTY the “source country” has the right to tax.
In case of income which comes from the sale
of immovable property, according to most of
DTAAs “the country where the property is
situated has the right to tax.”

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Procedure for claiming relief from double taxation:

The procedures which are required to follow for claiming relief from double taxation are stated
below:

1. Firstly it is necessary to find out “the country of residence” then the next step is to find
out that which provisions are there in the DTAA between the two countries.

2. Then it is needed to check that the person who claims “tax exemption” and tax-credit”
whether he paid tax in “the source country”. For this he has to submit the following documents to
the tax-authorities as evidence. These are :-

1. Tax Residency Certificate

2. Self-attested Xerox of Pan Card.

3. Self-declaration & identity form.

4. Self-attested Xerox of passport & visa.

In short to get the benefits of the DTAA, a person who lives outside of India; i.e. any foreign
country should apply for “tax residency certificate” from “tax authorities”. Finally he/she has to
submit “a self declaration form” and also Xerox of PAN, TRC, PASSPORT, VISA to the “tax
authorities.”

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 DOUBLE NON TAXATION AND TREATY SHOPPING: THE
MISUSE OF DOUBLE TAXATION AVOIDANCE AGREEMENT:
AN ANALYSIS

In this chapter I will analyse the negative effect of double taxation avoidance agreement. DTAA
can be misuse by two ways, these are:

Double Non Taxation

Treaty Shopping

Double Non Taxation

Firstly I would like to discuss about the double non taxation. In case double non taxation a
specific income is not taxed in the source country, because of “an incentive”, “exemption” or
“prevailing” in that country.

Hypothetical Example

If a person who lives in India has an immovable property in country X. In country X the income
which comes from immovable property “may be” tax in accordance with the DTAA but the law
of country X does not provide for any tax of the income from such immovable property for some
specific reason, then such income will be “untaxed”; because of this reason that country X does
not impose any tax on the immovable property.

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But DTAA should not be interpreted in such way that it allows double non taxation; because the
purpose of DTAA is to avoid double taxation not to promote double non taxation.

So it can be said that the country of the resident has “inherent right” to tax the income of the
resident. If it is so then in the above example country X does not impose tax on the income from
immovable property; in that case India can tax the same income as it is the country of residence.

But situation is not as easy as it seems. A DTAA should be interpreted according to its own term
even it is “result in double non taxation”. The Supreme Court also stated that the double non
taxation possibility is not relevant.

In the famous case CTI v. Laxmi Textile Exporters Ltd , the assessee is the Indian resident and in
Srilanka he owns a business which is a permanent establishment. That income is not considered
as taxable income in Sri-lanka. The Mardas High Court held that India would not tax this income
as it is a country of resident.

Treaty Shopping

Treaty shopping is another example of misuse of DTAA. It means when an assessee wants to do
“a transaction through another country which has most beneficial treaty with India in order to
reduce his tax liability.”

Example: Indo-Mauritius Treaty.

In India 40% of the total FDI comes through Mauritius, because according to the Indo Mauritius
DTAA, tax levied on capital gain as per the law of the country of the residence of the assessee.
But according to the tax law on Mauritius there is no tax imposed on capital gains; because of
which all the investment in India from the different country comes through the Mauritius.

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In the famous case Union of India v. Azadi Bachao Andolan ; it was held that if the aim of the
DTAA was not to include a person of third country and restricts him/her from taking “the benefit
out of the favourable terms”, then there should be an another provision about it. Parliament has a
duty to take care of it in this regard; and if there is no specific provision and limitation
mentioning DTAA; then “no one can be denied benefit of the favourable tax provision in the
belief that treaty shopping is prohibited.”

Example: In the Indo-US DTAA Art 24 deals with treaty shopping.

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CONCLUSION

So from the above study it can be said Double Taxation Avoidance Agreement is very much
helpful for avoiding double taxation not only that double taxation avoidance agreement can over
ride the Income Tax act; if it is beneficial for the assessee. But it should not be used in wrong
manners like to promote double non taxation or to unnecessarily or illegally reduce the tax
liability or treaty shopping. It is essential that the Double Taxation Avoidance Agreements
should have a clear provision which prevent DTAA from misuse (example: provision for anti
treaty shopping etc).

So to conclude it can be said the Double taxation avoidance agreement should be used for good
purpose like for the beneficial of the assessee or to prevent a person from being taxed twice for
the same income it should not be misused.

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 BIBLIOGRAPHY

 Dr. V.K. Singhania, Students Guide to Income tax, Taxmann Publications Pvt.
Ltd., New Delhi.

 Girish Ahuja and Ravi Gupta, Systematic Approach to Income-tax and Sales-tax,
Bharat Law House, New Delhi

 Alan Stainer, The Ethics of Tax Planning (Last seen at 31/03/2014)

 file:///F:/apurva%20corp%20tax/Tax%20Planning%20in%20india.html (Last
seen at 02/04/2014)

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