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2. Foreign income of person becomes liable in 2 countries :- The country in
which income is earned and The country in which the person in resident
Double taxation of such income is avoided by means of ADT (Double taxation
avoidance agreements)
3. What is Double taxation avoidance agreements? Such agreements are
entered into by the Government of India with Governments of other countries
under section 90
4. Also referred as Tax Treaty. It is a bilateral economic agreement between
two nations that aims to avoid or eliminate double taxation of the same
income in two countries.
5. Example of DTAA An NRI individual living in X country maintains an NRO
account with a bank based in India. The interest income on the balance
amount in the NRO account is deemed as income that originates in India and
hence is taxable in India.
6. In case, India and X nation are contracted under the DTAA, this income
will have tax implications in accordance with the rate specified in the
agreement. Otherwise, the interest income will attract tax @ 30.90 % i.e. the
current withholding tax.
7. To be entitled to the benefits laid down under the provisions of the DTAA,
NRI individual needs to submit below listed documents in a timely manner to
the concerned deductor. Self-attested PAN card copy Self-attested visa and
passport copy Tax Residency Certificate (TRC): TRC is a crucial document
that is to be submitted with the deductor for availing the benefits of the DTAA
agreement. The same can be obtained from the government or tax authorities
of the foreign nation where the NRI is residing.
8. Current Scenario As of now, India has DTAA with 84 nations, including
Armenia, Bangladesh, Finland, Ireland, Japan, Kazakhstan, Greece, Italy and
several others.
9. What if no DTAA exists? Unilateral tax relief is provided on doubly taxed
income under section 91 provisions
10. Modes of granting relief under ADT Agreements Two modes of granting
relief:- Exemption Method Tax credit Method
11. Exemption Method Under this method, a particular income is taxed in
one of the two countries.
12. Tax credit Method Income is taxable in both the countries in accordance
with ADT agreement. Then, the country of residence of tax payer allows him
credit for the tax charged

13. Unilateral Relief (Sec 91) It is provided in case resident tax payers has
suffered tax in India as well as with country with which there is no ADT
14. Requirements to be satisfied to claim double taxed income:- The
assessee must have been resident in PY Income must have accrued or arisen
to him outside India

Double Taxation Avoidance Agreement - DTAA

In the current era of cross -border transactions across the world, due to
unique growth in international trade and commerce and increasing interaction
among the nations, residents of one country extend their sphere of business
operations to other countries where income is earned. One of the most
significant results of globalization is the Introduction noticeable impact of one
countrys domestic tax policies on the economy of another country. This has
led to the need for incessantly assessing the tax regimes of various countries
and bringing about indispensable reforms. Therefore, the consequence of
taxation is one of the important considerations for any trade and investment
decision in any other countries. Double Taxation Avoidance Agreements with
Where a taxpayer is resident in one country but has a source of income
situated in another country, it gives rise to possible double taxation. This
arises from two basic rules that enable the country of residence as well as the
country where the source of income exists to impose tax, namely, Source
ruleDouble 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
nonresidentTaxation Residence rule The residence rule stipulates that the
power to tax should rest with the country in which the taxpayer resides. If
both rules apply simultaneously to a business entity and it were to suffer tax
at both ends, the cost of operating in an international scale would become
prohibitive and deter the process of globalization. It is from this point of view
that Double taxation avoidance Agreements (DTAA) become very significant.
Double Taxation Avoidance Agreements with India 3
4. International double taxation has adverse effects on the trade and
services and on movement of capital and people. Taxation of the same income
by two or more countries would constitute a prohibitive burden on the taxpayer. The domestic laws of most countries, including India, mitigate this
difficulty by affording unilateral relief in respect of such doubly taxedDouble
income (Section 91 of the Income Tax Act). But as this is not a satisfactory

