TERM PAPER

ON

DOUBLE TAXATION
Submitted to

Dr. R.Anita Rao

Submitted by
Suchanda Som Roll no. 1226109149 Section- A MBA IB (2009-11)

Objective of the Study:
• To have a better understanding of the concept of double taxation and what kind of relief government is providing and how double taxation can be avoided. • To learn its practical implementation through case studies and illustrations.

relief is given on lowest rate. When two rates are different in the concerned countries. S90 speaks about agreements with foreign countries for tax relief.e. In former tax has already been paid where in later assessee will legally avoid payment of tax. the same income earned by the person should not be taxed twice.EXECUTIVE SUMMARY Double taxation avoidance is based on a simple principle that a country should tax a person once i. Another provision that is given is assessee have an option of choosing to be governed either by the provisions of particular DTAA or the provisions of the Income Tax Act. Double taxation relief and avoidance also is different. whichever are more beneficial. And S91 deals with double taxation relief where there is no pre-existing contract. There are certain conditions regarding residential status and taxable income that needed to be fulfilled before claim is made for relief. it covers many types of taxes and income. . And when rate in both the country are equal Indian rate will be applicable. The language of the DTAA is interpreted differently by different countries so carefully observations are required before coming to a conclusion. they are Section 90 and Section 91. In order to protect and promote international trade by protect the person from double taxation India has entered into Double taxation avoidance treaties with many countries. Through cases and illustrations a better understanding is obtained about the applicability of the law and how the individuals are avoiding the double tax levied on them.e. The reach of DTAA is very wide i. There are different methods to evaluate double taxation relief and avoidance. There are two sections in Income Tax Act 1961 which specifically deal with this issue.

Tax relief to foreign investors from double taxation is not the only purpose of DTTs. 1998a). indications of a restrictive trend on the part of capital-exporting countries (OECD. then revenues of 100 USD in the source country stand vis-à-vis expenses of only 80 USD in the recipient country (Lang 2002). however.REVIEW OF LITRETURE According to Rivier (1983) and Arnold and McIntyre (1995) double taxation can be defined. however. in a non-exhaustive way. (2006: 902): “One of the most visible obstacles to cross border investment is the double taxation of foreign-earned income. Until recently. . as the imposition of comparable taxes by two or more sovereign countries on the same item of income of the same taxable person for the same taxable period. different methods for the determination of the internal transfer price applied in two states can lead to a double taxation. In the words of Egger et al. Another important purpose is the exchange of information. 1997).. e. MFN concept can not be well applicable in context of double taxation relief because countries would be reluctant to agree to reciprocal concessions. many developed countries accepted the granting of tax-sparing credits.” One major purpose of Double Taxation Treaties (DTTs) is thus the encouragement of FDI. There are. Recently many developing countries consider tax sparing as an integral part of the elimination of the double taxation process. but country A ascertains a value of 100 USD. DTTs help to combat tax evasion and tax avoidance and to prevent double non-taxation by making information from one contracting state available to the other contract partner. Also. a company has a production facility in two countries and delivers intermediate goods from the plant in country A to the factory in country B. An MFN approach to double taxation could create difficulties for the symmetry of tax treaties (Hughes. Double taxation is generally defined as the imposition of comparable taxes in at least two countries on the same taxpayer with respect to the same subject matter and for identical periods (OECD 2005) Another potential source of twofold taxation could be the fact that both countries claim either a certain taxpayer as a resident or that an income arises within its country (Doernberg 2004). If domestic rules in B set a value of 80 USD as appropriate.g.

lowering corporate tax. the Central government under Section 90 of the Income Tax Act has entered into Double Tax Avoidance Agreements with other countries. comprising the Union Government. Objective of Government behind this step is 1. Protection against double taxation: These Tax Treaties serve the purpose of providing protection preventing any to tax-payers against double taxation taxation and thus may discouragement which the double otherwise promote in the free flow of international trade. To avoid hardship to individuals and also with a view to ensure that national economic growth does not suffer. . the State Governments and the Urban/Rural Local Bodies. citizens. Since 1991 tax system in India has under gone a radical change. 2. Mutual exchange of information: In addition. 3. The power to levy taxes and duties is distributed among the three tiers of Governments. Legal and fiscal certainty: They provide a reasonable element of legal and fiscal certainty within a legal framework. such treaties contain provisions for mutual exchange of information and for reducing litigation by providing for mutual assistance procedure. and 4.INTRODUCTION India has a well-developed tax structure with a three-tier federal structure. The growth in international trade and commerce and increasing interaction among nations. international investment and international transfer of technology. in accordance with the provisions of the Indian Constitution. Prevention of discrimination at international context: These treaties aim at preventing discrimination between the taxpayers in the international field and providing a reasonable element of legal and fiscal certainty within a legal framework. residents and businesses of one country has extended their sphere of activity and business operations to other countries. in line with liberal economic policy and WTO commitments of the country like reduction in custom and excise duties. widening of the tax base and toning up the tax-administration.

