THE TAMIL NADU NATIONAL LAW SCHOOL TIRUCHIRAPPALLI

LAW OF DIRECT TAXATION – PROJECT

ANALYSIS OF DTAA BETWEEN INDIA WITH AUSTRALIA AND MAURITIUS

Submitted by: Basil Shibu, BC0170013

Allen Francis, BC0170056
Submitted to: Mr. Reghu Balan
Submitted on: 15th October, 2019

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ANALYSIS OF DTAA BETWEEN INDIA WITH AUSTRALIA AND MAURITIUS

ALLEN FRANCIS- BC0170056

BASIL SHIBU- BC0170013

INTRODUCTION

Double taxation is the taxation by two or more countries of the same income, asset or transaction
and these double liabilities are mitigated by tax treaties between the countries through Double
Taxation Avoidance Agreement1. Double taxation can be economic and juridical where the
former refers to a situation when two legal entities are subject to tax on the same income in two
countries and the latter occurs when the income is subject to tax in two countries. In 1921, the
fiscal committee of the League of Nations instigated the drafting of a Model Agreement which
was completed by 1928 in the First Model Bilateral Convention. Later the committee conducted
meetings at Mexico, 1943 and London, 1946 wherein several minor variations were proposed.
India follows UN model convention2.

On the basis of their scope, DTAA can be categorised into Limited and Comprehensive.
Comprehensive DTAA ensures equality for the tax payers in both the countries and equity is
served in matters regarding double taxation. The latter refers to the income derived from gifts,
inheritance and shipping and air transport.

Throughout these years Indian tax laws have seen many significant changes. One of the most
recent change made was introduction of the concept of Place of Effective Management (PoEM)
through the Finance Act, 20153. This concept is utilized to identify whether a company is indeed
a resident of India, in order to ascertain that a two-fold idea was born. In order for a company to
be taxed under the Indian Income Tax Act, 1961 it need to be an Indian company or its PoEM in

1
Parvatha Vardhini C, All you wanted to know about DTAA, THE HINDU BUSINESS LINE, May 16, 2016
2
Introduction To International Double Taxation And Tax Evasion And Avoidance, Committee of Experts on
InternationalCooperationinTaxMatters(7thsession),(Oct.19,2011)http://www.un.org/esa/ffd/tax/seventhsession/CRP1
1_Introduction_2011.pdf
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Section 6(3), Income Tax Act, 2015

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that particular previous year must have been India. It is a place where key and effective
management decisions of a company are made.

One of the most complex tax system in the world is the Australian taxation system with
approximately 125 types of taxes4. Taxation is based on self-assessment model hence, payers
lodge their own taxes. The power to impose tax on income from worldwide sources is vested on
the Parliament by Australian Constitution5. Taxes are imposed only on income sourced in
Australia income for the non-residents. The rules specified in the legislation determine whether a
company or an individual is a resident of a particular country. Income is usually, sourced in the
place of employment or the fixed place of business. International transactions with Australia are
often sourced conferring to where the relevant contract is made. Australia has entered into many
double tax agreements with other countries and in case of a dispute, the agreement will prevail
over domestic law. In addition to this, Australia maintains a system of foreign tax credits
whereby tax credits are provided to the residents who pay foreign tax on foreign income6.

As it is not considered to be resident of Mauritius under section 73A for treaty purposes, a
company holding a Category II Global Business Licence is not covered under any treaty and
thus, cannot avail itself of any treaty benefits. Provisions are made in the Act for unilateral relief
to relieve double taxation on foreign source income of residents of Mauritius.

4
Colin Brinsden, Australian tax system complex: survey, THE SYDNEY MORNING HERALD, JUNE 19, 2008
5
Section 51(ii), Constitution of the Commonwealth of Australia
6
Hall & Wilcox, A guide to taxation in Australia, Lexology, (June 25, 2015)
https://www.lexology.com/library/detail.aspx?g=5ebb4d78-d304-4d32-9cdb-9b26ba544b7e,

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DOUBLE TAXATION AVOIDANCE AGREEMENT IN INDIA

Under the Income Tax Act, 1961, India gives relief to two kinds of taxpayers – one who had paid
the tax to a country where India has signed in an DTAA agreement with 7 and those to countries
where India has not signed a DTAA agreement8. The basic principle of the DTAAs are that the
resident State has basic rights to tax global income of its resident and the source State shall also
levy tax, however, generally lower than normal tax without giving credit for taxes paid in the
resident State. DTAA is a distributive rule based on which the revenue each State will receive
from income arising from a particular transaction or activity is determined. It cannot impose
higher tax burden than what is under the domestic law and it also cannot tax an item, which is
otherwise not taxable.