solution in view of the divergence inTaxation the rules for determining sources
of income in various countries, the tax treaties try to remove tax obstacles that
inhibit trade and servicesAvoidance and movement of capital and persons
between the countries concerned. It helps in improving the general investment
climate.Agreements The double tax treaties (also called Double Taxation
Avoidance Agreements or DTAA) are negotiated under public internationalor
DTAA law and governed by the principles laid down under the Vienna
Convention on the Law of Treaties. It is in the interest of all countries to
ensure that undue tax burden is not cast on persons earning income by taxing
them twice, once in the country of residence and again in the country where
the income is derived. At the same time sufficient precautions are also needed
to guard against tax evasion and to facilitate tax recoveries. Double Taxation
Avoidance Agreements with India 4
5. The Fiscal Committee of OECD in the Model Double Taxation Convention
on Income and Capital, 1977,defines double taxation as: The imposition of
comparable taxes in two or more states on the same tax payer in respect of the
same subject matter and for identical periods.Double Double Taxation of the
same income would cause severe consequences on the future of international
trade. Countries ofTaxation the world therefore aim at eliminating the
prevalence of double taxation. Such agreements are known as "Double Tax
Avoidance Agreements" (DTAA) also termed as "Tax Treaties. In India, the
Central Government, acting under Section 90 of the Income Tax Act, has been
authorized to enter into double tax avoidance agreements with other countries.
Double Taxation Avoidance Agreements with India 5
6. Necessity of The need and purpose of tax treaties has been summarized
by theDouble OECD in the Model Tax Convention on Income and on Capital in
the following words:Taxation It is desirable to clarify, standardize, and confirm
the fiscal situation of taxpayers who are engaged, industrial, financial, or any
otherAvoidance activities in other countries through the application by all
taxation.Agreements Double Taxation Avoidance Agreements with India 6
7. Avoiding and alleviating the adverse burden of international double
taxation, by - 1. laying down rules for division of revenue between two
countries; 2. exempting certain incomes from tax in either country;Objectives
of 3. reducing the applicable rates of tax on certain incomes taxable inDouble
either countries. Tax treaties help a taxpayer of one country to know with
greaterTaxation certainty the potential limits of his tax liabilities in the
otherAvoidance country. Another benefit from the tax-payers point of view is
that, to aAgreements substantial extent, a tax treaty provides against nondiscrimination of foreign tax payers or the permanent establishments in the

source countries vis--vis domestic tax payers. Double Taxation Avoidance

Agreements with India 7
8. DTAAs ensure that countries adopt common definitions for factors that
determine taxing rights and taxable events. Crucial among these is the
definition of a permanent establishment. Most treaties also specify a Mutual
Agreement Procedure (MAP) which is invoked when interpretation of treaty
provisions is disputed. To prevent abuse of treaty concessions, treaties
increasingly incorporate restrictions and rules, such as a general antiFunctions of avoidance rule (GAAR), that allow tax authorities to determine if
aDTAAs transaction is only undertaken for tax avoidance or not. Benefit
limitation tests and controlled foreign corporation (CFC) rules also place limits
on claims of residence in countries eligible for treaty concessions. Exchange of
tax information on either a routine basis or in response to a special request is
provided for in most treaties to assist countries counter tax evasion. Double
Taxation Avoidance Agreements with India 8
9. As of now there exists 84 Double Taxation Avoidance Agreements (DTAAs)
between India & other countries.Salient Features These treaties are usually
between countries with substantial trade or other economic relations. Most
treaties are between pairs of developed countries while, of the balance, mostof
Double are between developed and developing countries. DTAAsTaxation
Provide reciprocal concessions to mitigate double taxation,Avoidance Assign
taxation rights roughly in accordance with that existing consensus and
Largely though not rigidly follow the OECD Model Tax Convention or, for
developingAgreements countries, the UN Tax Convention.(DTAAs) Recent
treaties contain new clauses following the OECD Model Tax Conventions of
2005 to 2010 which extend areas of cooperation to administrative and
information issues.agreements A typical DTA Agreement between India and
another country covers only residents of India and the other contracting
country who has entered into the agreement with India. A person who
isbetween India & not resident either of India or of the other contracting
country cannot claim any benefit under the said DTA Agreement.other
countries Such agreement generally provides that the laws of the two
contracting states will govern the taxation of income in respective states except
when express provision to the contrary is made in the agreement. Double
Taxation Avoidance Agreements with India 9
10. Section 90 - Agreement with foreign countries or specified territories
Bilateral Relief Since the tax treaties are meant to be beneficial and not
intended to put tax payers of a contracting state to a disadvantage, it is
provided in Sec. 90 that a beneficial provision under the Indian Income Tax Act
will not be denied to residents of contracting state merely because the

