DTAA

DOUBLE TAX AVOIDANCE AGREEMENT (DTAA)

 

Note: The rates mentioned above are the rates of tax applicable in the source country. Taxability in the country of residence would be as per the domestic law of country of residence, unless otherwise specified.

+ Beneficial ownership may not be required

E Exempt from tax

$ For agreement made after 31st May, 1997, the rate of tax under the Income Tax Act on royalty or fees for technical services receivable by a foreign company is reduced to 20% (plus Surcharge & Cess, as applicable) by the Finance Act, 1997. As per section 90(2), this rate may be adopted if is lower than rates under DTAA.

The rate is reduced to 10% (plus surcharge & cess, as applicable) for agreements entered into on or after 31st May, 2005 vide Finance Act, 2005.

Note 1: There is no separate provision for fees for Technical Services under the Treaty. Therefore, the same may be taxed under “Business Profits” or “Independent Personal Services” as per relevant DTAA, whichever is applicable.

Note 2: In the country of source, Royalties and fees for technical services are taxed at following rates:

a. during 1st five years of agreement

- 15% if Government or Specified Organization is payer

- 20% for other payers

Note 3: Taxable as per Domestic Law.

Note 4: Refer Treaty for detailed provisions.

Note 5: Special Rate of Tax on Dividend (other than Section 115-O Dividend) as mentioned in col. 4 is applicable if the recipient is a company beneficially holding at least specified percentage of voting control (mentioned in col, 5) in the company declaring Dividend.

Note 6: The above rates should be applied after carefully analysing and applying each Article of the Treaty and the Protocols, if any.

Note 7: Dividend u/s. 115-O is exempt u/s. 10(34) of the IT Act, 1961.

Note 8: Contracting States will review the provisions of this Agreement after a period of 4 years from the date on which this Agreement enters into force in order to consider the inclusion of an Article on “Fees for Technical Services” within the scope of this Agreement.

Double Taxation Avoidance Agreements – A Brief Overview

Fiscal jurisdiction is often the most aggressively guarded jurisdiction of any nation. As a consequence, even in times when economies are going global and borders fading, leading to liquid movement of goods, services and capital, double taxation is still one of the major obstacles to the development of inter-country economic relations. Nations are often forced to negotiate and accommodate the claims of other nations within their heavily guarded fiscal jurisdiction by the means of double taxation avoidance agreements, in order to bring down the barriers to international trade.

The Fiscal Committee of OECD in the Model Double Taxation Convention on Income and Capital, 1977, defines ‘the phenomenon of international juridical double taxation’ as ‘the imposition of comparable taxes in two or more states on the same tax payer in respect of the same subject matter and for identical periods’. Therefore, the basic cause of international multiple taxation is the exercise by sovereign states of their inherent right to levy tax extra-territorially. Most of the countries subject their residents to tax, on the basis of ‘personal jurisdiction’, on their global income including income arising or having its source in foreign countries.

Double tax treaties comprise of agreements between two countries, which, by eliminating international double taxation, promote exchange of goods, persons, services and investment of capital. These are bilateral economic agreements where the countries concerned evaluate the sacrifices and advantages which the treaty brings for each contracting state, including tax forgone and compensating economic advantages.

The interaction of two tax systems each belonging to different country, can result in double taxation. Every country seeks to tax the income generated within its territory on the basis of one or more connecting factors such as location of the source, residence of taxable entity, maintenance of Permanent Establishment and so on. Double Taxation of the same income in the hands of same entity would give rise to harsh consequences and impair economic development. Double Taxation Agreements between two countries therefore aim at eliminating or mitigating the incidence of double taxation.

In this article an attempt has been made to give a brief description of the various concepts related to double taxation avoidance agreements.

Classification 

Double taxation avoidance agreements, depending on their scope, can be classified as Comprehensive and Limited.

Comprehensive Double Taxation Agreements provide for taxes on income, capital gains and capital, while Limited Double Taxation Agreements refer only to income from shipping and air transport, or estates, inheritance and gifts. Comprehensive agreements ensure that the taxpayers in both the countries would be treated equally and on equitable basis, in respect of the problems relating to double taxation.

Objectives

The object of a Double Taxation Avoidance Agreement is to provide for the tax claims of two governments both legitimately interested in taxing a particular source of income either by assigning to one of the two the whole claim or else by prescribing the basis on which tax claims is to be shared between them.[2]

The need and purpose of tax treaties has been summarized by the OECD in the ‘Model Tax Convention on Income and on Capital’ in the following words:

It is desirable to clarify, standardize, and confirm the fiscal situation of taxpayers who are engaged, industrial, financial, or any other activities in other countries through the application by all countries of common solutions to identical cases of double taxation.

The objectives of double taxation avoidance agreements can be enumerated in the following words: 

First, they help in avoiding and alleviating the adverse burden of international double taxation, by - 

a) laying down rules for division of revenue between two countries; 

b) exempting certain incomes from tax in either country ; 

c) reducing the applicable rates of tax on certain incomes taxable in either countries

Secondly, and equally importantly tax treaties help a taxpayer of one country to know with greater certainty the potential limits of his tax liabilities in the other country.

Still another benefit from the tax-payers point of view is that, to a substantial extent, a tax treaty provides against non-discrimination of foreign tax payers or the permanent establishments in the source countries vis-à-vis domestic tax payers.

Pattern of taxation

Double taxation agreements allocate jurisdiction with respect to the right to tax a particular kind of income. The principle underlying tax treaties is to share the revenues between two countries. If each country gets a reasonable share of tax revenues, the bilateral and multilateral trade prospers and the overall tax collection also increases as a result of which both countries tend to benefit.[3] A double tax avoidance agreement deals by and large with business income, income from moveable property and from immovable property.

There are well established patterns of taxation of various types on income. The agreements provide of allocation of taxing jurisdiction to different contracting parties in respect of different heads of income.

In general, the rules are to the following effect: 

· Income from the business[4] is taxed – 

only in the resident country, if the business entity has no activity in the source state; 

only on the source state, if there is a fixed place of business, i.e. Permanent Establishment and to the extent it is attributable to that place

· Income form immovable property[5] arising to a non-resident is taxed primarily in the state of its location, i.e. the source[6] state. 

· Income from movable property such as dividends[7], interest[8] and royalties[9] are primarily taxed in the resident state, but the source state may impose a reduced tax.

Methods of Eliminating Double Taxation 

The objective of double taxation can be achieved Tax treaties employ various methods or a combination of 

(i) Exemption Method -

One method of avoiding double taxation is for the residence country to altogether exclude foreign income from its tax base. The country of source is then given exclusive right to tax such incomes. This is known as complete exemption method and is sometimes followed in respect of profits attributable to foreign permanent establishments or income from immovable property. Indian tax treaties with Denmark, Norway and Sweden embody with respect to certain incomes.

(ii) Credit Method

This method reflects the underline concept that the resident remains liable in the country of residence on its global income, however as far the quantum of tax liabilities is concerned credit for tax paid in the source country is given by the residence country against its domestic tax as if the foreign tax were paid to the country of residence itself.

(iii) Tax Sparing

One of the aims of the Indian Double Taxation Avoidance Agreements is to stimulate foreign investment flows in India from foreign developed countries. One way to achieve this aim is to let the investor to preserve to himself/itself benefits of tax incentives available in India for such investments. This is done through “Tax Sparing”. Here the tax credit is allowed by the country of its residence, not only in respect of taxes actually paid by it in India but also in respect of those taxes India forgoes due to its fiscal incentive provisions under the Indian Income Tax Act.

Thus, tax sparing credit is an extension of the normal and regular tax credit to taxes that are spared by the source country i.e. forgiven or reduced due to rebates with the intention of providing incentives for investments.

The regular tax credit is a measure for prevention of double taxation, but the tax sparing credit extends the relief granted by the source country to the investor in the residence country by the way of an incentive to stimulate foreign investment flows and does not seek reciprocal arrangements by the developing countries.

Applicability of Treaty benefits

In order to get the benefit of a tax treaty, it is necessary to have an access to it. For that purpose, a person must qualify in terms of the treaty as a: 

- person 

- resident of any of the Contracting states; and 

- beneficial owner of the income by the way of dividends, interest or royalties for a lower rate of withholding tax.

Residence of a Person/ Resident

The determination of the residential status is of great significance as the taxability of income under the domestic laws depends upon it, and as also only the resident of a contracting state can seek relief from double taxation.

The expression ‘resident of contracting state’ is defined to mean any person who, under the laws of that state, is 

1. liable to tax therein by reason of 

2. domicile, residence, place of management or 

3. any other criterion of a similar nature.

The treaty provisions set forth rules for determination whether a person is a resident of a contracting state for purposes of the treaty. The determination looks for first to a person’s liability to tax as a resident under the respective taxation laws of the contracting state. If a person is resident in both the contracting states, there are provisions to assign a single state of residence to him for purposes of the treaty through tie-breaking rules.

Business Income

The business income of a non-resident is taxable in India under section 9(1)(i) of the ITA only if it accrues or arises, directly or indirectly, through or from any business connection in India, property in India, asset or source of income in India, or through the transfer of an Indian capital asset. Explanation 2 of section 9(1) (i) contain an inclusive definition of business connection; as per which a business connection is said to exist if any person carrying on a business activity acts on behalf of a non-resident and:

# has and habitually exercises an authority to conclude contracts on behalf of the non-resident 

# has no such authority, but habitually maintains in India a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the non-resident 

# habitually secures orders in India, mainly or wholly for the non-resident or its affiliates.

Permanent Establishment

Double taxation agreement restricts the jurisdiction of the contracting states to taxing business income of a foreign enterprise only if such enterprise carries on business in India through a permanent establishment.