WHAT DTAA HAS TO OFFER?

The main purpose of DTAA is to assign the whole tax claim to any one of the two governments
with legitimate interest to tax any source of income or prescribe the basis on which tax claims is
to be shared between them. The two models of DTAA are OECD model and UN model. OECD
model is essentially a treaty between two developed countries, whereas UN model is between
developed and lesser developing countries and developing countries. While the OECD model
accommodates the residence principle in which emphasis to tax is laid on the State of residence,
the UN model gives weight age to source principle where income taxed is in the place it is
generated. India‟s treaties are mostly based on a mixture of the OECD model and UN model by
incorporating changes to suit the conditions in India.

The objectives of DTAA are to lay down rules for revenue division among two countries,
provide tax exemptions or tax rate reductions to certain incomes, to exchange sufficient
information to combat tax evasion and to provide cognizance for the taxpayers about the
potential limits of their tax liabilities in the other country. The interpretation of DTAA has an
effect on the general pricing policy and also on the business decisions of residents while
undertaking cross border transactions. The basic concern in the interpretation of DTAA is the

7
Section 90, Income Tax Act, 2015
8
Section 91, Income Tax Act, 2015

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probable conflict between the provisions of the Act and the provisions of the pertinent
agreement. In Nagarjuna Fertilizes and Chemical Ltd. v. ACIT 9, it was held that Section
206AA10 will not supersede the provisions of the tax treaties to the extent that they are more
beneficial to the taxpayer as per Section 90(2)11. The apex Court in the cases of Azadi Bazhao
Andolan12and P.V.A.L. Kulandagan Chettiar13 has clarified and settled the position that in case
of a conflict between provisions of a tax treaty and a domestic law, the treaty will triumph even
for the charging section of the domestic law.

Place of Effective Management is a comprehensive and well thought out concept which is
important to note while dealing with DTAAs. In order to understand the concept of Place Of
Effective Management, it becomes impetrative to define it as a place where the key management
and commercial decisions necessary for the conduct of a business entity as a whole are
substantially made. India has borrowed the concept of PoEM from the internationally recognized
test used for determining the residence of a company incorporated in a foreign jurisdiction.

POEM will ensure that there is no chance of tax evasion by foreign companies. The companies
who have a turnover of Rs 50 crore or less in a financial year and those with active business
outside India will be exempt from the POEM provisions14.POEM provisions will be applicable
from financial year 2016-17.

The DTAA on the other hand is also comprehensive but if it adopts the PoEM it will become a
much better agreement. The DTAA will never incorporate this though, since the main aim of the
DTAA is to facilitate trade and increase the free flow of trade and commerce. PoEM will become
too stringent a measure and will deter trade and flow in capital since companies will hesitate to
take decisions in India since it will attract the provisions of place of effective management and
the place where the decision of key importance was taken. Still, most of the treaties that India
has entered into recognize PoEM for the determination of residence of the company in question
as a tie-breaker in order to avoid taxing the company twice.
9
ITA No. 11887/H/2014 AY:2011-2012
10
Income Tax Act, 1961
11
Income Tax Act, 1961
12
UOI v. AzadiBachaoAndolan, [2003] 263 ITR 706 (SC)
13
CIT v. P.V.A.L. KulandaganChettiar [2004] 267 ITR 654 (SC)
14
“Payaswini Upadhyay, Tax Department Issues ‘Place Of Effective Management’ Rules To Stop Evasion By
Foreign Companies, January 24,2017, https://www.bloombergquint.com/union-budget-india/2017/01/24/tax-
department-issues-place-of-effective-management-rules-to-stop-evasion-by-foreign-companies”

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DTAA BETWEEN INDIA AND AUSTRALIA

The double taxation avoidance agreement was entered between the Government of Australia and
the Government of the Republic of India on 25th July1991and it came into force later on 30th
December 1991. The agreement had 30 articles and the personal scope of people who are defined
and covered under the agreement. Agreement is applicable only to persons who are either
residents of one of the signatory countries or residents of both the countries.

