Double Taxation Relief

Question 1

What are the different types of reliefs granted under DTAA?

Answer 1

• Bi lateral relief - where government of two countries enter into an agreement for providing relief
• Unilateral relief - Where the country of residence provides relief for the source tax paid, irrespective of whether a DTA agreement exists with the source country or not.

Question 2

Give a brief explanation on the Bilateral relief provided under DTAA and what are the different ways in which such relief could be provided?

Answer 2

Question 3

Who can enter into an agreement with foreign countries or specified territories outside India for Bilateral relief under section 90?

Answer 3

Section 90(1) provides that the Central Government may enter into an agreement with the Government of any country outside India or specified territory outside India,

Question 4

For granting relief to what types of Income, the Bilateral agreement is entered into by the CG with Foreign country or specified territory outside India as per Section 90?

Answer 4

• income on which income-tax has been paid both in India and in that country or specified territory; or
• income-tax chargeable under this Act and under the corresponding law in force in that country or specified territory to promote mutual economic relations, trade and investment; or
• All the above has to be done ensuring that without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance (including through treaty-shopping arrangements aimed at obtaining reliefs provided in the said agreement for the indirect benefit to residents of any other country or territory)

Question 5

What is the sum and substance of the relief granted? as in how the bilateral relief will be claimed by the person availing such relief?

Answer 5

Accordingly, the Central Government has notified that where such an agreement provides that any income of a resident of India may be taxed in the other country then, 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, and relief shall be granted in accordance with the method for elimination or avoidance of double taxation provided in such agreement.

Question 6

What other miscellaneous areas which the Bilateral agreement can provide for with the Foreign country or specified territory outside India as per section 90?

Answer 6

• for exchange of information for the prevention of evasion or avoidance of income-tax chargeable under this Act or under the corresponding law in force in that country or specified territory or investigation of cases of such evasion or avoidance; or
• for recovery of income-tax under this Act and under the corresponding law in force in that country or specified territory

Question 7

Suppose in a given scenario, the provisions of the act with respect to the bilateral agreement provides beneficial section when compared to the agreement itself, can the same be applied to the assessee?

Answer 7

• Where the Central Government has entered into such an agreement with the Government of any country outside India or specified territory outside India for granting relief of tax, or for avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, the provisions of this Act shall apply to the extent they are more beneficial to that assessee.
• However, the provisions of Chapter X-A, General Anti-Avoidance Rule, shall apply to the assessee even if such provisions are not beneficial to him.

Question 8

Can the taxpayers who are not even the residents of the country claim relief by applying the beneficial provisions of either the treaty or the domestic law?

Answer 8

• section 90(4) provides that the non-resident to whom the agreement referred to in section 90(1) applies, shall be allowed to claim the relief under such agreement if a Tax Residence Certificate (TRC) obtained by him from the Government of that country or specified territory, is furnished declaring his residence of the country outside India or the specified territory outside India, as the case may be.
• Also, section 90(1)(b) provides that treaties shall not be used for claiming reduced taxation through tax evasion or avoidance(including treaty shopping etc).
• the assessee would be required to provide such other documents and information, as may be prescribed, for claiming the treaty benefits..

Question 9

Where the assessee who is a non resident and is charged at a differential and non beneficial rate in comparison to the rate provided as per DTAA? can the non resident enforce the rate in DTAA which is more beneficial to him?

Answer 9

The charge of tax in respect of a foreign company at a rate higher than the rate at which a domestic company is chargeable, shall not be regarded as less favourable charge or levy of tax in respect of such foreign company.(That is to mean that non beneficial foreign rate can be applied and it cannot be considered as less favorable to the assessee.

Question 10

What is the computation mechanism for identifying the DTA reliefs and whether specific provision in the DTAA prevail over the more general provisions of the act?

Answer 10

Generally, DTAA only provides for distribution of taxing rights between the residence and the source state. The computation mechanism is usually not provided under DTAA and the same is governed by the domestic tax law of each country.

that a specific provision of the DTAA will prevail over the general provisions of the Income-tax Act, 1961.. However, where there is no specific provision in the treaty, then the Income-tax Act will apply.

Question 11

What are certain model tax conventions on which the treaties are based upon?

Answer 11

• OECD Model Tax Convention
• U.N. Model Tax Convention

Question 12

What are some requirements of Double Taxation relief to be extended to agreements between specified associations adopted by the Central Government [Section 90A]

Hint: All the other miscellaneous provisions of section 90 will also ditto applied here, hence those are not noted down again

Answer 12

• Section 90A provides that any specified association in India may enter into an agreement with any specified association in the specified territory outside India and the Central Government may, by notification in the Official Gazette, make the necessary provisions for adopting and implementing such agreement for

1. grant of double taxation relief,
2. avoidance of double taxation of income without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance -Including treaty shopping etc.
3. exchange of information for the prevention of evasion or avoidance of income- tax, or
4. recovery of income-tax.

Question 13

What are the Documents and information, to be furnished by the assessee for claiming treaty benefits,(Especially for the non resident claiming benefits through TRC) prescribed by CBDT vide Notification No. 57/2013 dated 01.08.2013:

Answer 13

Question 14

What is the meaning of specified association and specified territory outside India?

Answer 14

the ‘specified association’ means any institution, association or body, whether incorporated or not, functioning under any law for the time being in force in India or the laws of the specified territory outside India and which may be notified as such by the Central Government.

‘specified territory’ means any area outside India which may be notified by the Central Government

Question 15

What are certain relief provided by the government by way of an unilateral relief in relation to an transaction in foreign country or specified territory outside India with which India does not have DTAA?

Answer 15

• Here, the most important part are the conditions provided for falling under unilateral relief.
• The meaning of Indian rate of tax is also very important and comparing of the same with the foreign rate is equally important for our purposes.

