CHAPTER IX

CHAPTER IX

DOUBLE TAXATION RELIEF

1[1] [90. Agreement with foreign countries2[2] :-

3[3] [(1)] The Central Government may enter into an agreement with the Government of any country outside India—

4[4] [(a) for the granting of relief in respect of—

(i) Income on which have been paid both income-tax under this Act and income-tax in that country; or

(ii) Income-tax chargeable under this Act and under the corresponding law in force in that country to promote mutual economic relations, trade and investment, or]

(b) For the avoidance of double taxation of income under this Act and under the corresponding law in force in that country, or

(c) 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 investigation of cases of such evasion or avoidance, or

(d) For recovery of income-tax under this Act and under the corresponding law in force in that country, And may, by notification in the Official Gazette, make such provisions as may be necessary for implementing the agreement.]

5[5] [(2) Where the Central Government has entered into an agreement with the Government of any country outside India under sub-section (1) for granting relief of tax, or as the case may be, 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.]

6[6] [(3) Any term used but not defined in this Act or in the agreement referred to in sub-section (1) shall, unless the context otherwise requires, and is not inconsistent with the provisions of this Act or the agreement, have the same meaning as assigned to it in the notification issued by the Central Government in the Official Gazette in this behalf.]

7[7] [Explanation.—For the removal of doubts, it is hereby declared that 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 8[8] [* * *].]

DEPARTMENTAL VIEW/SUPREME COURT RULINGS

1. A non-resident entity or the foreign company will be liable to tax in India if the IT-enabled BPO unit in India constitutes its permanent establishment. The circumstances when a unit is to be treated as a Permanent Establishment and the manner of taxability in the context of relevant Double Taxation Avoidance Agreement and the arm's length principle in section 92F have been set out in this circular. [Circular No. 5/2004, dated 28-9-2004]

2. Where a non-resident or a foreign company outsourcers the whole or part of its core revenue generating business activities to an IT-enabled entity in India, such as the services of a travel agent, software developer, software maintenance, investment consultant, debt collection service, etc. and the IT-enabled entity in India renders the services either directly to the customers abroad or through the non-resident principal, a considerable portion of the profits derived by the non-resident or the foreign company from its customers abroad would certainly be attributable to the activities performed by the IT-enabled entity in India. If such entity constitutes a permanent establishment of the non-resident or foreign company in India, such attributed profits would be taxable under the Income-tax Act, 1961 in accordance with the provisions of the relevant tax treaty. [Circular No. 1/2004, dated 2-1-2004, withdrawn by Circular No. 5/2004, dated 28-9-2004]

3. The total income of Foreign Telecasting Companies (FTC) shall be determined by the Assessing Officers in accordance with the provisions of the Income-tax Act in relation to assessment year 2002-2003 and subsequent assessment years. Where an FTC is resident of a country with whom India has a DTAA, its business income can be taxed only if it has a permanent establishment in India or else, under the provisions of section 5 read with section 9 of the Income-tax Act. [Circular No. 6/2001, dated 5-3-2001 withdrawing Circular Nos. 742, dated 2-5-1996 and 765, dated 15-4-1998]

4. In case of a remittance to a country with which a Double Taxation Avoidance Agreement is in force, the tax should be deducted at the rate provided in the Finance Act of the relevant year or at the rate provided in the Double Taxation Avoidance Agreement, whichever is more beneficial to the assessee. [Circular No. 728, dated 30-10-1995. See also Circular No. 734, dated 24-1-1996]

5. As per the agreement for avoidance of double taxation with Mauritius, any resident of Mauritius deriving income from alienation of shares of Indian companies will be liable to capital gains tax only in Mauritius as per Mauritius tax law and will not have any capital gains tax liability in India. 'Alienation' has been defined to mean the sale, exchange, transfer or relinquishment of the property or the extinguishment of any rights in it or its compulsory acquisition under any law in force in India or in Mauritius. [Circular No. 682, dated 30th March, 1994]

6. Under Article XVIII of the Agreement between India and the Government of the Federal Republic of Germany for Avoidance of Double Taxation of Income, dated 13-9-1960 and subsequently amended by a protocol notified vide Notification No. 6387 and exchange of notes dated 28-6-1984, mutual agreement has been reached for application of this agreement with effect from 1-1-1991, in the territory of five new States as well as part of the Land Berlin where Basic Law was not valid before the coming into force of the German merger. The existing agreement between India and the German Democratic Republic for the avoidance of double taxation with respect to taxes on income and on capital dated 2-3-1990 will be applied only until 31-12-1990. [Circular No. 659, dated 8th September, 1993]

7. A reduced tax rate of 20 per cent has been prescribed in respect of royalties and fees for technical services paid by a resident of India to a resident of Canada. The reduced rate will be applicable to payments made in respect of the right or property which is first granted or under a contract which is signed after 12th December, 1988. [Circular No. 638, dated 28th October, 1992]

8. Where a specific provision is made in the Double taxation avoidance agreement, that provision will prevail over the general provisions contained in the Income-tax Act. Where such Agreement provided for a particular mode of computation of income the same should be followed irrespective of the provisions of the Act. [Circular No. 333, dated 2nd April, 1982]