It also segregated the taxes that are applicable to be taxed in India and those that will be taxed by
Australia. In Australia the income tax and resource rent tax in respect of offshore projects that
relate to the exploration or exploitation of petroleum resource in accordance with the
commonwealth law of Australia are covered under the DTAA. All income tax including the
surcharge applicable on the income as well as the surtax that is imposed on the chargeable profit
of companies in India is dealt with in the DTAA. It also laid down what comes within the scope
of permanent establishment and residence for the purposes of taxation, business profits and
income from all immovable property, dividends and interest. One can easily deduce that the
agreement was basically made to increase trade and commerce between the two countries.

On 16th December 2011, both the governments signed a protocol for making major amendments
in the agreement between the two countries and it came into force on 2nd of April 2013. As per
the protocol, all cross border services will be taxed in the country where these services are
performed and carried out for 183 days in the preceding 12 months. If the exploration or
exploitation activities of all natural resources have lasted for more than a period of 90 days in12
months, the profits resulting from these activities will be levied by the source country. The
profits that are derived from the operation of a substantial equipment will be taxable if the
operations continue for a period of more than 183 days in 12 months in the source country. To
reduce the effect of the force of attraction rule in the agreement as it gave scope for taxation of
indirect profits connected with a permanent establishment, the protocol altered the provision to
the extent that now, the profits that are attributable only to the permanent establishment branch
of a company is taxable in India or Australia.

A new clause that deals with non-discrimination was added so as to protect nationals and
business of one country from tax discrimination in the other country. In order to facilitate current

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international standards and allow the revenue authorities of both the countries to exchange
taxpayers information on a wide range of taxes a new article was implanted by the protocol. To
allow revenue authorities to assist each other and facilitate the collection of outstanding tax debts
another provision is included. The taxation policy in Australia does not follow the concept of
PoEM. A company to be resident of Australia, must be incorporated in Australia or should be
carrying on its business in Australia. It has to have either central management or control in
Australia and its voting power should be controlled by shareholders who are residents of
Australia. The Tax regime of Australia is extremely comprehensive and does not support PoEM.
Hence, if PoEM is only applicable to Indian residents it would be unfair15.

DTAA BETWEEN INDIA AND MAURITIUS

DTAA between India and Mauritius is based on OECD model with 29 articles. The agreement
was signed on 24th August 1982 and came into force on 6th December 1983. The treaty is
applicable to residents of one or both of the States. Mauritius treaties cover the income tax levied
under the amended Income Tax Act, 1995. Generally social security payments and indirect taxes
like customs and excise duties on imports, and taxes on consumption or property are not covered
by Mauritius' treaties. Mauritius has concentrated on the expansion of its Global Business centre
and on the use of its rising network of DTAAs for organising investment abroad.

While considering India-Mauritius DTAA, the place of effective management refers to the place
from where the day to day affairs of the companies are carried on literally and efficiently. It is
not the place in which the ultimate control of the company exists. The agreement follows OECD
model provision to decide the place of taxation. India and Mauritius have been involved in
prolonged negotiations with respect to the DTAA over the past few years and was finally
amended recently in 2016 to refrain Indians from round tripping their money. Prior to the
amendment, capital gains on the sale of assets by companies registered in Mauritius in India
were taxed only in Mauritius which exempted short-term capital gains from taxation. This way,
the companies found loophole to avoid taxes in both the countries.

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“AGREEMENT BETWEEN THE GOVERNMENT OF AUSTRALIA AND THE GOVERNMENT OF THE
REPUBLIC OF INDIA FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION OF

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The primary change is upon the basis of taxation, which has altered from a residence based
taxation to a source based taxation. Therefore, the right to tax capital gains earned in India from
the transfer of shares of an Indian company as per its domestic tax laws is vested to India. The
right to tax capital gains will be implemented in a step by step manner. The period of progress is
in 3 phases – prior to 1st April, 2017, from 1st April 2017 to March 31st, 2019 and from 1st April
2019. During the second phase, a Limitation of Benefits clause is added as per which a resident
of Mauritius will not be entitled to benefits of concessional rate, if it fails the main purpose and
bona fide business test. The amended DTAA updates the exchange of information article as per
international standards.