Mr. On the same income. Double taxation may arise when the jurisdictional connections. Suppose Mr. corporate profit is taxed and then dividend is also taxed. For ex. As such. an NRI will end up paying Income-tax twice on the same income. tax will have to be paid in the country of residence on residence basis. . Or a firm is taxed. The two connecting factors (residence and source) lead to taxation of same income in same person’s hands by two jurisdictions – Country of Residence as well as Country of Source. Tax Treaties provide protection to tax payers against such double taxation. X gets income from U. Juridical double taxation means an income is taxed in one person’s hands – but in two different jurisdictions (countries). For ex. For e. an ordinary resident under the Indian Income tax Act.DOUBLE TAXATION Double taxation can be defined as the levy of taxes on income or capital in the hands of the same tax payer in more than one country. Economic double taxation means the same income is taxed twice in two persons’ hands. has to pay tax in his world income as citizen in USA (Residential jurisdiction) Case 2: The taxpayer or his income may have connections with more than one country. and subsequently the partners’ share may also be taxed. overlap or it may arise when the taxpayer has connections with more than one country. e. “X” has to pay tax on his world income in India. X. Case 1: The jurisdictional connections used by different countries may overlap with each other.g. used by different countries. A DTAA seeks to eliminate juridical double taxation. An NRI will have to pay tax on the income earned in India on source basis i. International double taxation may arise in two ways. in respect of the same income or capital for the same period.e. Two basic kinds of double taxation are economic double taxation and juridical double taxation. Economic double taxation is not eliminated by a DTAA. and also tax on income earned in each country mentioned above Kinds of Double Taxation: Double taxation occurs due to various reasons. where income accrues or arises.g. 1961.K and dividend income from France.

Methods of DTAA DTAA can be of two types. i.g. One important feature in this distinction is that in case of avoidance of double taxation the assessee does not have to pay the tax first and then apply relief in the form of refund. ii. The Supreme Court of India has clearly pointed out the distinction between avoidance of double taxation and relief against double taxation. Double tax relief Vs. too. as he would be obliged to do under a provision for relief against double taxation. Many a time a treaty covers wealth tax. Etc. gift tax. Where as Double tax avoidance means avoidance of double taxation of income under the tax laws of the two countries.Conditions for applicability of Double Taxation: Double taxation may also occur due to the fact that a person may be a resident of both countries. Comprehensive . e. Limited . Double tax avoidance Double tax relief means granting of relief in respect of income on which income tax has been paid under the Indian tax laws and also in the other country. A DTAA allocates residence to one country with tiebreaking rules.Comprehensive DTAAs are those which cover almost all types of incomes covered by any model convention. The DTAA does not eliminate this kind of double taxation. surtax. Double taxation may also occur due to the fact that source is in both countries (and the person is a non-resident of both countries).Limited DTAAs are those which are limited to certain types of incomes only. DTAA between India and Pakistan is limited to shipping and aircraft profits only .

