IMPORTANCE OF DOUBLE TAX

AVOIDANCE AGREEMENT (DTAA)

Submitted To:
MR. RANA NAVNEET ROY
Assistant Professor
Faculty of Taxation

Submitted By:
MUSKAN KHATRI
Roll no.87, Semester-V, Section B
B.A. LL.B. (Hons.)

HIDAYATULLAH NATIONAL LAW UNIVERSITY

Uparwara Post, Abhanpur, Atal Nagar, Raipur (C.G.) - 492002
 DECLARATION

I hereby declare that this research work titled “IMPORTANCE OF DOUBLE TAX
AVOIDANCE AGREEMENT” is my own work and represents my own ideas, and where
others’ ideas or words have been included, I have adequately cited and referenced the original
sources. I also declare that I have adhered to all principles of academic honesty and integrity and
have not misrepresented or fabricated or falsified any idea, data, fact or source in my submission.

Muskan Khatri
 ACKNOWLEDGEMENT

Every project big or small is successful largely due to the effort of a number of wonderful people
who have always given their valuable advice or lent a helping hand. I sincerely appreciate the
inspiration; support and guidance of all those people who have been instrumental in making this
project a success.

I, Muskan Khatri, a student of Hidayatullah National Law University, Raipur, am extremely

grateful to Mr. Rana Navneet Roy for the confidence bestowed in me and entrusting my project
titled “IMPORTANCE OF DOUBLE TAX AVOIDANCE AGREEMENT (DTAA)”.

At this juncture I feel deeply honored in expressing my sincere thanks to Mr. Rana Navneet Roy
for providing valuable insights leading to the successful completion of my project.
I would also like to thank all the faculty members of Hidayatullah National Law University,
Raipur, for their critical advice and guidance without which this project would not have been
possible. Last but not the least I place a deep sense of gratitude to my family members and my
friends who have been constant source of inspiration during the preparation of this project work.

Thank You
 TABLE OF CONTENTS

Declaration…………………………………………………………..……..I
Acknowledgement.………………………………………………….…….II
Introduction.……………………………………………………….………1
Research Question………………………………………………………....3
Objectives…………………………………………………………………3
Chapterisation……………..………………………………………………4
Chapter- 2 ………………...……………………………………………….5
Chapter- 3…………...……………………………………………………..7
Chapter- 4………………………………………………………………….8
Chapter- 5………………………………………………………………...10
Chapter- 6…………………………..…………………………………….12
Chapter -7……………..…………………………………………….......15
Conclusion……………………………………………………………….17
Bibliography……………………………………………………………..18
 INTRODUCTION

A DTAA is a tax treaty signed between two or more countries. Its key objective is that tax-payers
in these countries can avoid being taxed twice for the same income. A DTAA applies in cases
where a tax-payer resides in one country and earns income in another. DTAAs can either be
comprehensive to cover all sources of income or be limited to certain areas such as taxing of
income from shipping, air transport, inheritance, etc. India has DTAAs with more than eighty
countries, of which comprehensive agreements include those with Australia, Canada, Germany,
Mauritius, and Singapore, UAE, the UK and US. DTAAs are intended to make a country an
attractive investment destination by providing relief on dual taxation. Such relief is provided by
exempting income earned abroad from tax in the resident country or providing credit to the extent
taxes have already been paid abroad. DTAAs also provide for concessional rates of tax in some
cases.

For instance, interest on NRI bank deposits attract 30 per cent TDS (tax deduction at source) here.
But under the DTAAs that India has signed with several countries, tax is deducted at only 10 to 15
per cent. Many of India’s DTAAs also have lower tax rates for royalty, fee for technical services,
etc. Favourable tax treatment for capital gains under certain DTAAs such the one with Mauritius
has encouraged a lot of foreign investment into India. Mauritius accounted for $93.65 billion or
one-third of the total FDI flows into India between April 2000 and December 2015. It has also
remained a favoured route for foreign portfolio investors. But the problem is DTAAs can become
an incentive for even legitimate investors to route investments through low-tax regimes to sidestep
taxation. This leads to loss of tax revenue for the country.

For us to prosper, the economy has to grow. And for growth in today’s globalised world, foreign
investments are inevitable. DTAAs basically provide clarity on how certain cross-border
transactions will be taxed and this encourages foreign investors to take the plunge. If you are sent
on deputation abroad and you receive emoluments during your stint away from home, your income
may sometimes be subject to tax in both the countries. You can claim relief when filing your tax
return for that financial year, if there is an applicable DTAA. Similarly, if you are an NRI having
investments in India, DTAA provisions may also be applicable to your income from these
investments or from their sale.