corresponding provision in tax treaty is less beneficial. Section 90A - Double

taxation relief to be extended to agreements (between specifiedDTAAs &
Associations) adopted by the Central Government Section 91 - Countries with
which no agreement exists-Unilateral Agreementsrelevant Some Double
Taxation Avoidance agreements provide that income by way of
interest,provisions of royalty or fee for technical services is charged to tax on
net basis. This may result in tax deducted at source from sums paid to Nonresidents which may beIncome-Tax more than the final tax liability. The
Assessing Officer has therefore been empowered under section 195 to
determine the appropriate proportion of the amount from which tax is to be
deducted at source.Act, 1961 There are instances where as per the Incometax Act, tax is required to be deducted at a rate prescribed in tax treaty.
However this may require foreign companies to apply for refund. To prevent
such difficulties Sec. 2(37A) provides that tax may be deducted at source at the
rate applicable in a particular case as per section 195 on the sums payable to
non- residents or in accordance with the rates specified in D.T.A. Agreements.
Double Taxation Avoidance Agreements with India 10
11. 1. 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 the basis on which relief is to be granted. India has
entered into 84 agreements for relief against or avoidance of double taxation.
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
two countries; andTypes of relief b. Tax relief methods under which, an income
is taxable in both countries in accordance with the respective tax laws read
with the Double Taxation Avoidance Agreements. However, the country of
residence of the taxpayer allows him credit for the tax charged thereon in the
country of source. 2. Unilateral relief This method provides for relief of some
kind by the home country where no mutual agreement has been entered into
between the countries. Double Taxation Avoidance Agreements with India 11
12. 1. Exemption Method One method of avoiding double taxation is for the
residence country to altogether exclude foreign income from its tax base. The
country of source is then given exclusive right to tax such incomes. This is
known as complete exemption method and is sometimes followedMethods of in
respect of profits attributable to foreign permanent establishments or income
from immovable property. Indian taxEliminating treaties with Denmark,
Norway and Sweden embody with respect to certain incomes.Double 2. Credit
MethodTaxation This method reflects the underline concept that the resident
remains liable in the country of residence on its global income, however as far
the quantum of tax liabilities is concerned credit for tax paid in the source

country is given by the residence country against its domestic tax as if the
foreign tax were paid to the country of residence itself. Double Taxation
Avoidance Agreements with India 12
13. 3. Tax Sparing One of the aims of the Indian Double Taxation Avoidance
Agreements is to stimulate foreign investment flows in India from foreign
developed countries.Methods of One way to achieve this aim is to let the
investor to preserve to himself/itself benefits of tax incentives available in India
for suchEliminating investments. This is done through Tax Sparing. Here the
tax credit is allowed by the country of its residence, not only in respect of
taxesDouble actually paid by it in India but also in respect of those taxes India
forgoes due to its fiscal incentive provisions under the Indian IncomeTaxation
Tax Act. Thus, tax sparing credit is an extension of the normal and regular
tax credit to taxes that are spared by the source country i.e. forgiven or
reduced due to rebates with the intention of providing incentives for
investments. Double Taxation Avoidance Agreements with India 13
14. There are Two major types of DTAA Model 1. OECD MODEL OECD
Models are generally adopted by developed nations and their emphasis is on
the residency based taxation.DTAA Models 2. UN MODEL UN Model emphasis
is on the source based taxation and generally adopted by the developing
nations. There are also US model Convention & Indian Model Convention too.
Double Taxation Avoidance Agreements with India 14
15. An analysis of any tax treaty would have the following components: 1.
The date on which it come into effect. 2. Applicability Applies to a person who
is resident of one or both the countries. Resident is defined under domestic
law of different counties differently. Article 4 expects that it should based upon
domicile, physical residence, place of management or such other criteria but
makes it clear that where a person is a resident in both the countries, it is the
location of the permanent home or where vital interests are located or where
there is fixed abode or where he is citizen, in that order, will decide the
residential status. There may be cases, when it has been found that the
assessee is resident in both the countries then tie-breaker rule has to apply to
determine the residential status.Components a. In the case of individual his
personal & economic ties determine his residential status.of Tax Treaty 3. b. In
the case of others, it is the place of effective management. General Definitions
Article 3 of DTAA generally covers general definition of Person, Company,
contracting state, Enterprise of a contracting state, Competent Authority,
national etc, which all are applicable to the respective DTAA. 4. The Tax which
it covers What kind of tax the treaty covers should be known as there are
different form of tax in different countries & the DTAA will provide the relief on
the specified tax as mentioned in the DTAA. 5. The definition which will be