The term “permanent establishment” as defined in Article 5 means a fixed place of business through which business of an enterprise is carried on. The definition requires performance of business activity through a fixed place of business in another country. The expression has been defined as: 

a. fixed place of business through which the business of an 

b. enterprise is 

c. Wholly or partly carried on.

The first part of Article 5(1) postulates that the existence of a fixed place of business whereas the second part postulates that the business is carried on through a fixed place. If the second part is not attracted, there is no permanent establishment.[10] Thereby meaning that there should necessarily be a fixed place of business through which the enterprise must conduct business activity and that activity must be income generating.

Treating shopping

Treating shopping is an expression which refers to the act of a resident of a third country taking advantage of a fiscal treaty between states. A person acts through a legal entity created in a state essentially to obtain treaty benefits that would not be available directly to such person.

The basic feature of treaty shopping is the establishment of base companies in other states solely for the purpose of enjoying the benefit of a particular treaty rules existing between the state involved and the third state. An example of treaty shopping can be the India-Mauritius double Taxation agreement where various companies have been incorporated in Mauritius to take advantage of the Indo-Mauritius DTAA in which capital gains are to be assessed as per the law of the state of residence of the entity .However, under the Mauritian law, tax is not levied on capital gains which means that the capital gains made by the Mauritian entity on transfer of shares in an Indian company go unassessed.

However, the last few tears have seen a change in the approach of the States in the wake of wide reports of extensive money laundering and the tax evasion. As a consequences, a lot of countries are adopting a “Limitation of Benefits” clause in the tax treaties so as o restrict third parties from taking advantage of tax treaties between two other states.

Indian Tax Regime

The Income Tax Act, 1961 (ITA) governs taxation of income in India. According to section 5 of the ITA, Indian residents[11] are taxable on their worldwide income, and nonresidents are taxed only on income that has its source in India.[12]10 Section 6 of the ITA defines who may be a tax resident and contains different residency criteria for companies, firms, and individuals. The scope of section 5 is expanded by the ‘‘legal fiction contained in section 9,’’ which deems certain kinds of income to be of Indian source.

The ITA favors source-based taxation as compared to the OECD model conventions or treaties entered into by many developed countries that favor residence based taxation. Indian courts have supported source based taxation in several cases in the past.

Indian Policy With Respect To Double Taxation Avoidance Agreements

The policy adopted by the Indian government in regard to double taxation treaties may be worded as follows:

Trading with India should be relieved of Indian taxes considerably so as to promote its economic and industrial development. 

There should be co-ordination of Indian taxation with foreign tax legislation for Indian as well as foreign companies trading with India 

The agreements are intended to permit the Indian authorities to co-operate with the foreign tax administration. 

Tax treaties are a good compromise between taxation at source and taxation in the country of residence

India primarily follows the UN model convention and one therefore finds the tax-sparing and credit methods for elimination of double taxation in most Indian treaties as well as more source-based taxation in respect of the articles on ‘royalties’ and ‘other income’ than in the OECD model convention.

Conclusion

The regime of international taxation exists through bilateral tax treaties based upon model treaties, developed by the OECD and the UN, between the Contracting States. India has entered into a wide network of tax treaties with various countries all over the world to facilitate free flow of capital into and from India. However, the international tax regime has to be restructured continuously so as to respond to the current challenges and drawbacks.

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[1] ***

[2] Ostime (Inspector of taxes) v. Australian Mutual Provident Society (1960) 39 ITR 210 (HL)

[3] N.K.Bhat, “Overview of International Taxation”, International Taxation – A Compendium, The Chamber of Income Tax Consultants, fifth edition, 2005

[4] Article 7, 8 & 9 of UN Model Convention

[5] Article 6 of UN Model Convention

[6] Source state is where income is generated; residence state is where the recipient of the income is a resident.

[7] Article 10 of UN Model Convention

[8] Article 11 of UN Model Convention

[9] Article 12 of Un Model Convention 

[10] DIT v. Morgan Stanley (2007) 292 ITR 416 (SC) 

[11] Defined in Section 6 of the Income Tax Act, 1961

[12] Income is said to have its source in India if it accrues or arises in India, is deemed to accrue or arise in India, or is received in India

India has comprehensive Double Taxation Avoidance Agreements (DTAA ) with 83 [4] countries. This means that there are agreed rates of tax and jurisdiction on specified types of income arising in a country to a tax resident of another country. Under the Income Tax Act 1961 of India, there are two provisions, Section 90 and Section 91, which provide specific relief to taxpayers to save them from double taxation. Section 90 is for taxpayers who have paid the tax to a country with which India has signed DTAA, while Section 91 provides relief to tax payers who have paid tax to a country with which India has not signed a DTAA. Thus, India gives relief to both kind of taxpayers.

A large number of foreign institutional investors who trade on the Indian stock markets operate from Mauritius and the second beingSingapore. According to the tax treaty between India and Mauritius, capital gains arising from the sale of shares are taxable in the country of residence of the shareholder and not in the country of residence of the company whose shares have been sold. Therefore, a company resident in Mauritius selling shares of an Indian company will not pay tax in India. Since there is no capital gains tax in Mauritius, the gain will escape tax altogether.

The Indian and Cypriot tax treaty is the only other such Indian treaty to provide for the same beneficial treatment of capital gains.

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Double taxation is a situation that affects C corporations when business profits are taxed at both the corporate and personal levels. The corporation must pay income tax at the corporate rate before any profits can be paid to shareholders. Then any profits that are distributed to shareholders through dividends are subject to income tax again at the individual rate. In this way, the corporate profits are subject to income taxes twice. Double taxation does not affect S corporations, which are able to "pass through" earnings directly to shareholders without the intermediate step of paying dividends. In addition, many smaller corporations are able to avoid double taxation by distributing earnings to employee/shareholders as wages. Still, double taxation has long been subject to criticism from accountants, lawyers, and economists.

Critics of double taxation would prefer to integrate the corporate and personal tax systems, arguing that taxes should not affect business and investment decisions. They claim that double taxation places corporations at a disadvantage in comparison with unincorporated businesses, influences corporations to use debt financing rather than equity financing (because interest payments can be deducted and dividend payments cannot), and provides incentives for corporations to retain earnings rather than distributing them to shareholders. Furthermore, critics of the current corporate taxation system argue that integration would simplify the tax code significantly.

Avoiding Double Taxation

There are many ways for corporations to avoid double taxation. For many smaller corporations, all of the major shareholders are also employees of the firm. These corporations are able to avoid double taxation by distributing earnings to employees as wages and fringe benefits. Although the individual employees must pay taxes on their income, the corporation is able to deduct the wages and benefits paid to employees as a business expense, and thus is not required to pay corporate taxes on that amount. For many small businesses, distributions to employee/owners account for all of the corporation's income, and there is nothing left over that is subject to corporate taxes. In cases where income is left in the business, it is usually retained in order to finance future growth. Although this amount is subject to corporate taxes, these tax rates are usually lower than those paid by individuals.

Larger corporations—which are more likely to have shareholders who are not employed by the business and who thus cannot have corporate profits distributed to them in the form of salaries and fringe benefits—are often able to avoid double taxation as well. For example, a non-active shareholder may be called a "consultant," since payments to consultants are considered tax-deductible business expenses rather than dividends. Of course, the shareholder/consultant must pay taxes on his or her compensation. It is also possible to add shareholders to the payroll as members of the board of directors. Finally, tax-exempt investors such as pension funds and charities are often significant shareholders in large corporations. The tax-exempt status of these groups enables them to avoid paying taxes on corporate dividends received.

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A major portion of international capital flows entering the Indian economy is aided by taxation laws and systems among countries like the Double Taxation Avoidance Agreement.

The phenomenal growth in international trade and commerce and increasing interaction among nations, citizens, residents and businesses of one country has extended their sphere of activity and business operations to other countries. A person earning any income has to pay tax in the country in which the income is earned (as Source Country) as well as in the country in which the person is resident. As such, the income is liable to be taxed in both the countries. To avoid this hardship to individuals and also with a view to ensure that national economic growth does not suffer, the Central government under Section 90 of the Income Tax Act has entered into Double Tax Avoidance Agreements (DTAA) with other countries.

Definition: Double taxation can be defined as the levy of taxes on income or capital in the hands of the same tax payer in more than one country, in respect of the same income or capital for the same period DTAAs provide for the following reduced rates of tax on dividend, interest, royalties, technical service fees, etc., received by residents of one country from those in the other. Where total exemption is not granted in the DTAAs and the income is taxed in both countries, the country in which the person is resident and is paying taxed, the credit for the tax paid by that person in the other country is allowed.

DTAT with Mauritius:

The Indo-Mauritius DTAT was first signed in 1983. The main provision of the agreement was that no resident of Mauritius would be taxed in India on capital gains arising out of sale of securities in India. The treaty gives capital gains exemption for investments if routed via Mauritius. The treaty remained on paper until 1992 when FIIs were allowed into India. The same year, Mauritius passed the Offshore Business Activities Act which allowed foreign companies to register in the island nation for investing abroad. Registering a company in Mauritius has obvious advantages such as, total exemption from capital gains tax, quick incorporation, total business secrecy and a completely convertible currency.

