DOUBLE TAXATION AVOIDANCE

AGREEMENTS IN INDIA
SUBMITTED TO:
Ms. Apoorvi Shrivastava
(FACULTY, CORPORATE TAXATION)

SUBMITTED BY:
Surabhi Maheshwari
SECTION VIII/B
ROLL. 160

HIDAYATULLAH NATIONAL LAW UNIVERSITY

RAIPUR, CHHATTISGARH

ACKNOWLEDGEMENTS
I would like to express my heartfelt gratitude to the faculty advisor for the project
Ms. Apoorvi Shrivastava for allowing me to work on this topic and for her support and
encouragement throughout the project.
I would also like to thank the internet sources and the various authors whose books helped me
in researching for the project. I would also like to thank my seniors for their support.
At last I would like thank my batch mates and my parents for their valuable criticisms and
support which has helped in modifying the project to its best.

SURABHI MAHESHWARI
Roll no.160
Semester VIII

TABLE OF CONTENTS

Content

Page No.

Introduction

Double Taxation Avoidance Agreement: An Analysis

The Misuse of DTAA

11

Conclusion

13

References

14

SCOPE AND OBJECTIVE

The objective of the following research project is to understand the need of Double Taxation
Avoidance Agreements. This project also studies in detail the working of the DTAA and how it
can be misued.
The scope of this project extends to doctrinal and secondary resources and analysis is thereby
drawn on the basis of the electronic data available and the books available in the library.

RESEARCH METHODOLOGY
This Doctrinal research is descriptive and analytical in nature. Secondary and Electronic
resources have been largely used to gather information and data about the topic.
Books and other reference as guided by Faculty have been primarily helpful in giving this
project a firm structure. Websites, dictionaries and articles have also been referred.
Footnotes have been provided wherever needed, to acknowledge the sources

Intr
od
uct
ion
The
double
taxation
avoidanc
e
agreeme
nt is an
agreeme
nt which
helps the
taxpayer
to

get

relief
from
double
taxation
on

the

same
income.
If India
has
signed
any

double
taxation
agreeme
nt

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
avoidanc
e
agreeme
nt is a
useful
tool
which
helps the

taxpayer
to avoid
"double
taxation"
. In case
of
claiming
relief
under
double
taxation
avoidanc
e
agreeme
nt

two

importan
t things
are
needed
t
o
f
i
n
d
o
u
t
.
T

h
e
s
e
a
r
e
:
1.

The
cou
ntry
of
resi
den
ce.

2.

T
h
e
s
o
u
r
c
e
c
o
u
n
t

r
y
.

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
avoidanc
e is so
much
important
.

The

project
will have
a

detail

study on
double
taxation

avoidanc
e
agreemen
t in India.

Ch
apt
er
1Do
ubl
e
Tax
ati
on
Av
oid
an
ce
Agr
ee
me
nt:
An
An

aly
sis
In

this

chapter I
will
discuss
the
meaning
and the
concept
of
double
taxation
avoidanc
e
agreeme
nt

or

"DTAA"
. I will
also
analyze
the
effective
ness

or

importan
ce of the
DTAA.
Basicall
y
Double
Taxation

Avoidan
ce
Agreeme
nt is a
"bilatera
l
agreeme
nt"
between
two
countries
to avoid
"double
taxation
of same
income".
E
x
a
m
p
l
e
:
If

there

is

double
taxation
avoidanc
e
agreeme
nt

between
India
and
other
foreign
country
then

it

restricts
taxation
of

the

same
income
in

both

countries
.
India has
double
taxation
avoidanc
e
agreeme
nt

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
.
T
h
e
e
f
f
e
c
t
i
v
e
n
e

s
s
o
f
D
T
A
A
c
a
n
b
e
e
x
p
l
a
i
n
e
d
b
y
u
s

i
n
g
a
h
y
p
o
t
h
e
t
i
c
a
l
e
x
a
m
p
l
e
:
E
x
a
m
p

l
e
:
A person
who
lives in a
foreign
country
and
maintain
s

an

NRO
account
(non
resident
ordinary
account)
in India;
so

the

interest
he

gets

from
this
NRO
account
is
appearin
g

as

"NRIs
income
originate
d

in

India". If
India
and this
foreign
country
where
the
person
lives are
binding
with

Double
taxation
avoidan
ce
agreeme
nt

then

this
income
will

be

taxed
accordin
g to the
specified
rate
prescribe
d 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
avoidanc
e
agreeme
nt

then

the
provisio
ns which
are laid
down in
DTAA
override
s

the

1 NRI
TAX
SERVICE
S,availabl
e at
http://ww
w.nritaxse
rvices.co
m/ (Last
Visited on
4th April,
2016)

provisio
ns

of

Tax Law
of
particula
r
country.
In India
also the
provisio
n

of

DTAA
override
s

the

income
tax
provisio
ns.
Accordi
ng

to

section
90 (2) of
the
income
tax act ,
assessee
can
choose
whether
he

will

go with
the
DTAA

provisio
ns

or

with the
Income
Tax act.
Assessee
can
decide
whichev
er

is

more
beneficia
l2.
Article
265

of

the Indian
constituti
on stated
that

"no

tax shall
be levied
or
collected
except by
authority
of

law".

