TAXATION ASSIGNMENT

AN OVERVIEW OF DOUBLE TAXATION AVOIDANCE

AGREEMENTS: INDIA

PREPARED AND SUBMITTED BY-

ARGHYADEEP CHAKRABORTY [A908111150]
CHANDRIKA SAHA [A90811115017]
DEBOPRIYA MUKHERJEE [A90811115031]
ANANT KHANNA [A908111150]
NASIF MUSTAHID [A908111150]
VIII SEMESTER
 ACKNOWLEDGEMENT

We would like to express our special thanks of gratitude to Taxation Law Professor Mr. Rites
Goel, who gave us the golden opportunity to do this wonderful project, which also helped us
in doing a lot of research and we came to know about so many new things. We are really
thankful to them.
Secondly, we would also like to thank our parents and friends who helped us a lot in
finalizing this project within the limited time frame.

Date- 18-03-2019 Arghyadeep Chakraborty

Place- Kolkata Chandrika Saha

Debopriya Mukherjee

Anant Khanna

Nasif Mustahid
 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 assesses resides and the source country is
any foreign country other than where he resides, but the assesses earn some income from that
foreign state. In that case if the two countries do 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.

DOUBLE TAXATION AVOIDANCE AGREEMENT: AN ANALYSIS

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
rate.7 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.”8 The concept of providing

1
NRI TAX SERVICES,available at http://www.nritaxservices.com/
2
Id
3
Id
4
INDIA’S DOUBLE TAXATION AVOIDANCE AGREEMENT, available at
http://www.incometaxindia.gov.in/publications/6_Advance_Rulings/Chapter07.asp
5
INCOME TAX ACT,1961,available at http://www.intaxinfo.com/pdf/law_by_country/India/Income%20Tax
%20Act%201961%20%28en%29.pdf
6
See The Income Act,1961
7
SHARMENDRA CHAUDHRY, DOUBLE TAXATION AVOIDANCE AGREEMENTS, available at ,
http://dx.doi.org/10.2139/ssrn.2036494
8
Id
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

DOUBLE TAXATION AVOIDANCE 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.13
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 assesses who will decide that which provision is more beneficial
for them and that provision will apply accordingly14. In the famous case CIT vs.
VISAKHAPATNAM PORT TRUST15 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 ANDOLON16, 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

9
Id
10
Id
11
Id
12
Id
13
Id
14
See The Income Act,1961 §90 (2)
15
CIT vs. VISAKHAPATNAM PORT TRUST available at http://www.indiankanoon.org/doc/865397/
16
UNION OF INDIA vs. AZADI BACHAO ANDOLON ,available at
http://law.incometaxindia.gov.in/DitTaxmann/incometaxacts/2007itact/%5B2003%5D263ITR0706%28SC
%29.htm
assesses will apply on him then the question is whether an assesses 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 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 type 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”.17
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 another 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. Muthaiah19 in both these cases it was held that when it is stated that

17
Chaudhry Sharmendra, Double Taxation Avoidance Agreements, available at,
http://dx.doi.org/10.2139/ssrn.2036494
18
208 ITR 400
19
9CIT vs. R. M. Muthaiah,available at, http://indiankanoon.org/doc/1675748/
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.20
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

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.21 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.22 Or,
2. The country where the taxpayer resides, “grant the credit for the tax paid in another foreign
country”.23
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.24

20
See Supra Note 17
21
Id
22
DTAA,available at http://businesstoday.intoday.in/story/how-treaties-with-foreign-countries-can-help-
nrissave-tax/1/194401.html
23
Id
24
Id
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

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 deposits
should 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 e.g.: 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 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.”25

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.26
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.27

25
DTAA, available at http://businesstoday.intoday.in/story/how-treaties-with-foreign-countries-can-help-
nrissave-tax/1/194401.html
26
See Supra Note 17
27
Id
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.28

In the famous case CTI v. Laxmi Textile Exporters Ltd29, 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. 30
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 Andolan31; 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 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.

28
Id
29
(2000) 245 ITR 521 (Mad)
30
Id
31
263 ITR 706 at pages 746 - 753
 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
override 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.
 REFERENCE
BOOKS

1. GIRISH AHUJA & RAVI GUPTA, PRACTICAL APPROACH TO INCOME

TAX (2009)

2. D.P MITTAL, TAXMAN’S INDIAN DOUBLE TAXATION AGREEMENTS &

TAX LAWS (2004)

ARTICLES

1. SHARMENDRA CHAUDHRY, DOUBLE TAXATION AVOIDANCE

AGREEMENTS, available at, http://dx.doi.org/10.2139/ssrn.2036494 (Last Visited on 3rd
March 2019)

2. APOORVA SHARMA, Double Taxation Avoidance Agreement and Impact of

Advanced Pricing Agreement on Indian Regime: A Comparative Study with Other Nations,
available at, http://dx.doi.org/10.2139/ssrn.2338920 (Last Visited on 3rd March 2019)

3. DTAA, available at http://businesstoday.intoday.in/story/how-treaties-with-

foreigncountries-can-help-nris-save-tax/1/194401.html (Last Visited on 3rd March 2019)

4. NRI TAX SERVICES, available at http://www.nritaxservices.com/ (Last Visited

on 29TH November 2013) NRI TAX SERVICES, available at
http://www.nritaxservices.com/ (Last Visited on3rd March 2019)

WEB SITES

1. http://www.oecd.org/dataoecd/52/34/1914467.pdf

2. http://www.unclefed.com/ForTaxProfs/Treaties/india.pdf