For foreign investors willing to invest in India, it made sense to set up a subsidiary in Mauritius and route their investments through that country. By doing so, they would avoid paying capital gains tax all together — India won’t tax because the company is based in Mauritius and Mauritius had anyway exempted investors from capital gains tax.

In the last few years Mauritius has emerged as the largest foreign investor [analysts estimate about 25% of all inbound FII money is routed thorough Mauritius] in India thus clearly indicating that it has become a tax haven for foreign investors. This indicates the route investors are taking into India to avoid otherwise due taxation.

There are allegations that foreign companies are using ‘notional residence’ in Mauritius to avoid paying taxes in India. It has even been claimed that tax losses to India are more than incoming investments. In spite of the controversies generated, it has been kept in its present form. As it was felt that changing its clauses would lead to flight of capital from the country, slowing down foreign investment inflows and may lead to a significant stock market crash. It is reported that Indians used Mauritius-registered companies and Mauritius offshore trusts to hold assets abroad beyond the reach of Indian tax laws. This is called ’round-tripping’, where Indians re-route their money stashed abroad through the Mauritius route.

It is now hoped that the Treaty, duly modified, will help encourage Indian investments in Mauritius, rather than the other way around. It is expected that Mauritius will agree to the changes as having signed similar DTATs with other ASEAN countries, it will be able to highlight its attraction as a tax haven and also plug gaps to stop both ‘round tripping’ and ‘treaty shopping’.

The list of FIIs that have preferred to invest in India via Mauritius includes Aberdeen Asset Management, Citi Group Global, CLSA Merchant Bankers, Deutsche Securities, Emerging Markets Management LLC, Fidelity Assets Management, Golden Sachs Investments, HSBC Global Investment, JP Morgan Fleming Asset Management, Merrill Lynch Investment Managers and UBS Securities Asia

DTAA with Singapore:

Under the India Singapore DTAA (2005), a Singapore tax resident is not subject to Indian taxes on capital gains derived from the sale of shares in an Indian company. The changes introduced in 2005 put the Singapore DTAA on par with the India-Mauritius DTAA with respect to tax exemption on capital gains but include two important limitations on beneficial treatment for capital gains:

First, investors from Singapore do not receive an exemption from Indian capital gains tax if the affairs of the company were arranged with the “primary purpose” of taking advantage of the capital gains exemption (the so-called “limitation on benefits”). Specifically, a “shell/conduit” company cannot avail itself of the capital gains exemption, but provides a safe harbour for companies listed in India or Singapore or a company with more than S$200,000 or Rs. 5 million of total annual expenditures on operations in Singapore in the preceding 24- month period.

A second important limitation ties the fate of the capital gains exemption under the Singapore DTAA to the India-Mauritius DTAA. Investors from Singapore will lose their capital gains exemption if India and Mauritius amend their DTAA to take away the corresponding exemption.

The Indian Government has entered into similar DTAAs with 79 countries including Cyprus (renegotiated now), UAE, Spain, Luxembourg etc. and other courtiers such as Saudi Arabia and Kuwait are eager to have such agreements with India in place.

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Consistent with the practice adopted in most of the countries in the world that have taken to levy tax on income / capital, India has adopted the system under which Income Tax on residents is imposed on the "total world income" i.e. income earned anywhere in the world. Whereas a tax payer’s own country (referred to as home country) has a sovereign right to tax him, the source of income may be in some other country (referred to as host country) which country also claims a right to tax the income arising in that country. The result is that income arising to a resident out of India is subjected to tax in India as it is part of total world income and, also in host country which provides the source for that income.In the case of non-residents, however, it is not the "total world income" but only that income is subjected to tax in India which is earned in this country. Since a resident is taxed in respect of foreign income in his own country as well as in the country where it is earned, he is subjected to tax in both the countries in respect of the same income. The purpose of double tax avoidance agreement is to avoid such double taxation to the extent agreed upon.Due to phenomenal growth in international trade and commerce and increasing interactivity among the nations, residents of one country extend their sphere of business operations to other countries. Cross-country flow of capital, services and technology is the order of the day particularly after the country embarked on the path of globalization of economy. Presence of double or multiple taxation acts as a major determining factor in decisions relating to location of investment, technology etc. as it affects the bottom-line of a business enterprise. The effort is, therefore, to ensure that heavy tax burden is not cast as a result of double or multiple taxation. The object is achieved by the Government entering into agreements with other countries whereby the respective jurisdiction is so identified that a particular income is taxed in one country only or, in case it is taxed in both the countries, suitable relief is provided in one country to mitigate the hardship caused by taxation in another jurisdiction. 

Such agreements are known as "Double Tax Avoidance Agreements" (DTAA) also termed as "Tax Treaties". The statutory authority to enter into such agreements is vested in the Central Government by the provisions contained in Section 90 of the Income Tax Act in terms of which India has, by the end of March 2002, entered into 64 agreements of this nature which are comprehensive in the sense that they deal with different types of income which may be subjected to double taxation. A list of such agreements and the respective years of their coming into force forms annexure to this book. In addition there are 12 agreements which deal with only profit of enterprises engaged in operation of aircraft and 5 which are limited to shipping profit.

Apart from providing ways and means to avoid double taxation of same income, the agreements generally provide for other matters of common interest of the two countries such as exchange of information, mutual assistance procedure for resolution of disputes and for mutual assistance in effecting recovery of taxes. Treaties being international agreements, their consequences are determined according to the rules of Vienna convention on the law of Treaties of 1969. Article 31, 32 and 33 of the convention lay down the rules for interpretation of these treaties. The commentaries by OECD and UN based on respective models also provide material for interpretation of the treaties. The terms and expressions, if not defined in the treaties, take their meaning from respective domestic law in case they are defined there.

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SOME CLARIFICATIONS ON DOUBLE TAXATION AVOIDANCE AGREEMENTS

 

QUESTION: In The Hindu dated October 3, 2011, you have stated that where the income from one country is assessed in the other country with which India has Agreement, there are treaty benefits. Amnesty is currently in vogue in U.S. Many taxpayers would like to know, what would be the damage in disclosure of income after Double Tax Relief? Could you answer the following queries?

What are the broad features of Double Taxation Avoidance Agreements?

 

ANSWER: All Double Taxation Avoidance Agreements are not identical. Extent of relief can be decided only with reference to terms of the Agreement and the nature of income. Following are the broad features of an Agreement. (1) The date on which it comes into effect; (2) taxes covered by it; (3) rules for determination of residential status for the purposes of the Agreement; (4) guidelines for inference of permanent establishment in respect of business income and fixed base for professional income; (5) definitions of concepts such as immovable property, dividend, business profits, royalty, technical fees and salaries; (6) extent of relief to be granted on doubly taxed income on agreed tax-sharing between the participants to the Agreement; (7) exchange of information as between the countries primarily to tackle tax evasion and recovery of tax due in one country in the other; (8) provision for non-discrimination and (9) other clauses to suit the requirements of the participating countries.

 

Q: Is there any difference between the meaning of resident between the domestic law and the Agreement? Is the fact of citizenship in both countries as in the case of NRIs abroad make any difference?

 

A: Most agreements expect that residential status should be based on location of permanent home or where vital interests are located or where there is a fixed abode or where he is a citizen, in that order. Where no inference could be drawn with reference to these tests, it will be decided by the competent authorities of the Agreement partners.

In the case of a company, place of control and management would decide the residential status, unless the Agreement itself provides for such criteria like place of incorporation so as to avoid enquiry as regards the place of effective management.

In view of differing definitions of resident as between domestic law and the Agreements, it is quite possible that a taxpayer could be resident of one country under the domestic law and resident of the other country under the Agreement.

Citizenship is only a tie-breaker rule accepted in some Agreements where residential status cannot be sorted out by other criteria. NRIs, who have acquired citizenship abroad, do not have any immunity, which is not available to others.

 

 

 

 

 

Q: What is the difference between avoidance of double taxation and relief from double taxation?

 

A: There are both provisions of avoidance and relief depending upon the categorisation of income. Income and capital gains from immovable properties are ordinarily taxable in the country where the immovable property is located so that the other country cannot tax the same, though the owner of such income is a permanent resident of that other country.

Interest and dividend are taxable in the country where such income arises usually at 10 per cent as provided in the Agreements. Where same income is also taxable in the other country of which the enterprise is resident, credit for the tax paid (at 10 per cent) in the other country is available for set-off of tax on such income. It is a case of revenue sharing by treating these categories of income in the specified manner as between the two countries, irrespective of domestic law in either country. It is also an instance of “avoidance principle” in case of overlapping jurisdiction, irrespective of liability under domestic law. Royalty and technical fees are also similarly taxed at the specified rate.

Salaries are usually taxed with reference to the period of stay on the principle that salary income arises, where service is rendered, whether he is a resident or non-resident.

This is yet another application of avoidance principle. Business is taxed in the country where business is carried on, but it will also be taxed in the country where the enterprise has a permanent establishment to the extent such income is attributable to permanent establishment. But such tax paid will be set off against the tax payable in the country of which the enterprise is resident. Relief for double taxation by such set off is available only in the home country where the enterprise or the individual is a resident within the meaning of the Agreement.