To avoid
any
confusion
The
Income
2 id

Tax Act,
1961
enacted
clear
provision
s

to

confer
"the
power of
the
central
governm
ent

to

enter into
agreemen
ts

with

foreign
countries
for

the

avoidanc
e

of

Double
taxation
as
contained
in
Chapter 9
of

the

Income

tax Act."3
Section
90

and

section
91 of the
income
tax

act,

1961,
these two
provision
s

deals

with
double
taxation.
Section
90

and

section
91

are

very
helpful
3 INDIA'S
DOUBLE
TAXATIO
N
AVOIDAN
CE
AGREEME
NT,
available at
http://www.
incometaxi
ndia.gov.in/
publication
s/6_Advan
ce_Rulings
/Chapter07.
asp (Last
Visited on
4th April,
2016)

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"4
On

the

other
4 The
Income
Act,1961
90

hand
section
91

is

talking
about
"those
taxpayers
who have
paid

tax

to

country
which
does not
have any
double
taxation
avoidanc
e
agreemen
t

with

India.
That

is

how
Indian
income
tax

act

takes
care

of

these two
different
types of
taxpayers
.

When

India
enters
into

double
taxation
avoidanc
e
agreemen
t

with

any
foreign
country,
by

such

agreemen
t

they

mutually
determin
ed the tax
rate.

It

protects
the
interest
of
taxpayers
.

B
a
c
k
g
r
o

u
n
d
a
n
d
H
is
to
r
y
In 1899
Prussia
and
Austro
Hungari
an
Empire
for

the

first time
entered
into the
double
taxation
avoidanc
e
agreeme
nt. 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

resident
of

the

state."8
The
concept
of
providin

the

relief
from
double
taxation
comes
on

the

scene in
1939
when the
incometax
(double
taxation
relief)
(Indian
states)
rules
were
framed.
It

was

felt that
the
necessity
to have a
model
agreeme
nt which
can be a
good
reference
in
framing

double
taxation
avoidanc
e
agreeme
nt
between
two
foreign
states.
That

is

how The
League
of
Nations
introduc
ed

the

first
model
bilateral
conventi
on

in

1928.
After
that

in

1943 the
model
conventi
on

of

Mexico
and

in

1946 the
London

model
conventi
on

was

getting
introduc
ed. Later
in 1956
the
council
of

the

organiza
tion for
Europea
n
economi
c
cooperati
on
establish
ed

fiscal
committ
ee

to

formulat
e

model
conventi
on.

In

1963 for
the very
first time
the first
draft

"double
taxation
conventi
on

on

income
and
capital
was
enacted.
Finally
in 1977
OECD
model
conventi
on

and

comment
aries
come
into
existence
. In 1992
OECD
publishe
d model
conventi

on5.

D
T
A
A
a
n
d
T
h
e
I
n
c
o

5
INDIA'S
DOUBLE
TAXATIO
N
AVOIDA
NCE
AGREEM
ENT,
available
at
http://ww
w.incomet
axindia.go
v.in/public
ations/6_
Advance_
Rulings/C
hapter07.a
sp (Last
Visited on
4th April,
2016)

m
e
T
a
x
A
c
t
The
main aim
of
double
taxation
avoidanc
e
agreeme
nt is to
provide
relief to
the
taxpayer
from
double
taxation.
A
country
entered
into

DTAA
with

foreign
state

so

that; by

this
agreeme
nt 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
avoidanc
e
agreeme
nt. Now
in

this

chapter I
will
to

try
find

out what
happene
d

when

any

of

the
provision
s of the
Double
taxation
avoidanc
e
agreeme
nt clash
with any
section
of

the

Income
tax

act6

and
which
provision
s should
prevail
over
another?
Section
90 (2) of
the
Income
Tax Act,
1961
explain
6 The
Income
Act,1961
90

that

if

India has
a DTAA
with any
other
foreign
country
then it is
the
assessee
who will
decide
that
which
provision
is

more

beneficia
l

for

them
and that
provisio
n

will

apply
accordin
gly.

In

the
famous
case CIT
vs.
VISAK
HAPAT
NAM
PORT

TRUST7
first time
"the rule
under
section
90

(2)"

was
recognis
ed

by

Andhra
Pradesh
High
Court.
After
that

in

the
famous
case
UNION
OF
INDIA
vs.
AZADI
BACHA
O
ANDOL
7 Available
at
http://www.
indiankano
on.org/doc/
865397/
(Last
Visited on
4th April,
2016)

ON8, the
supreme
court of
India
recognis
ed

the

same.

