PROJECT REPORT AS PER ICSI REQUIREMENT

TOPIC: DOUBLE TAXATION AVOIDANCE AGREEMENTS

Submitted by:

Name: HONEY GUPTA

REG.NO.: 221148274/08/2011
ADDRESS: KALI GALI,
MOHALLA MAHAJANAN,
MURADNAGAR (G.Z.B)
201206
MOBILE NO: 9319145325, 9639819408
EMAIL ID : honey201206@gmail.com
CHAPTER NO. TOPIC

CHAPTER 1 INTRODUCTION

CHAPTER 2 DOUBLE TAXATION AVOIDANCE AGREEMENT: ANALYSIS

CHAPTER 3 BACKGROUND AND HISTORY

CHAPTER 4 DOUBLE TAXATION AVOIDANCE AGREEMENT AND

INCOME TAX ACT : A STUDY

CHAPTER 5 DTAA AND JURISDICTIONAL ISSUE

CHAPTER 6 DOUBLE TAXATION AVOIDANCE AGREEMENT IN INDIA:

HOW ITS WORK: AN ANALYSIS

CHAPTER 7 DOUBLE NON TAXATION AND TREATY SHOPPING: THE

MISUSE OF DOUBLE TAXATION AVOIDANCE AGREEMENT:
AN ANALYSIS
 CHAPTER 1

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.
 CHAPTER 2

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 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. 1 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.2 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
beneficial3.
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.”4 Section 90 and section 91 of the income tax act, 1961, these two
provisions deals with double taxation.5 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”6.
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 rate7. It protects the interest of
taxpayers.
 CHAPTER 3

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.” 8 The
concept of providing the relief from double taxation comes on the scene in 1939 when
the income-tax (double taxation relief) (Indian states) rules were framed.9
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 convention12.
 CHAPTER 4

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 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.
 CHAPTER 5

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”.
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 & Others18 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.
 CHAPTER 6

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:
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/PROFESSION: According to most of the DTAA, business
profits can be taxed only when it comes from 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 depositsshould be taxed at a “concessional rate” of 10-15 %.
ROYALTY AND FEE FOR TECHNICAL SERVICE: In India in this case the tax rate is
25% but in 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.
But the exception is there eg: double taxation 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 PROPERTY: In case of rent earn from immovable
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.”

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 taxcredit”
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.”
 CHAPTER 7

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.
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.
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.

CONCLUSSION:
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.