Ordinarily, such relief is limited to the lesser of the two incomes, where computation of income results in different incomes with credit available at lesser of the two rates of taxes, so that the assessee is left with tax payable at the higher rate on the larger income.

The same principle applies for income from profession, which is taxed in the country on income earned through fixed base.

Relief in such a case has to await completion of assessment in the other country, unlike other instances covered by avoidance principle. Agreements usually make special provision for entertainers, students and pensioners.

 

 

Q: If a person is not entitled to any double income-tax relief, but he does not choose to claim such relief, should he report his income in the other country, where the income does not arise?

 

A: Report of foreign income is a matter of stipulation under the law, where an income-tax return is required to be filed.

In countries like India or the U.S., every income within its borders is bound to be reported and so is the global income abroad by residents under the domestic law. Information relating to income outside the country can always be obtained by the tax collector, through the provision for exchange of information under the Agreement, special agreements which India now has with some countries under Tax Information Exchange Agreement (TIEA) or by enquiry through its embassies or even by purchase of information from informants or other third parties. It is not advisable for the taxpayer having income in more than one country to bank upon international boundaries as securing secrecy to avoid payment of legitimate tax. Since relief is available under Double Taxation Avoidance Agreement and unilateral relief is available even where there is no Agreement, liability, if any, may not be as large as apprehended, so that it is unwise to play hide and seek with the tax collector.

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DTAA - an Introduction 

By the very nature of their status as non residents they are likely to be covered by the laws of at least two countries, one country of which they are residents and second where such persons are earning income as non residents. It is, therefore, essential to know the manner in which income earned by them will be taxed whether in the country of their residence or the country where income is earned. 

In fact most of the countries in the world that have taken to levy tax on income/capital have adopted more or less similar pattern, i.e. Income Tax is imposed on the person who has derived the income and the tax is levied at the place where either he has earned it or where he resides.

Due to phenomenal growth in international trade and commerce and increasing interac tivity among the nations, residents of one country extend their sphere of business opera tions to other countries where income is earned. It is in the interest of all countries to ensure that undue tax burden is not cast on persons earning income by taxing them twice, once in the country of residence and again in the country where the income is derived. At the same time sufficient precautions are also needed to guard against tax evasion and to facilitate tax recoveries.

Need for Double Taxation Avoidance Agreements 

Double taxation can be defined as the levy of taxes on income / capital in the hands of the same tax payer in more than one country in respect of the same income or capital for the same period. The problem gets complicated since taxation schemes of different countries contain divergent notions regarding definition of income as source. The position becomes anomalous in a situation where an assessee residing in one country earns income in another country, and the tax rates in both the countries are higher than 50%. If taxed at both places on the same income the assessee will be left with a negative income. This is bound to affect the economic growth. 

To avoid such a hardship to individuals and also with a view to seeing that national economic growth does not suffer, Double Taxation Avoidance Agreements (D.T.A.A.) are entered into with other countries. 

Such tax treaties, therefore, serve the purpose of providing full protection to tax payers against double taxation and thus prevent the discouragement which double taxation may provide in the free flow of international trade and international investment. Be sides, such treaties generally contain provisions for mutual exchange of information and for reducing litigation.

DTA Agreement by Govt. of India with Foreign countries 

Coming to specific provisions contained in the Indian Income-tax Act, such tax trea ties are made under the provisions contained in Section 90 of the Income-tax Act which enables the Central Government to enter into treaties to avoid double taxation. Govt. of India has entered into DTA agreement with several countries, some of the main countries are Australia, Bangladesh, Canada, China, Germany, Japan, Malaysia, Mauritius, Nepal, Singapore, Srilanka, UAE, UAR, UK, USA, USSR etc.

Salient Features of DTA agreements between India & others 

A typical DTA Agreement between India and another country covers only residents of India and the other contracting country who has entered into the agreement with India. A person who is not resident either of India or of the other contracting country cannot claim any benefit under the said DTA Agreement. Such agreement generally provides that the laws of the two contracting states will govern the taxation of income in respective states except when express provision to the contrary is made in the agreement. 

A situation may arise when originally the tax provision in the other contracting state gave concessional treatment compared to India at a particular time but Indian laws were subsequently amended to bring incidence of tax to a level lower than the tax rate existing in the other contra cting state. 

Since the tax treaties are meant to be beneficial and not intended to put tax payers of a contracting state to a disadvantage, it is provided in Sec. 90 that a benefi cial provisions under the Indian Income Tax Act will not be denied to residents of contra cting state merely because the corresponding provision in tax treaty is less beneficial. Some Double Taxation Avoidance agreements provide that income by way of interest, royalty or fee for technical services is charged to tax on net basis. 

This may result in tax deducted at source from sums paid to Non-residents which may be more than the final tax liability. 

The Assessing Officer has therefore been empowered u/s 195 to determine the appropriate proportion of the amount from which tax is to be deducted at source. There are instances where as per the Income-tax Act, tax is required to be deducted at a rate prescribed in tax treaty. However this may require foreign companies to apply for refund. To obviate such difficulties Sec. 2(37A) provides that tax may be deducted at source at the rate applicable in a particular case as per section 195 on the sums payable to non-residents or in accordance with the rates specified in D.T.A. Agreements

Taxation of Business Profits under DTA agreement 

One of the important terms that occurs in all the Double Taxation Avoidance Agree ments is the term 'Permanent Establishment' (PE) which has not been defined in the Income- tax Act. However as per the Double Taxation Avoidance Agreements, PE includes, a vide variety of arrangements i.e. a place of management, a branch, an office, a factory, a workshop or a warehouse, a mine, a quarry, an oilfield etc. Imposition of tax on a foreign enterprise is done only if it has a PE in the contracting state. Tax is computed by treating the PE as a distinct and independent enterprise. 

In order to avoid double taxation it is provided that if a resident of India becomes liable to pay tax either directly or by deduction in the other country in respect of income from any source, he shall be allowed credit against the Indian tax payable in respect of such income in an amount not exceeding the tax borne by him in the other country on that portion of the income which is taxed in the said other country. The same benefit is available to the resident of the other Country, on income taxed in India. 

In respect of incomes on which taxes are either exempted or reduced, the country of residence will not take the exempted income into account while determining the tax to be imposed on the rest of the income. 

Taxation of income from Air and Shipping Transport under DTA agreement 

Income derived from the operation of Air transport in international traffic by an enterprise of one contracting state will not be taxed in the other contracting state. 

In respect of an enterprise of one contracting state, income earned in the other contracting state from the operation of ships in international traffic, will be taxed in that contracting state wherein the place of effective management of enterprise is situated. However some DTA agreement contain provisions to tax the income in the other contracting state also, although at reduced rate. These provisions do not apply to coastal traffic. 

Taxation of income from Associated Enterprises under DTA agreements 

In order to plug loop holes for tax evasion, a separate article in DTA agreement provides for taxing the notional income deemed to arise on account of an enterprise of one contracting state participating directly/indirectly in the management of another enter prise in the other contracting state or where some persons participate directly or indi rectly in both the enterprises under conditions different from those existing between the independent enterprises. 

Taxation of Dividend income under DTA agreement 

Dividend paid by a Company which is a resident of a Contracting State to a resident of the other Contracting State will be taxed in both the States. 

Taxation of Interest Income under DTA agreement 

Interest paid in a Contracting State to a resident of the other Contracting State is chargeable in both the States. 

Taxation of income from Royalties under DTA agreement 

Regarding Royalties arising in a Contracting State and paid to a resident of the other Contracting State:-

Some DTA agreements provide for taxation in the other Contracting State. 

Some agreements provide for taxation in the contracting State. 

Some agreements provide for taxation in both the States. 

Taxation of Income from Capital Gains under DTA agreement 

Capital Gains will be taxed in the state where the capital asset is situated at the time of sale. 

Taxation of income from Professional Services under DTA Agreement 

Income will be taxed in the state where the person is resident. However if he has a fixed base in the other Contracting State, the income attributable to the fixed base will be taxed in the other contracting state.

Resolving of disputes in interpretation of the terms of DTA Agreement 

If there are any disputes in the interpretation/ implementation of the terms of DTA Agreements, normal remedies of appeal etc. provided in the Income-tax Act are available to the aggrieved party. The DTA Agreements also contain mutual agreement procedure. The aggrieved party may approach the Competent Authority of the contracting State wherein he is a resident, who, if he is unable to resolve the dispute by himself will approach the competant Authority of the other Contracting State to arrive at a solution after mutual discussion.

Advance Ruling 

In respect of interpretation of terms contained in DTA Agreement The Indian Income-tax Act contains a special provision which is offered to those Non- residents who would like to have advance ruling on a matter of law or fact in relation to a transaction undertaken/proposed to be undertaken by them. 

The facilities available in such provision can be availed of by the Non-residents in the matters regarding Double Taxation of income also. More on this matter will be discussed in a separate chapter on the subject.