Where the foreign tax exceeds the tax payable in India. However. For example . Where the foreign tax paid is less than the Indian tax after deducting the foreign tax would be payable by the taxpayer. India. the treaty may provide relief from double taxation by reducing the tax ordinarily due in one or both of the contracting parties on that income which is subject to double taxation. which is the source of a dividend. and Japan to name a few. Where the foreign tax is equal to Indian tax. Firstly. For ex. a. The countries. For example. which follow this method of tax credit. the treaty may apply exempting method. the country. The principle is that the credit allowable will never exceed the amount of Indian income tax. which becomes due or payable in respect of the doubly taxed income. b.A resident in India who has paid income tax in any country with which India does not have a treaty for the relief or avoidance of double taxation is entitled to credit against his Indian Income tax for an amount equal to the Indian coverage rate or the foreign rate whichever is lower applied to the double taxed income. and c. the full amount of foreign tax will be given credit. Alternatively. Bilateral relief: Bilateral relief may take any one of the following two forms. This is done as follows. Greece. under this exemption method. are U. often agrees to reduce the withholding rate normally applicable to dividends paid to non-residents and the country of residence agrees to give a tax credit or similar relief for the tax paid to the . the liability to Indian tax will be nil. In Unitary system.Method of double taxation relief – Unilateral relief: Under this system of taxation whether the income is subject to tax abroad or not is immaterial.S. the country in question refrain from exercising jurisdiction to tax a particular income. the country of source in which the Permanent Establishment (PE) is located is assigned an exclusive jurisdiction to tax the profits of the establishment. no refund in respect of the excess amount is allowed. relief is given by way of tax credit for the taxes paid abroad. In turn it may agree to refrain from exercising its jurisdiction to tax the owner on these profits.

Many treaties combine both the methods of relief DOUBLE TAXATION AVOIDANCE AGREEMENT: A person earning any income has to pay tax in the country in which the income is earned (Source Country) as well as in the country in which the person is resident. whichever are more favourable to an individual would apply. Affected parties are tax payers of those two countries Position in India: A typical DTAA Agreement between India and another country usually covers persons. Its interpretation is based on the principles of interpretation of international law (Vienna Convention) as well as interpretations according to the courts. Total exemption is not granted in the DTAAs and the income is taxed in both countries. the country in which the person is resident and is paying taxed. One of the most important clauses of double taxation avoidance treaty between different nations is the clause of non-discrimination. These treaties are based on the general . Provisions of DTAA or Indian Income-tax Act. According to which neither of the contracting countries gives any preferential treatment in taxing its own residents or citizens vis-à-vis foreign persons. As such. these are contracts between two Governments. while mutually agreeing for adjustments. A person. A DTAA is an International agreement. This helps in avoiding or at least reducing the international double taxation on the income in question. which has entered into the agreement with India. who is not resident either of India or of the other contracting country. both the countries exercise the rights to jurisdiction. To avoid this hardship of double taxation. Thus In order to avail the benefits of DTAA. who are residents of India or the other contracting country. India has entered into DTAA with around 79 countries. the said income is liable to tax in both the countries.country of source. Essentially. would not be entitled to benefits under DTA Agreements. the credit for the tax paid by that person in the other country is allowed. Government of India has entered into Double Taxation Avoidance Agreements with various countries. an NRI should be resident of one country and be paying taxes in that country of residence. In such a case.

Sec90A says that any income of a resident of India "may be taxed" in the other country. Recovery of tax The two important sections are explained below: Section 90 According to this section Government enters into agreement with some countries for granting relief of tax or avoidance of double taxation. . Both apply the DTA but the understanding of “employment” is different in both countries. According to some country meaning of employment is a consultant is engaged by a foreign company to work in India.principles laid down in the model draft of the Organisation for Economic Cooperation and Development (OECD) with suitable modifications as agreed to by the other contracting countries. As the services are exercised in India. the income is considered to be taxable in India. and relief shall be granted in accordance with the method for elimination or avoidance of double taxation provided in such agreement. such income shall be included in his total income chargeable to tax in India in accordance with the provisions of the Income-tax Act 1961. Exchange of information d. This for example can be seen through different way of interpreting employment.Relief if there is no DTAA According to Sec 91 of the Indian Income tax Act. there have been interesting twists to the DTA interpretation. Section. 1961 provides unilateral relief under sec 91 and bilateral relief under section 90(A). India considers the consultancy contract as employment due to the terms of the contract. Double tax relief b. the following is the relief available if there is no agreement u/s 90 between India and the country in which the income accrues. In India. U/s 90(A) government signs treaties with different countries for following purpose – a. The Income tax Act. Double tax avoidance c.91. The foreign country considers the income as professional income and does not consider it to be taxable in India as there is no fixed base in India.