However, given India’s narrow tax base, it can ill-afford a tax regime that allows big fish to
completely evade the tax net, citing a DTAA. Hence the ongoing drive to plug loopholes in these
agreements.

2
 RESEARCH QUESTIONS

1. What is the necessity of double taxation avoidance agreement and how DTAA works in
India?
2. What is the misuse of Double Taxation Avoidance Agreement?

OBJECTIVES

 Set in the above perspective or background, the broad objective of the study is to
understand the concept, meaning, importance and the need of double tax avoidance
agreement (DTAA).

METHODOLOGY

 The following study is a descriptive in approach. It is largely based on secondary sources

of data due to its originality been already settled. Books & other references have been
primarily helpful for the completion of this project.

CHAPTERISATION

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

3
analyze 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 5th 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 analyze double non taxation
and treaty shopping. Finally last chapter will be consisted of conclusion and suggestion part.

4
 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:

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,

1
NRI TAX SERVICES, available at http://www.nritaxservices.com/
2
id
5
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
taxation5.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.

3
Id
4
INDIA’S DOUBLE TAXATION AVOIDANCE AGREEMENT, available at
http://www.incometaxindia.gov.in/publications/6_Advance_Rulings/Chapter07.asp
5
INCOME TAX ACT,1961,available at http://www.intaxinfo.com/pdf/law_by_country/India/Income%20Tax
%20Act%201961%20%28en%29.pdf
6
See The Income Act,1961 §90
7
SHARMENDRA CHAUDHRY, DOUBLE TAXATION AVOIDANCE AGREEMENTS, available at ,
http://dx.doi.org/10.2139/ssrn.2036494
6
 CHAPTER -3

BACKGROUND AND HISTORY

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.

8
id
9
id
10
id
11
id
12
id
7
 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
recognized by Andhra Pradesh High Court. After that in the famous case UNION OF INDIA vs.
AZADI BACHAO ANDOLON16, the supreme court of India recognized 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.

13
id
14
See The Income Act,1961 §90 (2)
15
CIT vs. VISAKHAPATNAM PORT TRUST available at http://www.indiankanoon.org/doc/865397/

16
UNION OF INDIA vs. AZADI BACHAO ANDOLON ,available at
http://law.incometaxindia.gov.in/DitTaxmann/incometaxacts/2007itact/%5B2003%5D263ITR0706%28SC
%29.htm
8
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.

9
 CHAPTER-5
DOUBLE TAX AVOIDANCE AGREEMENT
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 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

17
Chaudhry Sharmendra, Double Taxation Avoidance Agreements, available at,
http://dx.doi.org/10.2139/ssrn.2036494
18
208 ITR 400
19
CIT vs. R. M. Muthaiah,available at, http://indiankanoon.org/doc/1675748/
20
See Supra note 17

10
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.

11
 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

21
id
22
DTAA,available at http://businesstoday.intoday.in/story/how-treaties-with-foreign-countries-can-help-nris- save-
tax/1/194401.html
23
id
24
id
12
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.

Procedure for taxing different income under DTA:

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

13
 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 :-
a. Tax Residency Certificate
b. Self-attested Xerox of Pan Card.
c. Self-declaration & identity form.
d. 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

25
DTAA, available at http://businesstoday.intoday.in/story/how-treaties-with-foreign-countries-can-help-nris- save-
tax/1/194401.html
14
 CHAPTER-7

DOUBLE NON TAXATION AND TREATY SHOPPING:

THE MISUSE OF DOUBLE TAXATION AVOIDANCE
AGREEMENT: AN ANALYSIS

In this chapter I will analyze 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

26
See Supra note 17

15
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

In the famous case CTI v. Laxmi Textile Exporters Ltd29, 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 Madras 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 favorable 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 favorable tax provision in the
belief that treaty shopping is prohibited.”
Example: In the Indo-US DTAA Art 24 deals with treaty shopping.

27
id
28
id
29
(2000) 245 ITR 521 (Mad)
30
id
31
263 ITR 706 at pages 746 - 753
16
 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.

17
 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 
 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
 DTAA, available at http://businesstoday.intoday.in/story/how-treaties-with-foreign-
countries-can-help-nris-save-tax/1/194401.html 
 NRI TAX SERVICES, available at http://www.nritaxservices.com/ 
 NRI TAX SERVICES, available at http://www.nritaxservices.com/ 

WEB SITES

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

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

18