Double Taxation Relief where no DTA Agreements are entered into 

Apart from relief to persons of a country where India has entered in Double Taxation Avoidance Agreement, there is relief given even in cases where the Government of India has not entered into DTA agreement with any foreign country. In such cases if any resident Indian produces evidences to show that, he has paid any tax in any country with which the Government of India has not entered into a DTA agreement, tax relief on that part of his income which suffered taxation in the foreign country, to the extent of tax so paid in such foreign country, or the tax leviable in India under the Income Tax Act on such income whichever is less shall be allowed as deduction u/s.91 while calculating his tax liabili ties on such income.

Latest News Double Taxation Avoidance Agreements 

* A Double Taxation and Avoidance Convention (DTAC) and Protocol were signed between India and Austria on 8.11.1999. The Convention Protocol will cover in the case of India, Income-tax including surcharge thereon and in the case of Austria the Income-tax and Corporation tax. The existing DTAC between Austria and India signed at New Delhi on 24.9.1963 shall ceased to have effect on the entry into force of this Convention. 

* A convention for the avoidance of Double Taxation and the prevention of fiscal evasion with respect to taxes on income was signed between the Government of India and the Government of Kingdom of Jordan that had come into force on the 16th day of October 1999 has been notified vide notification No. 11161 on 8.12.99. 

* A convention for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and on capital that had come into force on 27th September 1999 has been notified vide notification No. 11160 dt. 8.

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Authority Tribunal

In Re: Advance Ruling A. No. P-11 Of ... vs Unknown on 9 February, 1996

Equivalent citations: 1997 228 ITR 55 AAR

Bench: S Ranganathan, D Lal, R Meena

RULINGS

Application No. P-11 of 1995

Decided On: 09.02.1996

Appellants: In Re: Advance Ruling A. No. P-11 of 1995 Vs.

Respondent:

Hon'ble Judges:

S. Ranganathan, J. (Chairman), D.B. Lal and R.L. Meena, Members

Subject: Direct Taxation

Acts/Rules/Orders:

Income Tax Act, 1961

RULING

1. This application seeks the ruling of this Authority as per the provisions of Chapter XIX-B of the Income-tax Act, 1961, on certain questions which arise out of certain transactions entered into by the applicant in India. The applicant is a company duly incorporated and existing under the laws of Singapore. Accordingly, it is a resident of Singapore.

2. The facts having a bearing on the question on which ruling has been sought, as stated by the applicant, and as brought out from the other relevant records, are as follows :

(a) During the previous year ending on March 31, 1995, the applicant entered into the following two contracts with ABC for providing services related to burial of pipelines off-shore India.

(i) X pipeline project ; and

(ii) Y trunk pipeline project.

The scope of work in these contracts included burial of pipelines both onshore and offshore India and involved the following activities :

* mobilisation and demobilisation ;

* pre-trenching survey ;

* installation of pipeline crossing, pipe supports and free span rectification works ;

* subsea welding ;

* installation of submarine cables ;

* pipeline rigging, testing and drying.

(b) The job executed by the applicant was in the nature of a turnkey sub-contract because the main contract from the Oil and Natural Gas Commission was obtained by XYZ. This contract, inter alia, envisaged installation of pipeline crossing, free span rectification works, subsea welding, submarine cables, testing, drying, etc. Part of the job was subcontracted to the ABC by the XYZ. The ABC in turn further sub-contracted the job of burial of pipeline to the applicant. The contracts of the applicant being in the nature of turnkey sub-contracts, all marine vessels, personnel and equipment were provided by the applicant.

(c) The duration of the two contracts was 7 days and 39 days respectively.

(d) The fact that the activities under the contract were performed in Indian territory is undisputed. Therefore, in the normal course the income from such activities would have been assessable to income-tax in India.

3. However, it has been contended by the applicant that the specific provisions of the "Agreement for Avoidance of Double Taxation and Prevention of Fiscal evasion with respect to taxes on income" concluded between the Government of the Republic of India and Republic of Singapore (Agreement for Avoidance of Double Taxation) which came into force on May 27, 1994, should overrule the general provisions of the Indian Income-tax Act, 1961. It has further been contended that as per the provisions of the Agreement for Avoidance of Double Taxation, the applicant does not have a permanent establishment (P. E.), in India and, therefore, it cannot be subjected to income-tax on the profits earned from these operations. Accordingly, the following question has been raised before the Authority :

" The taxability [in terms of Article 5 of the Agreement for Avoidance of Double Taxation concluded between India and Singapore on January 20, 1994] of revenues earned by the applicant, a tax resident of Singapore, from the contracts entered into with ABC during the previous year ended on March 31, 1995."

4. Since any answers to the questions raised by the applicant will involve consideration of the relevant articles of the Agreement for Avoidance of Double Taxation, they may be set out in so far as they are relevant.

(See [1994] 209 ITR (St.) 1, 4, 8).

"Article 5

(1) For the purposes of this Agreement, the term 'permanent establishment' means a fixed place of business through which the business of the enterprise is wholly or partly carried on.

(2) the term 'permanent establishment' includes especially :

(a) a place of management ;

(b) a branch ;

(c) an office ;

(d) a factory ;

(e) a workshop ;

(f) a mine, an oil or gas well, a quarry or any other place of extraction of natural resources ;

(g) a warehouse in relation to a person providing storage facilities for others ;

(h) a farm, plantation or other place where agriculture, forestry, plantation or related activities are carried on ;

(i) premises used as a sales outlet or for soliciting and receiving orders ;

(j) an installation or structure used for the exploration or exploitation of natural resources but only if so used for a period of more than 120 days in any fiscal year ;

(3) A building site or construction, installation or assembly project constitutes a permanent establishment only if it continues for a period of more than 183 days in any fiscal year."

"Article 7

(1) The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is directly or indirectly attributable to that permanent establishment."

5. The Authority has no hesitation in accepting the contention of the applicant that the specific provisions of the Agreement for Avoidance of Double Taxation should override the general provisions of the Income-tax Act, 1961, because by now it is a settled law. The Department also has not raised any objection against this contention of the applicant. Therefore, it is to be considered whether the income of the applicant earned from the contracts mentioned earlier is taxable or not as per the provisions of the Agreement for Avoidance of Double Taxation. For this purpose it has first to be decided as to whether the applicant had a permanent establishment in India as per the provisions of Article 5 of the Agreement for Avoidance of Double Taxation or not. Since the applicant was only engaged in the burial of pipelines, therefore, it cannot be said that there was any fixed place through which its business was carried on. Thus, the applicant can be said to have a permanent establishment in India only if the nature of its activities in the Bombay High can be brought within the scope of Clause (f) or (j) of para 2 or para 3 of Article 5 of the Agreement for Avoidance of Double Taxation. It was argued on behalf of the applicant that the burial of the pipelines in the seabed amounted to installation as per the requirement of para 3 of Article 5 of the Agreement for Avoidance of Double Taxation. On the other hand, the Additional Commissioner of Income-tax who appeared on behalf of the Commissioner of Income-tax, stressed that the activities of the applicant are covered within the scope of Clause (f) of para 2 of Article 5 of the Agreement for Avoidance of Double Taxation. He maintained that the installation work was in fact carried out by the ABC and the applicant was awarded only a part of the work by the ABC and, therefore, it cannot be said that the applicant has carried out any installation work in the Bombay High. According to him as oil and gas-well has specifically been covered by the Agreement for Avoidance of Double Taxation in Clause (f) of para 2 of Article 5, it cannot be covered under any other Clause of the Agreement for Avoidance of Double Taxation. This argument of the Department cannot be accepted because the applicant has only worked on the oil or gas-well and the oil well in question was not owned or operated by the applicant.

6. From a perusal of the scope of the work carried on by the applicant, it is clear that the applicant was engaged in an installation and assembly project which pertained to the burial of pipelines in the seabed. Such activities are covered by para. 3 of the Article 5 of the Agreement for Avoidance of Double Taxation and not by Clause (f) of para 2 of Article 5 as claimed by the Department. But para. 3 permits such project to be treated as a permanent establishment only if the duration of the project exceeds 183 days in any fiscal year, which is not the case here. It, therefore, follows that the applicant has no permanent establishment in India within the meaning of Article 5 of the Agreement for Avoidance of Double Taxation and since Article 7 of the Agreement for Avoidance of Double Taxation permits the taxation, in the hands of a resident of Singapore, only of the profits attributable to a permanent establishment in India, no part of the profits earned by the applicant from its activities under the contract can be charged to Indian income-tax even though such activities took place within Indian territory and the profits therefrom would have been chargeable to tax in India but for the Agreement for Avoidance of Double Taxation.

7. For the reasons discussed above, the Authority pronounces the following ruling on the question raised in Application No. P-11 of 1995.

RULING

8. The revenues earned by the applicant from the contracts entered into with ABC, Singapore, during the previous year ended on March 31, 1995, would not be liable to tax in India, as it had no permanent establishment in India.

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The New India - Swiss Tax Treaty

The new provisions of the Double Taxation Avoidance Agreement (DTAA) between India and Switzerland have now come into effect.  While the DTAA itself was signed in November 1994, the new provisions are contained in an amending Protocol signed in August 2010.  The provisions apply to income arising in India after April 1, 2012 and in Switzerland after January 1, 2012.

The 14 articles of the Protocol deal with various matters.  While tax professionals would generally be absorbing all these changes with much interest, Article 8 on "Exchange of Information" and Article 11 on "Conduit arrangements" are particularly noteworthy.

Article 8 of the Protocol - Exchange of Information

The DTAA always contained a provision on information exchange.  These provisions have been materially retained in the new Protocol.  Additionally, the new Protocol has made some interesting inclusions. 