9. Sections 4 and 5 of the Income-tax Act provide for taxation of global income of an assessee but this is subject to the provisions of an agreement entered into between the Central Government and the Government of a foreign country for avoidance of double taxation. In case of any conflict between the provisions of the agreement and the Act, the provisions of the agreement would prevail over the Act in view of the provisions of section 90(2). [CIT v Kulandagan Chettiar (P V A L) (2004) 267 ITR 654 (SC)]

10. Where there was no permanent establishment in India for the assessee, in view of the Double Taxation Avoidance Agreement between India and Malaysia, the business income of the assessee from the rubber plantations in Malaysia could not be taxed in India. Likewise, the capital gains derived by the assessee from the transfer of immovable property in Malaysia could not be taxed in India. [CIT v Kulandagan Chettiar (P V A L) (2004) 267 ITR 654 (SC)]

1[9] [90A. Adoption by Central Government of agreements between specified associations for double taxation relief:-

(1) 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 such provisions as may be necessary for adopting and implementing such agreement—

(a) For the granting of relief in respect of—

(i) Income on which have been paid both income-tax under this Act and income-tax in any specified territory outside India; or

(ii) Income-tax chargeable under this Act and under the corresponding law in force in that specified territory outside India to promote mutual economic relations, trade and investment, or

(b) For the avoidance of double taxation of income under this Act and under the corresponding law in force in that specified territory outside India, or

(c) 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 specified territory outside India, or investigation of cases of such evasion or avoidance, or

(d) For recovery of income-tax under this Act and under the corresponding law in force in that specified territory outside India.

(2) Where a specified association in India has entered into an agreement with a specified association of any specified territory outside India under sub-section (1) and such agreement has been notified under that sub-section, for granting relief of tax, or as the case may be, 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.

(3) Any term used but not defined in this Act or in the agreement referred to in sub-section (1) shall, unless the context otherwise requires, and is not inconsistent with the provisions of this Act or the agreement, have the same meaning as assigned to it in the notification issued by the Central Government in the Official Gazette in this behalf.

Explanation 1.—For the removal of doubts, it is hereby declared that the charge of tax in respect of a company incorporated in the specified territory outside India at a rate higher than the rate at which a domestic company is chargeable, shall not be regarded as less favorable charge or levy of tax in respect of such company.

Explanation 2.—for the purposes of this section, the expressions—

(a) "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 for the purposes of this section;

(b) "Specified territory" means any area outside India which may be notified as such by the Central Government for the purposes of this section.]

91. Countries with which no agreement exists1[10] :-

(1) If any person who is resident in India in any previous year proves that, in respect of his income which accrued or arose during that previous year outside India (and which is not deemed to accrue or arise in India), he has paid in any country with which there is no agreement under section 90 for the relief or avoidance of double taxation, income-tax, by deduction or otherwise, under the law in force in that country, he shall be entitled to the deduction from the Indian income-tax payable by him of a sum calculated on such doubly taxed income at the Indian rate of tax or the rate of tax of the said country, whichever is the lower, or at the Indian rate of tax if both the rates are equal.

(2) If any person who is resident in India in any previous year proves that in respect of his income which accrued or arose to him during that previous year in Pakistan he has paid in that country, by deduction or otherwise, tax payable to the Government under any law for the time being in force in that country relating to taxation of agricultural income, he shall be entitled to a deduction from the Indian income-tax payable by him—

(a) Of the amount of the tax paid in Pakistan under any law aforesaid on such income which is liable to tax under this Act also; or

(b) Of a sum calculated on that income at the Indian rate of tax; whichever is less.

(3) If any non-resident person is assessed on his share in the income of a registered firm assessed as resident in India in any previous year and such share includes any income accruing or arising outside India during that previous year (and which is not deemed to accrue or arise in India) in a country with which there is no agreement under section 90 for the relief or avoidance of double taxation and he proves that he has paid income-tax by deduction or otherwise under the law in force in that country in respect of the income so included he shall be entitled to a deduction from the Indian income-tax payable by him of a sum calculated on such doubly taxed income so included at the Indian rate of tax or the rate of tax of the said country, whichever is the lower, or at the Indian rate of tax if both the rates are equal.

Explanation.—in this section,—

(i) The expression "Indian income-tax" means income-tax 2[11] [* * *] charged in accordance with the provisions of this Act;

(ii) The expression "Indian rate of tax" means the rate determined by dividing the amount of Indian income-tax after deduction of any relief due under the provisions of this Act but before deduction of any relief due under this 3[12] [Chapter], by the total income;

(iii) The expression "rate of tax of the said country" means income-tax and super-tax actually paid in the said country in accordance with the corresponding laws in force in the said country after deduction of all relief due, but before deduction of any relief due in the said country in respect of double taxation, divided by the whole amount of the income as assessed in the said country;

(iv) The expression "income-tax" in relation to any country includes any excess profits tax or business profits tax charged on the profits by the Government of any part of that country or a local authority in that country.

DEPARTMENTAL VIEW

1. Payment of income tax by a person in the foreign country in respect of his income which accrued or arose during the previous year outside India is a pre-requisite for the grant of unilateral relief from double taxation. Since a firm and its partners are separate entities under the Income-tax Act, a partner will not be entitled to relief under the section. [Letter No. 145/18/71, dated 29th July, 1976]