THE WEST BENGAL NATIONAL UNIVERSITY OF JURIDICAL SCIENCES,

KOLKATA

LAW OF TAXATION

TOPIC:
DOUBLE TAXATION AVOIDANCE AGREEMENTS IN INDIA

Name: ANNAPURNA CHAKRABORTY

I. D. No: PG21226

DOUBLE TAXATION AVOIDANCE AGREEMENTS IN INDIA

ANNAPURNA CHAKRABORTY (P.G 21226)
CHAPTER 1

INTRODUCTION
The double taxation avoidance agreement is an agreement which helps the taxpayer to get
relief from double taxation on the same income. If India has signed any double taxation
agreement with any foreign country; it’s meant that the taxpayer of those countries does not
have to pay the tax on the same income in both the countries. So, double taxation avoidance
agreement is a useful tool which helps the taxpayer to avoid “double taxation”. In case of
claiming relief under double taxation avoidance agreement two important things are needed
to find out. These are:

Electronic copy available at: http://ssrn.com/abstract=2404797

 1. The country of residence.
2. The source country.
Here “the country of residence” means where the assessee resides and the source country is
any foreign country other than where he resides, but the asseesee earn some income from that
foreign state. In that case if the two countries does not sign any DTAA then the assess has to
pay tax in both the state i.e. the country of his residence as well as the source country, this is
why double taxation avoidance is so much important. In this project I will make a detail
study on double taxation avoidance agreement in India. I will divide this project into seven
chapters. In first chapter there will be introduction, research objective. In Second chapter I
will make a detail study on double taxation avoidance agreement wherein I will discuss the
meaning and the concept of double taxation and also the importance of double taxation
avoidance agreement. In third chapter there will be a detailed study on the history and
background of the double taxation avoidance agreement. In next chapter I will analyse those
provisions of income tax act, 1961, which are dealing with double taxation and will try to
find out whether it is conflict with double taxation avoidance agreement or not. In 5 th chapter
I will discuss jurisdictional issue regarding double taxation avoidance. In chapter six, I will
make a detail analysis on how double taxation avoidance agreement works in India. In
chapter seven I will discuss about the misuse of DTAA where I will analyse double non
taxation and treaty shopping. Finally last chapter will be consisted of conclusion and
suggestion part.

RESEARCH QUESTIONES:
 What is the necessity of double taxation avoidance agreement and how DTAA works
in India?
 What are the misuse of Double Taxation Avoidance Agreement?

CHAPTER 2

DOUBLE TAXATION AVOIDANCE AGREEMENT: AN ANALYSIS

In this chapter I will discuss the meaning and the concept of double taxation avoidance
agreement or “DTAA”. I will also analyze the effectiveness or importance of the DTAA.
Basically Double Taxation Avoidance Agreement is a “bilateral agreement” between two
countries to avoid “double taxation of same income”.
Hypothetical example:
If there is a double taxation avoidance agreement between India and other foreign country
then it restricts taxation of the same income in both countries.
India has double taxation avoidance agreement with 84 countries. It means a person does not
give tax of the same income in India or any of those countries.
DTAA is an essential tool to avoid double taxation of the same income in different countries.
The effectiveness of DTAA can be explained by using a hypothetical example:
Hypothetical example:

Electronic copy available at: http://ssrn.com/abstract=2404797

A person who lives in a foreign country and maintains an NRO account (non resident
ordinary account) in India; so the interest he gets from this NRO account is appearing as
“NRIs income originated in India”. If India and this foreign country where the person lives
are binding with a Double taxation avoidance agreement then this income will be taxed
according to the specified rate prescribed in the DTAA.
So the main purpose of the DTAA is to provide benefit to the assesses. 1 When two countries
entering into Double taxation avoidance agreement then the provisions which are laid down
in DTAA overrides the provisions of Tax Law of particular country. In India also the
provision of DTAA overrides the income tax provisions.2 According to section 90 (2) of the
income tax act , assessee can choose whether he will go with the DTAA provisions or with
the Income Tax act. Assessee can decide whichever is more beneficial3.
Article 265 of the Indian constitution stated that “no tax shall be levied or collected except by
authority of law”. To avoid any confusion The Income Tax Act, 1961 enacted clear provisions
to confer “the power of the central government to enter into agreements with foreign
countries for the avoidance of Double taxation as contained in Chapter 9 of the Income tax
Act.”4 Section 90 and section 91 of the income tax act, 1961, these two provisions deals with
double taxation.5 Section 90 and section 91 are very helpful provision in this regards which
save taxpayers from double taxation. Section 90 of the Income Tax Act, 1961 talking about
“those taxpayers who have paid the tax to a country with which India has signed DTAA” 6.
On the other hand section 91 is talking about “those taxpayers who have paid tax to a country
which does not have any double taxation avoidance agreement with India. That is how Indian
income tax act takes care of these two different types of taxpayers. When India enters into a
double taxation avoidance agreement with any foreign country, by such agreement they
mutually determined the tax rate7. It protects the interest of taxpayers.
CHAPTER 3
BACKGROUND AND HISTORY:

1NRI TAX SERVICES,available at http://www.nritaxservices.com/ (Last Visited on 29TH November, 2013)

2 id

3 id

4 INDIA’S DOUBLE TAXATION AVOIDANCE AGREEMENT, available at

http://www.incometaxindia.gov.in/publications/6_Advance_Rulings/Chapter07.asp (Last Visited on 29TH
November, 2013)

5INCOME TAX ACT,1961,available at http://www.intaxinfo.com/pdf/law_by_country/India/Income%20Tax

%20Act%201961%20%28en%29.pdf (Last Visited on 29TH November, 2013)

6 See The Income Act,1961 §90

7 SHARMENDRA CHAUDHRY, DOUBLE TAXATION AVOIDANCE AGREEMENTS, available at ,

http://dx.doi.org/10.2139/ssrn.2036494 (Last Visited on 29TH November, 2013)
In 1899 Prussia and Austro Hungarian Empire for the first time entered into the double
taxation avoidance agreement. In the 13th century first time the double taxation relating issue
was raised among France and Italy. The issue was “the property to be taxed was situated in
one state but the owner of the property was a resident of the state.” 8 The concept of providing
the relief from double taxation comes on the scene in 1939 when the income-tax (double
taxation relief) (Indian states) rules were framed.9
It was felt that the necessity to have a model agreement which can be a good reference in
framing double taxation avoidance agreement between two foreign states. That is how The
League of Nations introduced the first model bilateral convention in 1928 10. After that in
1943 the model convention of Mexico and in 1946 the London model convention was getting
introduced.11 Later in 1956 the council of the organization for European economic
cooperation established a fiscal committee to formulate a model convention. In 1963 for the
very first time the first draft “double taxation convention on income and capital was enacted.
Finally in 1977 OECD model convention and commentaries come into existence. In 1992
OECD published model convention12.
CHAPTER 4
DOUBLE TAXATION AVOIANCE AGREEMENT AND THE INCOME TAX ACT: A
STUDY
The main aim of double taxation avoidance agreement is to provide relief to the taxpayer
from double taxation. A country entered into a DTAA with a foreign state so that; by this
agreement it can prevent double taxation of same income in different country. In India,
section 90 and section 91 of the income tax act deals with the double taxation avoidance
agreement. Now in this chapter I will try to find out what happened when any of the
provisions of the Double taxation avoidance agreement clash with any section of the Income
tax act13 and which provisions should prevail over another?
Section 90 (2) of the Income Tax Act, 1961 explain that if India has a DTAA with any other
foreign country then it is the assessee who will decide that which provision is more beneficial
for them and that provision will apply accordingly. 14 In the famous case CIT vs.
VISAKHAPATNAM PORT TRUST15 first time “the rule under section 90 (2)” was
8 id

9 id

10 id

11 id

12 id

13 id

14 See The Income Act,1961 §90 (2)

15CIT vs. VISAKHAPATNAM PORT TRUST available at http://www.indiankanoon.org/doc/865397/ (Last

Visited on 29TH November, 2013)
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
assessee will apply on him then the question is whether an assessee can choose income tax
act for his one types of income and DTAA for another types of income?
HYPOTHETICAL EXAMPLE:
If MR. A has a certain amount of income which is derived from business and he wants to pay
tax on this particular income according to the provision of income tax law and also MR A has
to give tax for his another types of income i.e. capital gain. In this case if he chooses to
follow the provisions of DTAA.
Here the question comes is it possible? It can be argued that if we follow the language of the
section 90 (2) of income tax act then it should be allowed a person to go with income tax act
for a certain types of income and also can go with DTAA provision for another types of
income.
CHAPTER 5
DTAA AND JURISDICTIONAL ISSUE
The main jurisdictional issue regarding double taxation avoidance agreement comes when the
question arises that “who can tax the income”? It means it is essential first to find out which
country should tax a particular income. If one country has entered into a double taxation
avoidance agreement with another foreign country then the question is who will tax the
particular income:
1. The country from where the income comes.
2. The country where the taxpayer resides.
If it is provided in the DTAA that in case of immovable property; the country where the
property was located, has the right to tax. Here the question comes that the country where the
owner lives can also tax the same income. In such case the owner of the property shall have
to claim “credit in the country where he resides for the tax paid in the country where the
property is located”.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 other source state and having a
permanent established located therein.
The Madras high court in CIT vs. V.R.S.R.M Firm & Others18 and the Karnataka High Court
in the case CIT vs. R. M. Muthaiah19 in both these cases it was held that when it is stated that

16UNION OF INDIA vs. AZADI BACHAO ANDOLON ,available at

http://law.incometaxindia.gov.in/DitTaxmann/incometaxacts/2007itact/%5B2003%5D263ITR0706%28SC
%29.htm (Last Visited on 29TH November, 2013)

17 Chaudhry Sharmendra, Double Taxation Avoidance Agreements, available at,

http://dx.doi.org/10.2139/ssrn.2036494 (Last Visited on 29TH November, 2013)

18 208 ITR 400

19CIT vs. R. M. Muthaiah,available at, http://indiankanoon.org/doc/1675748/ (Last Visited on 29TH November,

2013)
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.