For example, India can request for information only if it is 'forseeably relevant' to enforcement of its tax law.  Further, on a request for information from India, Switzerland will need to use its administration to obtain that information regardless of whether it requires this information under its own tax laws, as long as it does not violate its legal process.  It also does not matter that the information is held by a bank, a financial institution, or in a fiduciary capacity.  India can, however, request for information only after it has exhausted its own laws to obtain this information.  In terms of procedure, India ought to specifically identify the person under examination, set out the period of time for which information is required, detail the information required, state the underlying tax purpose and also name the person expected to have the information. 

The provisions therefore appear to be broad enough, with a risk that procedural aspects could still mar the process.  To address this, the Protocol clarifies that the new provisions are intended to have the widest coverage and the terms 'foreseeably relevant' and the procedures set out for requesting the information have only been inserted to prevent 'fishing expeditions' and not to frustrate genuine information requests.

The principles underlying the Protocol therefore appear to support liberal information exchange, though it remains unclear how these would practically work, given the details necessary to actually write out an information request.  This could prove a material impediment as 'black money' is not likely to leave a trail to build the case for seeking information leaving room to argue that an information request is merely a fishing expedition as the requesting country may not know for sure.  The good intentions of both countries still need to be relied on to drive the process. 

Another impediment could be that the new provisions apply from January 1, 2011, 4 months after signing the Protocol.  This is viewed by many as leaving out existing offenders for new ones, who are naive enough to leave unaccounted money in Switzerland even after the Protocol is in public domain. 

Article  11 - Conduit arrangement

Article 11 is an anti-abuse provision.  It states that benefits under Articles 10 (Dividends), Article 11 (interest), Article 12 (Royalty) and Article 22 (Other Income) would not be available where such sums are received under a "conduit arrangement".  A conduit arrangement is defined as a transaction or a series of transactions structured such that a resident of one of the countries receives income from the other country and claims benefits under the DTAA, but in reality pays out most of this income to a resident of a third country which may not have an equally beneficial DTAA. 

The DTAA provisions contain benefits like lower rates of tax or more restricted scope of taxation than the applicable domestic laws.  Such benefits are conditioned on the recipient being the "beneficial owner" of such income.  In the absence of a clear definition of the term "beneficial owner" back-to-back arrangements, similar to how conduit arrangements are now defined, could not be challenged easily.  With the definition of "conduit arrangements" specifically including such arrangements, Indian authorities should be better placed to prevent treaty abuse by giving the Revenue a peek into the internal arrangements of non-resident tax payers which may have otherwise been outside their reach.

Conclusion

The two provisions in the Protocol deal with different aspects of taxation - (i) unaccounted income and (ii) treaty abuse. 

The Exchange of Information provisions appear to be steps in the right direction, though its rewards may not be immediately visible or tangible.  The battle against tax treaty abuse though may achieve more success in initial years where such arrangements presently exist between companies in India and Switzerland, though rewards may taper off over the years as tax payers rework their arrangements to address the new law.  It may therefore, require many such treaty renegotiations to make a real difference in both these areas, and to that end the Protocol appears to be a good start.

To finance the welfare and the administrative expenditure, governments around the world impose certain taxes on their subjects. The taxation system helps in collecting revenue besides it also provides direction to the economic growth and also brings economic equilibrium amongst various classes. In any taxation system, the residential status of the taxpayer is of crucial significance. Residential status confirms the jurisdiction and the application of taxation accountabilities.

However, in cases, where cross country economic activity is carried out, it is a tricky affair to identify and justify the appropriate jurisdiction of tax authorities. In order to mitigate the hardships of multiple jurisdictions, the Governments enter into bilateral arrangements, which are commonly denoted as “Double Taxation Avoidance Agreements” (DTAA). DTAA refers to an accord between two countries, aiming at elimination of double taxation. These are bilateral economic agreements wherein the countries concerned assess the sacrifices and advantages which the treaty brings for each contracting nation. It would promote exchange of goods, persons, services and investment of capital among such countries.

Indian Government is actively pushing DTAA negotiations with several countries to help its residents in understanding their tax jurisdictions and accountability towards the appropriate authorities. So far India has signed DTAA with 81 countries and discussion is on with many others. The natures of DTAA’s entered by India are greatly diverse in their nature and contents.

OECD and DTAAs

The first international initiative regarding DTAA was taken by the Organization for Economic Co-operation and Development. OECD presented the first draft of DTAA in ‘Model Tax Convention on Income and on Capital’. DTAA was proposed as a tool of standardization and common solutions for cases of double taxation to the taxpayers who are engaged in industrial, financial or other activities in other countries. The double tax treaties are negotiated under international law and governed by the principles laid down under the Vienna Convention on the Law of Treaties.

Objectives

DTAA treaties must help in avoiding and alleviating the burden of double taxation prevailing in the international arena. The tax treaties must clarify the taxpayer to know with certainty of his potential tax liability in the country, where he is carrying on economic activities. Tax Treaties must ensure that there is no prejudice between foreign tax payers who has permanent enterprise in the source countries and domestic tax payers of such countries. Treaties are made with the aim of allocation of taxes between treaty nations and the prevention of tax avoidance. The treaties must also ensure that equal and fair treatment of tax payers having different residential status, resolving differences in taxing the income and exchange of information and other details among treaty partners.

Classification

Double taxation avoidance agreements may be classified into comprehensive agreements and limited agreements based on the scope of such agreements. Comprehensive Double Taxation Avoidance Agreements provide for taxes on income, capital gains and capital investments whereas Limited Double Taxation Avoidance Agreements denote income from shipping and air transport or legacy and gifts. Comprehensive agreements ensure that the taxpayers in both the countries would be treated on equitable manner in respect of the issues relating to double taxation.

Active & Passive Income

Passive Income refers to income derived from investment in tangible / intangible assets eg. Immovable property, dividend, interest, royalties, capital gains, pensions etc. Active income is the income derived from carrying on active cross border business operations or by personal effort and exertion in case of employment eg. Business profits, shipping, air transport, employment etc.

Current Scenario in India

The Indian Income Tax Act, 1961 administrates the taxation of income accrued in India. As per Section 5 of the Income Tax Act, 1961 residents of India are liable to tax on their global income and non-residents are taxed only on income that has its source in India. The Provisions of DTAA override the general provisions of taxing statute of a particular country. It is now well settled that in India the provisions of the DTAA override the provisions of the domestic statute. Moreover, with the insertion of Sec.90 (2) in the Indian Income Tax Act, it is clear that assessee have an option of choosing to be governed either by the provisions of particular DTAA or the provisions of the Income Tax Act, whichever are more beneficial. Further if Income tax Act itself does not levy any tax on some income then Tax Treaty has no power to levy any tax on such income. Section 90(2) of the Income Tax Act recognizes this principle.

Govt. of India has entered into DTA agreement with the following countries:

Armenia, Australia, Austria, Bangladesh, Belarus,  Belgium,  Botswana,  Brazil, Bulgaria, Canada, China, Cyprus, Czech Republic, Denmark, Egypt, Finland, France, Germany, Greece, Hashemite Kingdom of Jordan, Hungary, Iceland, Indonesia, Ireland, Israel, Italy, Japan, Kazakstan, Kenya, Korea, Kuwait, Kyrgyz Republic, Libya, Luxembourg, Malaysia, Malta, Mauritius, Mongolia, Montenegro, Morocco, Mozambique, Myanmar, Namibia, Nepal, Netherlands, New Zealand, Norway, Oman, Philippines, Poland, Portuguese Republic, Qatar, Romania, Russia, Saudi Arabia, Serbia, Singapore, Slovenia, South Africa, Spain, Sri Lanka, Sudan, Sweden, Swiss Confederation, Syrian Arab Republic, Tajikistan, Tanzania, Thailand, Trinidad and Tobago, Turkey, Turkmenistan, UAE, UAR (Egypt), UGANDA, UK, Ukraine, United Mexican States, USA, Uzbekistan, Vietnam, Zambia.

Tax Havens

OECD (Organization for Economic Co-operation and Development) has blacklisted over 25 nations for tax relaxations they offer for parking funds. These include Mauritius, Cyprus, Switzerland and the Netherlands. Tax havens allow easy parking of money either through investments or deposits. They may offer a range of incentives including a nominal capital gains tax for companies to complete financial secrecy of accounts held by individuals and corporate.

Treaty Models

There are different models developed over a period of time based on which treaties are drafted. These models assist in maintaining uniformity in the format of tax treaties. They also serve as checklist for ensuring exhaustiveness or provisions to the two negotiating countries. Some of the popular models are known as OECD Model, UN Model, the US Model and the Andean Model. Of these the first three are the most prominent and often used.

OECD Model – The OECD Model was issued in Double Taxation Convention on Income and Capital in 1977 and amended thereafter in 1992 and 1995. OECD Model is essentially a model treaty between two developed nations. This model advocates residence principle, that is to say, it lays emphasis on the right of state of residence to tax.