Rs 50. in any country in respect of his income which accrued or arose outside India. 91 for the assessment year 2009-2010. which ever is lower. India does not have any agreement with that country for avoidance of double taxation.000 and we want to find the relief available to him under Sec. the Indian rate shall apply. Through an illustration I would be explaining how this section is appliedSuppose A is a musician deriving income from foreign concerts performed outside India. relief is allowed at the average rate of Indian income tax which is lower among the two. which later . Origin: The League of Nations first commenced work in this behalf in 1921 and produced in 1928 the first Model Bilateral Convention.If any person resident in India in any previous year establishes that he has paid income tax by deduction or otherwise. Assuming that Indian income of A is Rs.2. Where the tax rates are equal. he shall be entitled to the deduction from the Indian income tax payable by him such a sum calculated on such doubly taxed income at the Indian rate of tax or at the rate of tax of the said country. Thus for the musician.9% and average rate of foreign income tax is 20%. 00. Average rate of Indian income tax is say 9.000. These were followed by the Model Convention of Mexico (1943) and the London Model Convention (1946). The Council of the Organisation for European Economic Co-operation. Tax of Rs 10.000 was deducted at source in the country where the concerts were given.

local authority. This model advocates residence principle. OECD published the 1992 Model Convention in a loose leaf format to facilitate updating. The OECD and UN Models are only “models”. Its origin lies in a resolution passed by the Economic and Social Council of the U. which lays emphasis on the right of state of residence to tax. or any political . The first draft Double Taxation Convention on income and capital was framed in 1963.This Model is essentially a model treaty between two developed nations. UN Model.became the Organisation for Economic Co-operation and Development (OECD) set up a fiscal committee in 1956 to formulate a Model Convention.N. Taxes covered by a DTAA: A DTAA covers all direct taxes on income and capital. OECD Model(Organization of Economic Co-operation and Development). Models on DTAA: Two models relied on most frequently for understanding of DTAA is the OECD Model and the UN Model. The actual DTAA are different and based on negotiations between the two countries and situations existing in the respective countries. In addition to the OECD Model. On the basis of the recommendation of the Committee on Fiscal Affairs. in August 1967 and was published in 1980 in the form of Model Double Taxation Convention between developed and developing countries. This ultimately gave birth to the 1977 OECD Model Convention and Commentaries. Taxes could be levied by any authority – Central Government.United Nations Model Double Taxation Convention between Developed and Developing Countries. The UN Model is generally considered to be more favourable from the point of view of the developing countries as it places greater emphasis on the right of the source state to tax a transaction having international ramifications. State government. there is the UN Model Convention. The UN Model gives more weight to the source principle as against the residence principle of the OECD mode However reality is different. Indian treaties are mainly based on UN model. The present Model Convention and Commentaries are updated as of January 2003.

In this case. The name of the law is not relevant. 333 dated 2. Some DTAAs list down the specific Acts to which the DTAA will apply. applies.division.S. In U. Hence the DTA has a wide coverage. it can be taxed. Hence any subsequent amendment in the domestic law. If any one exempts the income. provides for a tax of 15% on Royalty.1982. India – U. whichever is more beneficial to assessee. there cannot be any tax. Normally. and Various case laws.S.A a DTA becomes a part of domestic law. 1961. can override the DTA. To illustrate by way of a chart. the rate as per the DTA will apply.. It does not apply to state taxes.S. In such a case. Thus for example. DTAA refers to excise tax imposed on insurance premium paid to foreign insurance company. this is not considered appropriate under the International Treaty Conventions. In case of U. It is the nature of levy which is important.S. As per Income-tax Act. the rate as per Income-tax Act shall apply. Interest is taxable @ 15% as per the DTA. it is accepted that a DTAA or Income-tax Act. This situation however does not prevail in all countries. the DTA between India and U. Therefore credit for state taxes cannot be claimed as per the DTAA. Different countries levy income-tax in different manners. The rate u/s. 115A is 10%. CBDT circular No. the DTAAs apply only to Federal taxes.A. the rate is 20% u/s.4. This principle is stated in: Section 90(2) of Income-tax Act. . 115A.A. if the income falls in the common area (shaded area). DTAA v Income-tax Act: In India.

