DTAA(NEW)

Relief from Double Taxation of Income

Introduction

• Double taxation occurs when an individual is required to pay tax on the same income in more than one jurisdiction.

Overview of Taxation Rules

Tax Residency

• ‘X’ is a resident of ‘Y’ country.

• Y country follows a residence-based taxation rule.

• X has income from a source in ‘Z’ country.

• Z country follows a source-based taxation rule.

Kinds of Relief from Double Taxation

1. Bilateral Relief

• Governed under Section 90.

• Countries can enter into Double Taxation Avoidance Agreements (DTAAs) to provide relief.

• Mechanism based on mutual agreements to avoid double taxation.

2. Unilateral Relief

• Governed under Section 91.

• Applies when there is no DTAA between two countries.

• Home country provides relief for income taxed in another country.

Bilateral Relief: Section 90

• The Central Government can enter agreements:

  • (a) For granting relief on income taxed under both jurisdictions.

  • (b) For avoiding double taxation without creating tax evasion opportunities.

  • (c) For exchange of information to prevent evasion.

  • (d) For recovery of taxes in either jurisdiction.

Effects of DTAA

1. No tax liability in one jurisdiction implies no applicability of DTAA.

2. Income taxed in both countries allows deduction of tax paid in one from the other if applicable.

3. The individual must be a resident in at least one of the countries; if dual residency exists, Tie Breaker Rule applies.

4. Inconsistencies between Act provisions and agreements favor the agreement.

5. Basic law governs in the absence of specific provisions in the agreement.

6. Certificates confirming residency are binding.

Additional Notes on DTAA

7. Post A.Y. 2004-05, agreements can exempt income from taxation entirely.

8. Unclear terms may be defined by the Central Government through notifications.

Taxation of Different Income Types under DTAA

Income from Property and Assets

• Income from immovable property taxed if situated in India.

• Income attributed to a Permanent Establishment (PE) in India is taxable there.

• Other income is taxed per domestic law or treaty, whichever is more favorable.

Capital Gains

• Immovable Property: Taxable in India if situated there.

• Movable Property forming part of PE: Taxable in India.

• Other Movable Property: Taxed per domestic law or treaty dependent on residency.

Conflict between Section 9 and Section 90

• Amendments to the Income Tax Act, 1961 affect DTAAs (e.g., Finance Act 2012).

• Example: Income received by Thailand-based companies for services rendered in India was held not taxable under Section 9(1)(vi).

Technical Services & DTAA

• In absence of a Fee for Technical Service (FTS) clause in a DTAA, income may be examined under business profit rules, contingent on the presence of a PE.

Definition and Scope of Permanent Establishment (PE)

Article 5: Conditions for PE

• Permanent establishment defined as a fixed place of business that conducts enterprise activities. Includes management, branches, offices, factories, workshops, etc.

Exemptions

• PE does not include

  • Facilities merely for storage or display.

  • Fixed places maintained primarily for preparatory activities.

Authority Concerning PE

• Warranty for agents acting on behalf does not establish PE unless specific activities are undertaken.

Relevant Case Laws on PE

1. CIT v. Hyundai Heavy Industries Co. Ltd.

   • No tax on profits from installations in India until contracts concluded.

2. UAE Exchange Centre LLC

   • Liaison office activities not generating taxable income unless directly attributable to PE in India.

3. K T Corporation

   • Activities of liaison offices which are preparatory don’t constitute a PE.

4. DIT vs. Samsung Heavy Industries Co Ltd

   • Income only taxable if PE performs core business activities.

5. CIT v. Goodyear Tyre and Rubber Co.

   • Non-resident companies trading with subsidiaries exempt from Indian tax under specific conditions.

6. Aircon Beibars (FZE) v. DCIT

   • Income not taxable unless actual receipt conditions meet treaty conditions.

7. CIT v. Alibaba.com Singapore E-Commerce

   • Valid tax residency recognition necessary for DTAA benefits.

8. Payment of Commission to Foreign Airlines Agents

   • Payments are incidental to the agency contract; thus, Section 194H applies, incorporating commissions.

9. ONGC v. University of Texas

   • Payments for research viewed as royalty unless specific criteria under DTAA met.

Conclusion

• Understanding the interplay of domestic law and international taxation agreements is crucial for international income taxation and determining tax liabilities.