CHAPTER 6

DOUBLE TAXATION AVOIDANCE AGREEMENT IN INDIA: HOW ITS WORK:

AN ANALYSIS
In this chapter I will discuss how double taxation avoidance agreement works in the Indian
context. To save a taxpayer from being doubly taxed in respect of the same income, the
concept of double taxation avoidance agreement got introduced. If two countries have signed
in double taxation avoidance agreement both countries tax payers get benefit from it. India is
not an exception to it. Currently India has signed double taxation avoidance agreement with
87 countries.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
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.

20 See Supra note 17

21 Id

22 DTAA,available at http://businesstoday.intoday.in/story/how-treaties-with-foreign-countries-can-help-nris-
save-tax/1/194401.html (Last Visited on 29TH November, 2013)

23 id

24 id
Procedure for taxing different income under DTAA
SOURCE OF INCOME HOW IT IS TAXED

SALARY Most of the DTAA provides if a person lives

less than 183 days in India in a year can get
the exemption.
INCOME FROM BUSINESS According to most of the DTAA, business
/PROFESSION 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 In India in this case the tax rate is 25% but in
SERVICE case DTAA the tax rate will be applied at the
rate of 10-15%.
CAPITAL GAIN Most of the country does not provide any
relief regarding capital gain. But the
exception is there eg: double taxation
agreement with Mauritius, Singapore and
Cyprus. In case of capital gain generally the
country of residence grants credits for the tax
paid for capital gain in the “source country”
INCOME FROM IMMOVABLE In case of rent earn from immovable property
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
CHAPTER 7

DOUBLE NON TAXATION AND TREATY SHOPPING: THE MISUSE OF DOUBLE

TAXATION AVOIDANCE AGREEMENT: AN ANALYSIS
In this chapter I will analyse the negative effect of double taxation avoidance agreement.
DTAA can be misuse by two ways, these are:
 Double Non Taxation
 Treaty Shopping

Double Non Taxation

Firstly I would like to discuss about the double non taxation. In case double non taxation a
specific income is not taxed in the source country, because of “an incentive”, “exemption” or
“prevailing” in that country.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
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

25 DTAA, available at http://businesstoday.intoday.in/story/how-treaties-with-foreign-countries-can-help-nris-

save-tax/1/194401.html (Last Visited on 29TH November, 2013)

26 See Supra note 17

27 Id

28 Id
In the famous case CTI v. Laxmi Textile Exporters Ltd 29, 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 an another provision about it.
Parliament has a duty to take care of it in this regard; and if there is no specific provision and
limitation mentioning DTAA; then “no one can be denied benefit of the favourable tax
provision in the belief that treaty shopping is prohibited.”
Example: In the Indo-US DTAA Art 24 deals with treaty shopping.

CONCLUSSION:
So from the above study it can be said Double Taxation Avoidance Agreement is very much
helpful for avoiding double taxation not only that double taxation avoidance agreement can
over ride the Income Tax act; if it is beneficial for the assessee. But it should not be used in
wrong manners like to promote double non taxation or to unnecessarily or illegally reduce
the tax liability or treaty shopping. It is essential that the Double Taxation Avoidance
Agreements should have a clear provision which prevent DTAA from misuse (example:
provision for anti treaty shopping etc).
So to conclude it can be said the Double taxation avoidance agreement should be used for
good purpose like for the beneficial of the assessee or to prevent a person from being taxed
twice for the same income it should not be misused.

29 (2000) 245 ITR 521 (Mad)

30 Id

31 263 ITR 706 at pages 746 - 753

 BIBLIOGRAPHY
BOOKS

 GIRISH AHUJA & RAVI GUPTA, PRACTICAL APPROACH TO INCOME TAX

(2009)
 D.P MITTAL, TAXMAN’S INDIAN DOUBLE TAXATION AGREEMENTS &
TAX LAWS (2004)

ARTICLES
 SHARMENDRA CHAUDHRY, DOUBLE TAXATION AVOIDANCE
AGREEMENTS, available at , http://dx.doi.org/10.2139/ssrn.2036494 (Last Visited
on 29TH November, 2013)
 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 29TH
November, 2013)

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

countries-can-help-nris-save-tax/1/194401.html (Last Visited on 29TH November,
2013)
 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 on
29TH November, 2013)

WEB SITES

 http://www.oecd.org/dataoecd/52/34/1914467.pdf
 http://www.unclefed.com/ForTaxProfs/Treaties/india.pdf