 

UN Model - The UN Model of 1980 gives more weight to the source principle as against the residence principle of the OECD model. As a correlative to the principle of taxation at source the articles of the Model Convention are predicated on the premise of the recognition by the source country that (a) taxation of income from foreign capital would take into account expenses allocable to the earnings of the income so that such income would be taxed on a net basis, that (b) taxation would not be so high as to discourage investment and that (c) it would take into account the appropriateness of the sharing of revenue with the country providing the capital. In addition, the United Nations Model Convention embodies the idea that it would be appropriate for the residence country to extend a measure of relief from double taxation through either foreign tax credit or exemption as in the OECD Model Convention. Most of India’s treaties are based on the UN Model.

Relief to the tax payer

In order to prevent the hardship of double taxation, relief is provided to the tax payer. Such relief is provided by two ways:

Bilateral Relief

Bilateral relief is provided in section 90 and 90A of the Indian Income Tax Act. Bilateral relief is provided through following methods:

(i) Exemption Method

One method of avoiding double taxation is for the residence country to altogether exclude foreign income from its tax base. The country of source is then given exclusive right to tax such incomes. This is known as complete exemption method and is sometimes followed in respect of profits attributable to foreign permanent establishments or income from immovable property. Indian tax treaties with Denmark, Norway and Sweden embody with respect to certain incomes.

(ii) Credit Method

This method reflects the underline concept that the resident remains liable in the country of residence on its global income, however as far the quantum of tax liabilities is concerned credit for tax paid in the source country is given by the residence country against its domestic tax as if the foreign tax were paid to the country of residence itself.

(iii) Tax Sparing

One of the aims of the Indian Double Taxation Avoidance Agreements is to stimulate foreign investment flows in India from foreign developed countries. One way to achieve this aim is to let the investor to preserve to himself/itself benefits of tax incentives available in India for such investments. This is done through “Tax Sparing”. Here the tax credit is allowed by the country of its residence, not only in respect of taxes actually paid by it in India but also in respect of those taxes India forgoes due to its fiscal incentive provisions under the Indian Income Tax Act.

Unilateral Relief

Unilateral Relief is provided in section 91 of the Income Tax Act. The aforesaid method is depending on bilateral activity of both the countries. However, no country will have such an agreement with every country in the world. In order to avoid double taxation in such cases, country of residence itself may provide relief on unilateral basis.

Apart from relief to persons of a country where India has entered in Double Taxation Avoidance Agreement, there is relief given even in cases where the Government of India has not entered into DTA agreement with any foreign country. In such cases if any resident Indian produces evidences to show that, he has paid any tax in any country with which the Government of India has not entered into a DTA agreement, tax relief on that part of his income which suffered taxation in the foreign country, to the extent of tax so paid in such foreign country, or the tax leviable in India under the Income Tax Act on such income whichever is less shall be allowed as deduction u/s 91 while calculating his tax liabilities on such income.

General Features of a Model DTAA 

1) Language used by Treaties - Tax Treaties employ standard International language and standard terms. This is done in order to understand and interpret the same term in the same manner by both assessee as well as revenue. Language employed is technical and stereotyped. Some of the terms are explained below:

I. Contracting State – country which enters into Treaty.

II State of Residence- Country where a person resides.

III. State of Source- Country where income arises.

IV. Enterprise of a Contracting State- Any taxable unit including individuals.

V. Permanent Establishment – A fixed base of an enterprise

Components of DTAA

1) The date of DTAA. 

2) DTAA applies to all individual / person who is resident of either of countries entering into DTAA. The definition of resident is differently composed in different countries. 

Definitions – Article 3 of DTAA generally covers definitions of various terms used in DTAA. eg. person, company, contracting state, enterprise of contracting state, immovable property, dividend, business profits, royalty, technical fees, salaries etc.

The nature and category of taxes to be considered under DTAA as different countries use different descriptions for defining tax levies in their revenue system. Tax treaties may cover income taxes, inheritance taxes, value added taxes, or other taxes.

3) DTAA contains a clause to describe permanent establishment. PE means the place from where the business of the enterprise is carried on. PE includes place of management, branch, office, factory, workshop, mine, quarry, an oil or gas well, a construction site for long duration, a service location for a long duration etc. 

4) Tax-sharing method / depending upon the residential statute, permanent establishment, fixed base. 

5) Method of relief either by way of exempting income or where it is taxable, taxing it at stipulated rate. 

6) Exchange of information about associated enterprises principally to deal with diversion of income to avail treaty benefit or evasion.

7) Proviso for removal of double taxation.

8) Proviso for non- discrimination etc.

9) Other clauses may be added as per the specific requirements of the participating countries.

Indian Income Tax Act and DTAA

It has come to the notice of the Board that sometimes effect to the provisions of double taxation avoidance agreement is not given by the Assessing Officers when they find that the provisions of the agreement are not in conformity with the provisions of the Income-tax Act, 1961. The correct legal position is that where a specific provision is made in the double taxation avoidance agreement, that provisions will prevail over the general provisions contained in the Income-tax Act.  In fact that the double taxation avoidance agreements which have been entered into by the Central Government under section 90 of the Income-tax Act, also provide that the laws in force in either country will continue to govern the assessment and taxation of income in the respective countries except where provisions to the contrary have been made in the agreement.

Thus, where a double taxation avoidance agreement provides for a particular mode of computation of income, the same should be followed, irrespective of the provisions in the Income-tax Act.  Where there is no specific provision in the agreement, it is basic law, i.e., the Income-tax Act that will govern the taxation of income.

Harmonization of Tax Rates

Tax treaties usually specify the same maximum rate of tax that may be imposed on some types of income. As an example, a treaty may provide that interest earned by a nonresident eligible for benefits under the treaty is taxed at no more than five percent (5%). However, local law in some cases may provide a lower rate of tax irrespective of the treaty. In such cases, the lower local law rate prevails.

Resolving of Disputes in Interpretation

If there are any disputes in the interpretation/ implementation of the terms of DTA Agreements, normal remedies of appeal etc. provided in the Income-tax Act are available to the aggrieved party. The DTA Agreements also contain mutual agreement procedure. The aggrieved party may approach the Competent Authority of the contracting State wherein he is a resident, who, if he is unable to resolve the dispute by himself will approach the competent Authority of the other Contracting State to arrive at a solution after mutual discussion.

Advance Ruling 

In respect of interpretation of terms contained in DTA Agreement the Indian Income-tax Act contains a special provision which is offered to those Non- residents who would like to have advance ruling on a matter of law or fact in relation to a transaction undertaken/proposed to be undertaken by them. The facilities available in such provision can be availed of by the Non-residents in the matters regarding Double Taxation of income also.

Tax Information Exchange Agreement

The purpose of this agreement is to promote international co-operation in tax matters through exchange of information. It was developed by the OECD Global Forum Working Group on Effective Exchange of Information (“the Working Group”). The Working Group consisted of representatives from OECD Member countries as well as delegates from Aruba, Bermuda, Bahrain, Cayman Islands, Cyprus, Isle of Man, Malta, Mauritius, the Netherlands Antilles, the Seychelles and San Marino. The Agreement grew out of the work undertaken by the OECD to address harmful tax practices. The lack of effective exchange of information is one of the key criteria in determining harmful tax practices. The mandate of the Working Group was to develop a legal instrument that could be used to establish effective exchange of information. The Agreement represents the standard of effective exchange of information for the purposes of the OECD’s initiative on harmful tax practices. This Agreement, which was released in April 2002, is not a binding instrument but contains two models for bilateral agreements. A number of bilateral agreements have been based on this Agreement.

Salient general Features of DTA agreements between India & others countries

A typical DTA Agreement between India and another country covers only residents of India and the other contracting country who have entered into the agreement with India. A person who is not resident either of India or of the other contracting country cannot claim any benefit under the said DTA Agreement. Such agreement generally provides that the laws of the two contracting states will govern the taxation of income in respective states except when express provision to the contrary is made in the agreement.

A situation may arise when originally the tax provision in the other contracting state gave concessional treatment compared to India at a particular time but Indian laws were subsequently amended to bring incidence of tax to a level lower than the tax rate existing in the other contracting state. Since the tax treaties are meant to be beneficial and not intended to put tax payers of a contracting state to a disadvantage, it is provided in Sec. 90 that beneficial provisions under the Indian Income Tax Act will not be denied to residents of contracting state merely because the corresponding provision in tax treaty is less beneficial. Some Double Taxation Avoidance agreements provide that income by way of interest, royalty or fee for technical services is charged to tax on net basis.

This may result in tax deducted at source from sums paid to Non-residents which may be more than the final tax liability.  The Assessing Officer has therefore been empowered u/s 195 to determine the appropriate proportion of the amount from which tax is to be deducted at source. There are instances where as per the Income-tax Act, 1961 tax is required to be deducted at a rate prescribed in tax treaty. However this may require foreign companies to apply for refund. To obviate such difficulties Sec. 2(37A) provides that tax may be deducted at source at the rate applicable in a particular case as per section 195 on the sums payable to non-residents or in accordance with the rates specified in D.T.A. Agreements.

SOME ILLUSTRIOUS DTAA’S

European Union savings taxation

In the European Union, member states have concluded a multilateral agreement on information exchange. This means that they will each report (to their counterparts in each other jurisdiction) a list of those savers who have claimed exemption from local taxation on grounds of not being a resident of the state where the income arises. These savers should have declared that foreign income in their own country of residence, so any difference suggests tax evasion.