Under Singapore tax law. For exampleA person is considered as a resident of Singapore if he stays in Singapore for 182 days or more in a calendar year. In India. Thus for a period of 1st January. It provides that the person can be individual. he cannot get the benefit of India-Singapore DTA. But sometime it varies depending on the country. A person was employed in Singapore with a multinational company. a company and any other body of persons. From 1st January.This operation of DTA and IT Act that “income is taxable if it is taxable under both – DTA and IT Act”. the residential status is for a financial year. For this period. If a person is not a resident of any country. leads to the observation that “DTA or IT Act whichever is more beneficial applies”.Y.Under the Indian Income-tax act. 2007. From 1st January. . He had visited India for very short visits during 2006. 2007. he is not entitled to a DTAA relief. he is a non-resident of both countries. he is a non-resident of Singapore for calendar year 2007. Taxability and Residential status for DTAA: A person has been defined in article 3(1) (a) of the OECD and UN Model. 2006-07. 2007 he has been deputed to work in the Indian group company. he is a non-resident for F. He was a resident of Singapore upto 2006. Also the person has to be a resident of one or both countries to avail of DTAA relief. he does not go back to Singapore. 2007 to 31st March.

.Interpretation of the meaning of “may” and “shall” under the DTAA: Under the Indian principles of interpretation of law. and India cannot tax it. CASE Dy. This means Germany “may” tax dividends or “may not” tax dividends (as per its law). shall tax the income. It was held that if an Indian company has a PE outside India. the article on dividend states that “Dividend paid by a company which is a resident of a Contracting State (India) to a resident of the other Contracting State (Germany) may be taxed in that other state (Germany)”. it means “it shall be .. however. But in the below mention case we can see decisions are made which are contrary to this principle.29. India being the country of residence always has the right to tax. It is thus advisable that under the DTAA.660/. a company incorporated under the laws of India.K.K. Torqouise Investment & Finance Ltd 300 ITR 1 (SC) Case Facts: The assessee.K. then the income attributable to the PE is not taxable in India. This only means U. CIT v..”. Malaysia. the phrase used should be “shall be taxable only in … “. U. For example. The Assessing Officer. It doesn’t mean U. claimed refund of Rs..16. Thus if the law uses the phrase – “it may be . “. rejected the claim of the assessee on the ground that the assessee was a tax resident of India and taxable on its global income in India. This claim was based on the ground that such dividends were not taxable in India by virtue of the Indo-Malaysian DTAA as it stood at the relevant time. Similarly if an Indian company has a Permanent Establishment in U. It does not mean dividends “shall” be taxed in Germany. if the income has to be taxed in one country only. may tax the income attributable to the PE.being deemed credit of taxes on dividend received from a Malaysian company – Pan Century Edible Oils.. However this interpretation does not hold in case of DTAA.K. may tax or may not tax the income. “may” can be considered as “shall”. .

the Tribunal confirmed the order of the CIT. The phrase “may be taxed” interpreted as “shall be taxed” by Indian law. but the assessee was entitled to relief under the Indo-Malaysian Treaty. Analysis: In CIT v. The High Court held that. too. The agreement between India and Malaysia on DTAA was held supreme and the appeal was rejected citing the assessee was an Indian and he had paid taxes in Malaysia. . no doubt. India may or may not tax the person it is not like that India has to tax that person. confirmed the order of the CIT and the Tribunal but on different grounds. Judgement: The CIT allowed the claim of the assessee relying upon the provisions of the Indo-Malaysian Treaty. the dividend income from shares held in Malaysia by the assessee was taxable under section 5(1)(c) of the Act. dividends were taxable only in the country of residence of the company from whose shares such dividends arose. Article 7(3) provides that in computing profits of the PE. This case has same issue as main case. The High Court further held that in terms of Article 10 of the Indo-Malaysian Treaty. The CIT in India filed a case that the income is taxable in India. all expenses including executive and general administrative expenses will be allowed as deductions.Issue: Whether dividend income received by the assessee from shares held in a Malaysian company were liable to tax in India in view of Article 10 of the Indo-Malaysian Treaty was the main issued that need to be addressed by court. On further appeal. The High Court. Interpretation of ‘Business Profits’: Article 7 provides for business profits taxation. PVAL Kulandagan Chettiar the assessee was an Indian resident who had gained income from rubber plantations in Malaysia.