The protocol mainly aims at the prevention of round tripping and thus has made significant
changes to the treaty by the introduction of service permanent establishments, stern tax collection
and recovery measures and also a provision to cover taxation of Fee for Technical Services.
Many changes in allocation rights for „other income‟ to the source country are also made.
Government expects the protocol to handle issues of treaty abuse and round-tripping, reduce the
revenue loss, prevent tax evasion, reorganise the investment flow and encourage the flow of
exchange of information between both the countries. It also aims to stabilize the stock market in
terms of volatility by decreasing the role of speculators and small investors as there will be lesser
commitment from them.

COMPARATIVE ANALYSIS

The main findings regarding the DTAAs of India with Australia and Mauritius are –

 Taxation in both Australia and Mauritius is self-assessment model.

 The DTAA with Mauritius is older than with Australia.
 Tax regime of Indian DTAA with Australia is extremely comprehensive as is with
Mauritius.
 Both the treaties are applicable to residents of any one of the country.
 Amendment was made to both agreements recently in 2011 and 2016 with Australia and
Mauritius respectively.
 The amendments made to the Mauritius DTAA have made the agreement much more
lucid than it was. This will thereby boost the confidence in investment related decisions.

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  While most of the Indian DTAAs grant the right to grant tax capital gains to both the
countries including Australia, Mauritius is an exception.
 The fees for technical services are made available by way of royalty in Australia while
Mauritius doesn‟t have such clause. This is a concept mostly found in DTAAs of
developing countries like India. The fee is treated as passive income and is taxed on gross
basis.
 While the force of attraction rule was absent in Mauritius DTAA, it is eliminated by the
amendment made in DTAA with Australia.
 The exclusion of services in the nature of royalty has been eliminated from the India-
Australia DTAA through the amendment enlarging the scope of services that is
considered in Permanent Establishment test.
 Place of Effective management is not applied in DTAA with Australia whereas with
Mauritius it is applicable.
 Non-discrimination clause16was added to the DTAA with Australia in the recent
amendment. Article 24 of the India-Mauritius also DTAA talks about the non-
discrimination clause.

16
Article 24, DTAA between India & Australia

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CONCLUSION
Owing to its liberal business and economic atmosphere, Mauritius has always been the most
favourite place for investors in India. Adding to these factors, the potential capital gains tax
exemptions under the DTAA also helped in increasing the popularity of the country among
Indian investors. This situation led to stimulate the issues of double taxation, round tripping etc.,
the Government decided to amend the treaty. This amendment has been a progressive and much
awaited tax reform. It is expected that in two years a Mauritian resident entity cannot avoid
paying income tax on capital gains that arise in India. The Government included a new policy on
22nd February 2016 wherein all foreign companies will pay tax on what they earn in Australia.
Though many of the Australian companies seem to be keen to invest in India, in mining,
agricultural business, infrastructure and power etc., it is mainly due to the differences in the
income tax systems that there is a low scale and slow growth of the bilateral trade.17

Tax incidence is a significant factor that influence the decisions of non-residents regarding
investments. By offering protection to the tax payers against double taxation, the DTAAs
enhance free flow of international trade and investments. DTAAs also attract the non-residents
by including provisions for mutual exchange of information and mutual assistance for litigation
procedures. As the basic principle governing DTAA is sharing of revenues between two
countries if each country gets a reasonable share of tax revenues, the bilateral and multilateral
trade prospers and therefore the overall tax collection increases which would ultimately benefit
both the countries.

17
Sarma, Jana V.M., Indo-Australian Trade Links and the Income Tax Hurdles IIM Bangalore Research Paper No.
93. (February 27, 1997) https://ssrn.com/abstract=2170018 orhttp://dx.doi.org/10.2139/ssrn.2170018

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