H
o
w
it
w
o
r
k
s
?
To save
a
taxpayer
from
being
doubly
taxed in
respect
of

the

same
income,
the
concept
of
double
taxation
avoidanc

e
agreeme
nt

got

introduc
ed.

If

two
countries
have
signed in
double
taxation
avoidanc
e
agreeme
nt

both

countries
tax
payers
get
benefit
from it.
India

is

not

an

exceptio
n to it.
Currentl
y

India

has
signed
double
taxation
avoidanc
e

agreeme
nt

with

87
countries
.

This

agreeme
nt

is

very
effective
for

the

taxpayer
who has
income
in
another
foreign
country
other
than
where he
resides.
By

the

help

of

this
agreeme
nt
taxpayer
can

be

protecte
d

from

giving
tax

of

the same

income
in

two

times.
The
double
taxation
can

be

avoided
by
followin
g
manners:
1. T
h
e
c
o
u
nt
ry
w
h
er
e
th
e
ta
x
p
a
y
er
re

si
d
es
,
ca
n
e
x
e
m
pt
th
e
in
c
o
m
e
w
hi
c
h
is
c
o
m
in
g
fr
o
m
fo
re

ig
n
c
o
u
nt
ri
es
.
O
r,
2.

T
h
e
c
o
u
nt
ry
w
h
er
e
th
e
ta
x
p
a
y
er
re
si

d
es
,
"g
ra
nt
th
e
cr
e
di
t
fo
r
th
e
ta
x
p
ai
d
in
a
n
ot
h
er
fo
re
ig
n
co
u

nt
ry
".
The rules
of

the

agreemen
t depend
on

the

mutual
agreemen
t of the
two
states, so
the
DTAA
provision
will
apply in
the
countries
who have
signed
the same
agreemen
t. DTAA
can

be

different
from one
country
to
another.
In

the

general

case
when
two
countries
have
signed
the
Double
Taxation
Avoidanc
e
Agreeme
nt

then

the
"source
country"
gets

the

right

to

tax

by

using the
relevant
provision
s of the
taxation
law

of

that
country
and
thereafter
"the
country
of
residence

"

grants

"credit"
for

tax

also
apply low

tax rate.9
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.

P
r
o
c
e
d
u

r
e
f
o
r
t
a
x
i
n
g
d
i
f
f
e
r
e
n
t
i
n
c
o
m
e
u
n
d
e
r
D
T
A
A

S
O
U
R
C
E
O
F
I
N
C
O
M
E
H
O
W
I
T
I
S
T
A
X
E
D
SALARY
Most of
the
DTAA
provides
if a
person
lives
I
N
C

less than 183 days in India in a year

can get the exemption.
SI
O
N

D
I
V
I
D
E
N
D

I
N
T
E
R
E
S
T

B
U
S
I
N
E
S
S
A
c
c
o
r
di
n
g
to
m
o
st
o
f
th
e
D
T
A
A
,
b
u
si
n
e
ss
profits can
be taxed
only when
it comes
from a
permanent
establishme
nt.
In case of
dividend,
the source
country has
a

right to tax.
at 30%.
DTAA could
According
not help to DTAAs
much in interest
case.
receive
from bank
In India in
case of deposits
should be
interest which
is earned taxed at a
from bank"concession
al rate" of
deposit then
tax can be10-15 %.
applied on
ROYAL
TY AND
FEE
FOR
TECHNI
CAL
In India
in this
case the
tax rate
is 25%
but in

I
M
M
O
V
A
B
L
E
In
ca
se
of
re
nt
ea
rn
fro
m
im
m
ov
ab
le
pr
op
ert
y
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."

Chapter 2- The Misuse of DTAA

This chapter 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

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.
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.
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.10

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 Andolan 11; 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
8 Available at
http://law.incometaxindia.gov.in/DitTaxmann/incometaxacts/2007itact/
%5B2003%5D263ITR0706%28SC %29.htm (Last Visited on 4th April,
2016)

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

foreign-countries-can-help-nris- save-tax/1/194401.html (Last Visited on 4th April,

2016)

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

foreign-countries-can-help-nris- save-tax/1/194401.html (Last Visited on 4th April,

2016)

11 263 ITR 706 at pages 746 - 753

shopping is prohibited."

Conclusion
So from the above study it can be said Double Taxation Avoidance Agreement is very much
helpful for avoiding double taxation not only that double taxation avoidance agreement can 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.

REFERENCES
ARTICLES

SHARMENDRA

CHAUDHRY,

DOUBLE

TAXATION

AVOIDANCE

AGREEMENTS, available at , http://dx.doi.org/10.2139/ssrn.2036494 (Last Visited on

4th April, 2016)

DTAA, available at http://businesstoday.intoday.in/story/how-treaties-with-foreign- countriescan-help-nris-save-tax/1/194401.html (Last Visited on 4th April, 2016)

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

2016)

WEB SITES

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

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