Arif has no permanent establishment of business in India. Issue: Issue is whether the business income of Arif arising in Malaysia and the capital gains in respect of sale of the property situated in Malaysia can be taxed in India.Many Indian DTAAs contain a provision that expenses will be allowed “subject to the limitations of taxation laws of India”. . the provisions of the Income-tax Act. without the restriction. expenses can be fully allowed. 1961 are applicable in such case to the extent they are more beneficial to the assessed. However. This has been interpreted by courts that disallowance of expenses is permitted due to the restriction contained in article 7(3). he has derived rental income of Rs 6 lakh from property let out in India and he has a house in Lucknow where he stays during his visit to India. He has earned income of Rs 50 lakh from rubber estates in Malaysia during the financial year 2009-2010. He also sold some property in Malaysia resulting in short-term capital gain of Rs 10 lakh during the year. Thus even without any specific restriction on allow ability of expenses. owns immoveable properties (including residential house) at Malaysia and India. it was always understood that expenses are allowable only as per domestic law. However. According to latest published report of OECD on “Attribution of Profits” expenses to be allowed to the PE will be always as per domestic law. a resident both in India and Malaysia in previous year 2009-2010. Assessment of situation in which assessee is resident in both the countries: Take for exampleArif. Analysis: Where the Central Government has entered into an agreement with the government of any other country for granting relief to tax or for avoidance of double taxation.

he is deemed to be resident of that country in which he has a permanent home and if he has a permanent home in both the countries. - Arif owns rubber estates in Malaysia from which he derives business income. . - The Double Taxation Avoidance Agreement (DTAA) with Malaysia provides that where an individual is a resident of both countries. he has no permanent establishment of business in India. Therefore. a PE includes the following: • • • • A place of management. which has not been defined in the Incometax Act. Thus.- Arif has a residential house both in Malaysia and India. A branch. Therefore.e. i. a PE takes the form of a facility. all of which require a measure of permanence. Judgement: Thus Arif is not liable to income tax in India for assessment year 2009-2010 in respect of business income and capital gains arising in Malaysia. A factory Thus. a construction site or an agency relationship. he is deemed to be resident of that country. Arif has no permanent establishment of his business in India. Interpretation of Permanent Establishment: One important term that occurs in all the Double Taxation Avoidance Agreements is the term 'Permanent Establishment' (PE). he has a permanent home in both the countries. which is the centre of his vital interests. he is deemed to be resident of Malaysia for AY 2009-2010. his personal and economic relations with Malaysia are closer. However. An office. There is a consensus that the host country can tax income of foreign companies only if it maintains a PE. However. the country with which he has closer personal and economic relations. Normally. since Malaysia is the place where—(a) the property is located and (b) the permanent establishment (PE) has been set-up.

The DTAA may have provisions to prevent treaty abuse. . Another issue is the scope of income earned by a PE in a country. computed on the basis of a hypothesis that the establishment in a country is completely independent of the head office in another country. There must be a continuity of transactions so as to establish a business connection.e. or for purposes for which it is not meant. For example Dividends. it can be considered as abuse of treaty. invests in India through a Mauritian company to take advantage of India-Mauritius DTA. A business connection is deemed to exist if there is any continuous relationship between a business carried on in India and. Indo-Mauritius DTA agreement came into effect from 6th Dec 1983.K.. As per the agreement corporate entity if resident in Mauritius has the choice to pay income tax in Mauritius at Mauritius tax rates even if the taxable income accrues in India. For example if a company in U. Under the 'Attribution Rule'. incorporated in Mauritius can repatriate dividend income received from an Indian Joint venture subsidiary with option to pay tax in Mauritius at Mauritius rates of income tax instead of the very high corporate rate of income tax for foreign corporations in India. Under the Mauritius Offshore Act a corporation known as the MOBA entity has the privilege to pay income tax on dividend income (from India) repatriated into Mauritius on a voluntary basis in the sense of paying at a rate choosing from 0 percent to 35 percent. a non-resident person who derives income through this connection.There is difference between business connection and PE. i. A foreign corporation. Normally. the time period to constitute a PE in the host country is six months. what is the portion of the income of PE earned in India that can be taxed. Treaty Abuse: Treaty abuse means a treaty is used by people for whom it is not meant. India can only impose a law withholding tax of 5 percent of 15 percent on the dividend income paid by the Indian Subsidiary to the foreign corporation. Royalty and Fees for Technical Services may be taxed at lower rates only if the recipient is the “beneficial owner”. only those profits are taxable which are attributable to the PE. The most important treaty shopping in which the Indian Government is losing considerable revenue is in the Mauritius route. Abuse of treaty is also known as treaty-shopping. The following illustration will reveal how fiscal advantage of the Mauritius route will be availed by the MNC’s.. Interest.