Question 16

What is the year of availability of the foreign tax credit paid as per rule 128 of Income tax rules, 1962?

Answer 16

• An assessee, being a resident shall be allowed a credit for the amount of any foreign tax paid by him in a country or specified territory outside India, by way of deduction or otherwise, in the year in which the income corresponding to such tax has been offered to tax or assessed to tax in India, in the manner and to the extent as specified in this rule.
• However, in a case where income on which foreign tax has been paid or deducted, is offered to tax in more than one year, credit of foreign tax shall be allowed across those years in the same proportion in which the income is offered to tax or assessed to tax in India.

Question 17

What is the meaning of the term foreign tax as per the provisions of rule 128?

Answer 17

Question 18

What are the components of Income tax on which FTC is available?

Answer 18

Foreign Tax Credit (FTC) is available against the amount of tax, surcharge and cess payable under the Income-tax Act, 1961. However, it is not available in respect of any sum payable by way of interest, fee or penalty.

Question 19

What is the manner of computing FTC as per the provisions of rule 128 of IT act, 1961?

Answer 19

• The credit of foreign tax would be the aggregate of the amounts of credit computed separately for each source of income arising from a particular country or specified territory outside India and shall be given effect to in the following manner:-
  (a) the credit would be the lower of the tax payable under the Income-tax Act, 1961 on such income and the foreign tax paid on such income.
  However, where the foreign tax paid exceeds the amount of tax payable in accordance with the provisions of the agreement for relief or avoidance of double taxation, such excess has to be ignored.
  (b) the credit would be determined by conversion of the currency of payment of foreign tax at the telegraphic transfer buying rate on the last day of the month immediately preceding the month in which such tax has been paid or deducted.

Question 20

Give a summary chart of bilateral and unilateral relief under the Income tax act, 1961?

Answer 20

Question 21

In accordance with Article 5(1) and 5(2), the term PE would include and mean?

Answer 21

• Permanent establishment means a fixed place of business through which the business of an enterprises is wholly or partly carried on.
• Every DTAA has a specific clause, which will deal with an explanation of permanent establishment for the purpose of such DTAA.

Question 22

What is the difference in treatment when it comes to business connection as per section 9 Vs. Permanent establishment as per Article 5? how does the treatment vary and which is very broad in scope when compared to one another?

Answer 22

• Business Income of a non-resident will not be taxed in India, unless such non-resident has a permanent establishment in India.
• It may be noted that the scope of business connection under section 9(1)(i) is wider than that of a PE. Article 5(1) of the DTAA

Question 23

Does a Liaison Office engaged in remittance services be considered a permanent establishment for the purposes of Article 5 of DTAA?

Answer 23

In Union of India v. UAE Exchange Center (2020) 425 ITR 30,

the Supreme Court held that an Indian liaison office of a foreign enterprise engaged in remittance services would not constitute a PE.

The Supreme Court held that even if the activities of LO are regarded as business activities, they were of preparatory or auxiliary character.

Question 24

Does a Liaison Office engaged as communications channel be considered a permanent establishment for the purposes of Article 5 of DTAA?

Answer 24

• In DIT (International Taxation) v. Samsung Heavy Industries Ltd. (2020) 426 ITR 1 (SC),
• the project office was set up solely as an auxiliary office meant to act as liaison office between ONGC and the assessee. No expenditure relating to execution of contract was incurred by the project
  office.
• the Supreme Court held that the project office is not a fixed place of business through which core business of assessee is carried on, and hence, the same would not constitute a PE.

Question 24

Does a Liaison Office engaged as communications channel be considered a permanent establishment for the purposes of Article 5 of DTAA?

Answer 24

• In DIT (International Taxation) v. Samsung Heavy Industries Ltd. (2020) 426 ITR 1 (SC),
• the project office was set up solely as an auxiliary office meant to act as liaison office between ONGC and the assessee. No expenditure relating to execution of contract was incurred by the project
  office.
• the Supreme Court held that the project office is not a fixed place of business through which core business of assessee is carried on, and hence, the same would not constitute a PE.

Question 24

Does a Liaison Office engaged as communications channel be considered a permanent establishment for the purposes of Article 5 of DTAA?

Answer 24

• In DIT (International Taxation) v. Samsung Heavy Industries Ltd. (2020) 426 ITR 1 (SC),
• the project office was set up solely as an auxiliary office meant to act as liaison office between ONGC and the assessee. No expenditure relating to execution of contract was incurred by the project
  office.
• the Supreme Court held that the project office is not a fixed place of business through which core business of assessee is carried on, and hence, the same would not constitute a PE.

Question 25

What is the taxability of BPO units outsourced by a Non resident in India?

Answer 25

• A non-resident entity may outsource certain services to a resident Indian entity. If there is no business connection between the two, the resident entity may not be a Permanent Establishment of the non-resident entity, and the resident entity would have to be assessed to income-tax as a separate entity. In such a case, the non-resident entity will not be liable under the Income-tax Act, 1961.
• So, it becomes clear, that when there is a business connection, there is deemed to have a permanent establishment in India through which the non resident will have to be charged.
• Profits are to be attributed to the Permanent Establishment as if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a Permanent Establishment.
• The expenses that are deductible would have to be determined in accordance with the accepted principles of accountancy and the provisions of the Income-tax Act, 1961 - That is the expenses of PE in relation to general and executive administration expenses incurred.
• Hence, in determining the profits attributable to an IT-enabled BPO unit constituting a Permanent Establishment, it will be necessary to determine the price of the services rendered by the Permanent Establishment to the Head office or by the Head office to the Permanent Establishment on the basis of “arm’s length principle”.