Case Study: Double Tax Avoidance Agreement

QUESTION

Discuss the relief provided to the foreign income of an assessee in the following cases:

(a) In case there is bilateral DTAA;
(b) In case there is no DTAA.

LET'S DISCUSS THE APPLICABLE PROVISIONS OF THE INCOME TAX ACT,1961

SECTION 5 OF THE INCOME TAX ACT, 1961

(1) Subject to the provisions of this Act, the total income of any previous year of a person who is a resident includes all incomes from whatever source derived which-

(a) is received or is deemed to be received in India in such year by or on behalf of such person; or (b) accrues or arises or is deemed to accrue or arise to him in India during such year; or (c) accrues or arises to him outside India during such year:

Provided that, in the case of a person not ordinarily resident in India within the meaning of sub- section (6) of section 6, the income which accrues or arises to him outside India shall not be so included unless it is derived from a business controlled in or a profession set up in India.

Please Note That:

1. Income of a Resident Ordinary Resident India (RORI)- accruing or arising or deemed to be accruing or arising to him globally is chargeable to tax in India.

2. Income of a Resident but not Ordinary Resident India (RNOR)- accruing or arising or deemed to be accruing or arising in India is chargeable and not income accrue or arise outside or such incomes or which has no connection with India are not chargeable to tax in India.

Section 6(1) of the Income Tax Act, 1961

1. Residential Status of an Individual

Section 6(1) of IT Act,1961 offers two sets of parameters to determine whether a particular person is an Indian citizen or not. If the said individual falls under any one of the following criterias, he/she will be a resident of the country. These are:

• If the individual has resided in India during the relevant financial year that amounts to a total of 182 days or more.

• If the individual has resided in India for four consecutive years before the relevant financial year that amounts to a total of 365 days or more.

Meeting the above-mentioned parameters qualifies an individual as a resident of the country, however, in order to become an ordinary citizen of the country, one has to meet with the following standards:

• If the individual has been an Indian citizen for two consecutive financial years out of ten financial years, that falls immediately before the relevant financial year.

• If the individual has resided in India for seven consecutive financial years immediately before the financial year in question.

Two exceptions to the general rule can be applied here:

1. If a person (a resident of India) leaves the country in order to take up another job outside India, during a financial year, the second provision mentioned above will be nullified, and only the first one will be valid.

2. If a person of Indian origin who has been residing outside India, visits the country (India) during a particular financial year, then the second condition specified above will be nullified, and only the first one will be valid.

2. Residential status of a HUF

“6(2) A Hindu Undivided Family is said to be a resident in India in any previous year in every case except where during that year the control and management of its affairs is situated wholly outside India.

6(6) A person is said to be “not ordinarily resident” in India in any previous year if such person is a HUF whose manager has been a non-resident in India in 9 out of 10 previous years preceding that year, or has during the 7 previous years preceding that year been in India for a period of, or periods amounting in all to, 729 days or less”

Thus,

• If the Karta is Resident and ordinarily resident (ROR): then HUF is also ROR • If the Karta is Resident but not ordinarily resident (RNOR): then HUF is also RNOR

3. Residential Status of a Company is determined as follows

Section 90 of the Income Tax Act

• Section 90 (1) of the Income Tax Act is associated with relief measures for assesses involved in paying taxes twice i.e. paying taxes in India as well as in Foreign Countries or territory outside India.
• Section 90(2) also contains provisions which will certainly enable the Central Government to enter into an agreement with the Government of any country outside India or a definite territory outside India.
• Section 90(3)is intended for granting relief with reference to any of the following relevant situations that may occur:

• Income on which tax has been paid both under Income Tax Act, 1961 and Income Tax prevailing in that country or definite territory.

• Income tax chargeable under Income Tax Act, 1961 and according to the corresponding law in force in that country or specified territory to boost mutual economic relations, trade and investment.

• For the prevention of double taxation of income under Income Tax Act, 1961 and under the equivalent law in force in that country or specified territory.

• For exchange of information regarding the avoidance of evasion or avoidance of income-tax chargeable as per Income Tax Act, 1962 or under the equivalent law in force in that country or specified territory, or investigation of cases of evasion or avoidance.

• For recovery of income tax under the Income Tax legislation which is in force in India and under the equivalent law in force in that country of the specified territory.

The double tax relief as per Section 90 can be claimed only by the residents of the countries who have entered into the agreement.

If a resident of other countries wants to claim relief related to the phenomenon of double taxation, then they have to obtain a Tax Residence Certificate (TRC) from the government of a particular country Section 90(4).

ANSWER

Double Taxation Relief is applicable in the case of those assesses whose income is taxed in two or more countries due to residential status or due to source principle.

To mitigate the impact of double taxation of income, the provisions for double taxation relief were made.

(a) India has entered into agreement with many countries regarding avoidance of double taxation. In case there is a bilateral Double Taxation Avoidance Agreement ('DTAA' or 'the Treaty') concluded between India and the other country, the assessee can claim relief under section 90 of the Income-tax Act, 1961.

Foreign tax credit is provided to the assessee who has paid taxes in India as well as in a foreign country. This tax relief is governed by the provisions of respective DTAA. Further, the provision of Income-tax Act, 1961 are applicable to the assessee to the extent they are more beneficial to him.

(b) Where there is no bilateral agreement with a country, under Section 90 of the Income tax Act, section 91 of the Act grants unilateral relief in respect of income which has suffered tax both in India and in a country with which no DTAA exists (i.e. doubly taxed income).

This relief is provided in the form of a deduction from the income tax payable in India and is calculated on the doubly taxed income at Indian Tax rate or the tax rate of the foreign country whichever is lower or at Indian rate of tax, if both rates are equal.

An assessee shall be allowed deduction under section 91 provided all the following conditions are fulfilled:-

(a) The assessee is a resident in India during the relevant previous year. (b) The income accrues or arises to him outside India during that previous year. (c) Such income is not deemed to accrue or arise in India during the previous year. (d) The income in question has been subjected to income-tax in the foreign country in the hands of the assessee and the assessee has paid tax on such income in the foreign country. (e) There is no agreement under section 90 for the relief or avoidance of double taxation between India and the other country where the income has accrued or arisen.

DISCLAIMER: The case law presented here is only for sharing information and knowledge with the readers. The views are personal views of the author. In case of necessity do consult with tax professionals for more clarity and understanding on subject matter.