Analysis: Since the first issue was regarding PE. Morgan Stanley & Co Inc This case is under the context of Indo-US DTAA. One wholly owned Indian subsidiary Morgan Stanley Services Pvt. would also send people to work under the control of MSAS for a specified period (deputationists). Because support services comprise back office operations and do not amount to carrying on business of foreign company. which agreed to provide a number of services to this assessee at cost plus certain mark-up. The case facts are written below – Case Facts: Assessee. a resident of USA was an investment bank providing financial services. Ltd. While the costs of the personnel performing stewardship activities would be borne by MSCo. Back office operations were preparatory or auxiliary and get excluded by operation of article 5(3)(e).CASES 1.Whether any permanent establishment of foreign country came into existence. DIT v. . ('MSAS'). Issues before the court of law: . and back office. at the request of MSAS.Attribution of profit to such permanent establishment. MSCo. Indian Company was providing support services such as business research. the salary cost for the deputationists would be initially disbursed by MSCo and subsequently re-charged to MSAS. IT support. It was also agreed that MSCo would send people to India for stewardship activities to ensure quality standards as set by MSCo were met. accounting. . The observations wereThere is no fixed place PE under article 5(1).

assets. Deputation of personnel by the foreign company to . Service Rule PE u/s Article 5(2) (l) of the DTAA applies in cases where the MNE provides services within India and those services are provided through its employees. in each case the data placed by the taxpayer has to be examined as to whether the transfer pricing analysis placed by the taxpayer is exhaustive of attribution of profits and that would depend on the functional and factual analysis to be undertaken in each case. Also the taxable entity is the foreign entity and not PE. The SC states that where the activities of the MNE entails it to be responsible for the work of deputationists and the employees continue to be on the payroll of the MNE or they continue to have their lien on their jobs with the MNE. - Also there is no service PE on account of Stewardship services. etc. Therefore. Service PE comes into existence in view of employees deputed to Indian company. costs. Only those profits of FC that have economic nexus with Indian PE can be taxed in India The method for transfer price calculation is Transactional Net Margin Method (TNMM) is the most appropriate method in the case of Service PE as TNMM apportions the total operating profit arising from the transaction on the basis of sales.- There is no agency PE since they have no authority to conclude contracts only implementation of part of contract by way of back office functions. a service PE can emerge Regarding attribution of income the SC has observed that income attribution to a PE should take into account all the risk-taking functions of the enterprise and if the transfer price does not adequately reflect the functions performed and the risks assumed by the enterprise. Activities for protecting foreign company’s own interest cannot be said to constitute services rendered to Indian company. there would be a need to attribute profits to the PE for those functions/risks that have not been considered. Judgement: Thus it was held that back office operations do not constitute a PE of the foreign company in India under the fixed place of business rule or basic rule PE.

Part of the profits from designing and fabrication arising . Case Facts: non-resident assessee a foreign company entered into a contract with an Indian customer. Thus. CIT v Hyundai Heavy Industries Co Ltd This case is in context of Indo-South Korea DTAA. Contract was in respect of a turnkey project and was not divisible.the Indian company to provide services (other than stewardship activities) would trigger a PE of foreign company in India (under the Service PE Rule). which comprised of two parts: (i) Designing and fabrication of a platform (ii) Installation and commissioning of the said platform at Bombay high The consideration for both the parts was separate although the agreement was single. . Second issue was profits attributable to tax in India regarding that it was held under the AAR rule that as long as MSAS being the PE was remunerated for its services on an arm’s length basis taking into account all the risk-taking functions of the multinational enterprise. the SC has upheld the AAR’s ruling on this aspect . So he can not be taxed further. 2.MSCo is rendering services through its employees to MSAS and this practically the same as to a Service PE. It is held that the employee lends his experience to MSAS in India as an employee of MSCo as he retains his lien and in that sense there is a service PE (MSAS) under Article 5(2) (l). Issue: Dispute was over revenue. no further income was attributable in the hands of MSAS in India.