applicable in both countries irrespective of domestic law, as for example on

such vital issues as residence, which may be different from the residential
statute in local law with greater stress on nexus between source & income,
definition of certain categories like technical services etc. Double Taxation
Avoidance Agreements with India 15
16. 6. Permanent Establishment and its parameters a. PE means a fixed
place from where the business of the enterprise is carried on. b. PE includes
place of management, branch, office, factory, workshop, mine , quarry, an oil or
gas well, a construction site for long duration, a service location for a long
duration and a dependent agency with power to conclude contracts. 7. The
definition of concepts like immovable property, dividend, business profits,
royalty, technical fees, salaries etc. 8. Different ways of tax-sharing depending
upon the residential statute, permanentComponents establishment, fixed base
or tax sharing with both countries giving agreed part of relief.of Tax Treaty 9.
Stipulation as to the method of relief either by way of exempting income or
where it is taxable, taxing it at stipulated rate, which may be lower than the
domestic rate, or by unilaterally giving credit for tax paid in the other country.
10. Exchange of information with special reference to the concept of associated
enterprises primarily to tackle diversion of income to avail treaty benefit or
evasion of tax in one or the other country. 11. Provision for elimination of
double taxation. 12. Provision for non- discrimination etc. 13. Other clauses to
suit the requirement of the participating countries. Double Taxation Avoidance
Agreements with India 16
17. UOI v. Azadi Bachao Andolan (Mauritius) Validity of CBDT Circular No.
786, providing that Mauritian tax residency certificate was sufficient proof to
avail benefits under Indo-Mauritius DTAA, upheld: Supreme Court Aditya
Birla Nuvo Limited v ADIT (Italy) Payment made by assessee to an Italian
Company (GTA) for Deputing Certain Technicians to India for Supervising
erection of Machinery would not be chargeable to tax in India because person
who rendered services were not present in India for required number of days as
envisaged by article 5(j) of DTAA. Microsoft Corporation vs. ADIT (USA) ITAT
Delhi in the case of Microsoft Corporation held that payment made for grant of
licence in respect of Copy right by end user is taxable as royalty as per s.9(1)
(vi),domestic tax legislation to override treaty provisions in case of
irreconcilable conflict.Case Laws ADIT v. Chiron Behring Gmbh & Co KG
(Germany) Royalty income earned by a resident of Germany from India has to
be assessed to tax at the rate of 10% as provided in Article 12 of DTAA.
Praxair Pacific Ltd In RE (Mauritius , 42 DTR (AAR) 177) Shares held by the
applicant as investment in the books of accounts are treated as capital asset.
Applicant is not liable to be taxed in India on the proposed transfer of said

shares to its wholly owned subsidiary company in India in view of section 47

(iv) or under art 13 of India Mauritius treaties. Hindustan Petroleum
Corporation Ltd. vs. ADIT [(2010) 130 TTJ 518 (Mum.)] It is not necessary
that unless a person be taxed in the UAE that person cannot claim the benefits
of Indo- UAE tax treaty in India, what is really relevant to see is whether or not
the recipient was resident of the UAE. Double Taxation Avoidance Agreements
with India 17
18. India, Sweden sign protocol for amending double taxation avoidance pact
No progress in tax avoidance treaty revision with Mauritius: FM India, Sri
Lanka sign pacts on anti-terror, double taxation avoidanceDTAAs in Proposal
to amend double taxation avoidance deal betweenRecent News Bangladesh and
India cleared Budget 2013: USIBC for a fair transparent tax environment
Registered FIIs take P-note route to avoid tax tangles FinMin to make it easier
for foreigners to prove tax residency Govt postpones GAAR implementation by
2 years to 2016 Double Taxation Avoidance Agreements with India 18