PE to be treated as independent of FC. Sale of platform was outside India.in respect of the Korean operations were taxable in India. Director of Income Tax. Indian Income Tax act is concerned only with profits earned in India. Mumbai This case gave a new dimension on turnkey contracts. So no tax on such profit in India. as it had nexus with activities of installation in India. Only income relating to installation and commissioning was taxable on arms length basis. Petro net LNG Ltd for setting up liquefied natural gas receiving and degasification facility in Gujarat. Thus entire profit from business connection not taxable. Ishikawajma Harima Heavy Industries Limited vs. . Profits from supply could not be attributed to the installation PE There was no allegation that the sale price of the platform included any remuneration for services rendered by PE so no taxability in India as payment on arm’s length basis. The above would be valid even if supplies were an integral part of installation 3. PE came into existence after the supply of fabricated platforms. Only profit having economic nexus with PE taxable. It formed a consortium with four others companies in Japan and entered into an agreement with an Indian firm. Analysis and Judgement: Income relating to designing and fabrication was not taxable in India. Case Facts: The company was incorporated in Japan.

As per the Double Taxation Avoidance Agreement between India and Japan. when the PE is not actually connected with the offshore supplies The government. The supply of goods. that the breach of the offshore element would result in the breach of the whole contract. contended that the contract was a composite one. The contract involved offshore supply. whereas that of onshore supply. construction and erection partly in dollars and partly in rupees. . Issues: The dispute arose whether the amounts received by the Japanese corporation from Petro net for offshore supply of equipment and materials were liable to tax under the Indian Income Tax Act and the India-Japan double taxation avoidance treaty. The dominant object of the contract is the execution of a turnkey project. onshore supply. on the other hand. and performance of service were attributable to the turnkey project. even under the treaty. business income may be taxed in India only when the non-resident has a permanent establishment in India and only to the extent that such incomes could be directly or indirectly attributable to the activities of the PE in India. offshore services. - The price was payable for offshore supply and services in US dollars. The appellant contended that the contract is a divisible one and that there can be no tax liability in India for the offshore supply of equipment and services. whether offshore or onshore. Therefore the appellant contended that its PE had nothing to do with the offshore supply of materials and services and that the mere presence of the PE cannot attract tax liability in India. It contended that the offshore and onshore elements of the contract are so inextricably linked. onshore services. The Authority for Advance Rulings (Income Tax) ruled that the Japanese firm was liable to pay direct tax. construction and erection.- Each member of the consortium was to receive separate payments.

the transaction could not have been taxed in India for the mere reason that the appellant has a PE in India. the transaction cannot be taxed in India. Judgement: The Supreme Court held that merely because the contract has been designed as turnkey. it would not mean that the entire contract must be considered as an integrated one for the purpose of taxation as well. the application of the double taxation treaty would not arise. the activities in connection with the offshore supply were outside the country and therefore cannot be deemed to accrue or arise in this country. . The entire transaction having been completed on the high seas. Even though the contract was signed in India.Analysis: Only such part of the income as attributable to the operations carried out in this country can be taxed here. the profits on sale did not arise in India. If all parts of the transfer of goods as well as the payment are carried on outside the country. While the Japanese firm got relief in the case. Since all parts of the transaction like the transfer of property in goods and receipt of payment were outside India. Operations like fabrication carried out in Korea are not taxable in India. Thus it is excluded from the scope of taxation under the Act. The Supreme Court ultimately held that the tribunal was wrong and set aside its order. A PE cannot be equated to business connection under Section 9(1) (i) of the Act and the existence of PE would not constitute sufficient business connection.

in 3. www. TAXATION: UNCTAD series on issue in International investment agreement (2000) . Direct Taxes Code : Department of Revenue (August 2009) 5.incometaxindia. law. “Principles of Interpretation of issues in Double Taxation Avoidance Treaties” : Sohrab Erach Dastur. IMPORTANT CONCEPTS OF INTERNATIONAL TAXATION AND PRINCIPLES OF TAX TREATY INTERPRETATION :NARESH AJWANI(2007) 4.REFERENCES 1.itatonline.org 6. Senior Advocate 2.gov.

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