Cyprus double tax treaties

Cyprus has concluded 34 double tax treaties which apply to 40 countries. The main purpose of these treaties is the avoidance of double taxation on income earned in any of these countries. Under these agreements, a credit is usually allowed against the tax levied by the country in which the taxpayer resides for taxes levied in the other treaty country and as a result the tax payer pays no more than the higher of the two rates. Further, some treaties provide for tax sparing credits whereby the tax credit allowed is not only with respect to tax actually paid in the other treaty country but also from tax which would have been otherwise payable had it not been for incentive measures in that other country which result in exemption or reduction of tax.

German taxation avoidance

If a foreign citizen is in Germany for less than a relevant 183-day period (approximately six months) and is tax resident (i.e. and paying taxes on his or her salary and benefits) elsewhere, then it may be possible to claim tax relief under a particular Double Tax Treaty. The relevant 183 day period is either 183 days in a calendar year or in any period of 12 months, depending upon the particular treaty involved. So, for example, the Double Tax Treaty with the UK looks at a period of 183 days in the German tax year (which is the same as the calendar year); thus, a citizen of the UK could work in Germany from 1 September through the following 31 May (9 months) and then claim to be exempt from German tax (whilst still paying the UK tax).

United States

The U.S. requires its citizens to file tax returns reporting their earnings wherever they reside. However, there are some measures designed to reduce the international double taxation that results from this requirement. First, an individual who is a bona fide resident of a foreign country or is physically outside the United States for an extended time is entitled to an exclusion (exemption) of part or all of their earned income (i.e. personal service income, as distinguished from income from capital or investments.) That exemption is $91,400 for 2009, pro-rated. Second, the United States allows a foreign tax credit by which income taxes paid to foreign countries can be offset against U.S. income tax liability attributable to foreign income. This can be a complex issue that often requires the services of a tax advisor. The foreign tax credit is not allowed for taxes paid on earned income that is excluded under the rules described in the preceding paragraph (i.e. no double dipping).

DTAA - India and Mauritius

India has comprehensive Double Taxation Avoidance Agreements (DTAA) with 81 countries. This means that there are agreed rates of tax and jurisdiction on specified types of income arising in a country to a tax resident of another country. Under the Income Tax Act 1961 of India, there are two provisions, Section 90 and Section 91, which provide specific relief to taxpayers to save them from double taxation. Section 90 is for taxpayers who have paid the tax to a country with which India has signed DTAA, while Section 91 provides relief to tax payers who have paid tax to a country with which India has not signed a DTAA. Thus, India gives relief to both kinds of taxpayers.

A large number of foreign institutional investors who trade on the Indian stock markets operate from Mauritius. According to the tax treaty between India and Mauritius, capital gains arising from the sale of shares are taxable in the country of residence of the shareholder and not in the country of residence of the company whose shares have been sold. Therefore, a company resident in Mauritius selling shares of an Indian company will not pay tax in India. Since there is no capital gains tax in Mauritius, the gain will escape tax altogether.

The Indian and Cypriot tax treaty is the only other such Indian treaty to provide for the same beneficial treatment of capital gains. It must be noted that India has and is making attempts to revise both the Mauritius and Cyprus tax treaties to eliminate this favorable treatment of capital gains tax. The Indian government periodically checks for its DTAA with many countries and come up with amendments.

FRANCE

Agreement for avoidance of double taxation with France

Whereas the annexed Convention between the Government of the Republic of India and the Government of the French Republic for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and on capital has come into force on the 1st day of August, 1994 on the notification by both the Contracting States to each other of the completion of the procedures required under their law for bringing into force of the said Convention in accordance with paragraph 1 of Article 30 of the said Convention.

(2) Now, therefore, in exercise of the powers conferred by section 90 of the Income-tax Act, 1961 (43 of 1961), section 24A of the Companies (Profits) Surtax Act, 1964 (7 of 1964) and section 44A of the Wealth-tax Act, 1957 (27 of 1957), the Central Government hereby directs that all the provisions of the said Convention shall be given effect to in the Union of India.

Notification : No. 9602 [F. No. 501/16/80-FTD], dated 6-9-1994, as amended by Notification No. SO 650(E), dated 10-7-2000.

ANNEXURE

CONVENTION BETWEEN THE GOVERNMENT OF THE REPUBLIC OF INDIA AND THE GOVERNMENT OF THE FRENCH REPUBLIC FOR THE AVOIDANCE OF DOUBLE TAXATION AND THE PREVENTION OF FISCAL EVASION WITH RESPECT TO TAXES ON INCOME AND ON CAPITAL

The Government of the Republic of India and Government of the French Republic, desiring to conclude a Convention for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and on capital;

Have agreed as follows :

ARTICLE 1 - Personal scope - This Convention shall apply to persons who are residents of one or both of the Contracting States.

ARTICLE 2 - Taxes covered - 1. The taxes to which this Convention shall apply are :

  (a)  in India :

   (i)  the income-tax including any surcharge thereon ;

  (ii)  the surtax ; and

(iii)  the wealth-tax,

(hereinafter referred to as ‘Indian tax’) ;

  (b)  in France :

   (i)  the income-tax (1 ‘impot sur le revenu’) including any withholding tax, pre-payment (precompte) or advance payment with respect thereto ;

  (ii)  the corporation tax (l’impot sur les scietes’) including any withholding tax, prepayment (precompte) and advance payment with respect thereto ; and

(iii)  the wealth-tax (I ‘impot le solioarite’sur la fortune).

(hereinafter referred to as “French tax”).

2. The Convention shall also apply to any identical or substantially similar taxes which are imposed by either Contracting State after the date of signature of the present Convention in addition to, or in place of, the taxes referred to in paragraph 1. The competent authorities of the Contracting States shall notify each other of any substantial changes which are made in their respective taxation laws.

ARTICLE 3 - General definitions - 1. In this Convention, unless the context otherwise requires :

  (a)  the term “India” means the territory of India and includes the territorial sea and air space above it, as well as any other maritime zone in which India, according to the Indian law, has sovereign rights, other rights and jurisdictions in accordance with International law ;

  (b)  the term “France” means the European and overseas departments of the French Republic including the territorial sea and the air space above it as well as the areas within which, in accordance with International law, the French Republic has sovereign rights for the purpose of exploring and exploiting the natural resources of the sea bed and its sub-soil and of the superjacent waters ;

  (c)  the terms “a Contracting State” and “the other Contracting State” mean India or France as the context requires ;

  (d)  the term “person” includes an individual, a company and any other entity which is treated as a taxable unit under the taxation laws in force in the respective Contracting States ;

  (e)  the term “company” means any body corporate or any entity which is treated as a company or body corporate under the taxation laws in force in the respective Contracting States ;

   (f)  the terms “enterprise of a Contracting State” and “enterprise of the other Contracting State” mean respectively an enterprise carried on by a resident of a Contracting State and an enterprise carried on by a resident of the other Contracting State ;

  (g)  the term “competent authority” means in the case of India, the Central Government in the Ministry of Finance (Department of Revenue) or their authorised representative; and in the case of France, the Minister in charge of the Budget or his authorised representative ;

  (h)  the term “national” means any individual possessing the nationality of a Contracting State and any legal person, partnership or association deriving its status from the laws in force in that Contracting State ;

   (i)  the term “international traffic” means any transport by a ship or aircraft operated by an enterprise of a Contracting State, except when the ship or aircraft is operated solely between places in the other Contracting State ;

   (j)  the term “fiscal year” in relation to Indian tax means “previous year” as defined in the Income-tax Act, 1961 (43 of 1961) and in relation to French income-tax means calendar year ;

  (k)  the term “tax” means Indian tax or French tax as the context requires.

2. As regards the application of the Convention by a Contracting State, any term not defined therein shall, unless the context otherwise requires, have the meaning which it has under the law of that Contracting State concerning the taxes to which the Convention applies.

ARTICLE 4 - Resident - 1. For the purposes of this Convention, the term “resident of a Contracting State” means any person who, under the laws of that Contracting State, is liable to tax therein by reason of his domicile, residence, place of management or any other criterion of a similar nature.

2. Where by reason of the provisions of paragraph 1, an individual is a resident of both Contracting States, then his status shall be determined as follows :

  (a)  he shall be deemed to be a resident of the Contracting State in which he has a permanent home available to him; if he has a permanent home available to him in both Contracting States, he shall be deemed to be a resident of the Contracting State with which his personal and economic relations are closer (centre of vital interests) ;

  (b)  if the Contracting State in which he has his centre of vital interests cannot be determined, or if he has not a permanent home available to him in either Contracting State, he shall be deemed to be a resident of the Contracting State in which he has an habitual abode ;

  (c)  if he has an habitual abode in both Contracting States or in neither of them, he shall be deemed to be a resident of the Contracting State of which he is a national ;

  (d)  if he is a national of both Contracting States or of neither of them, the competent authorities of the Contracting States shall settle the question by mutual agreement.

3. Where by reason of the provisions of paragraph 1, a person, other than an individual is a resident of both Contracting States, then it shall be deemed to be a resident of the Contracting State in which its place of effective management is situated.

ARTICLE 5 - Permanent establishment - 1. For the purposes of this Convention, the term “permanent establishment” means a fixed place of business through which the business of an enterprise is wholly or partly carried on.

2. The term “permanent establishment” includes especially :

  (a)  a place of management ;

  (b)  a branch ;

  (c)  an office ;

  (d)  a factory ;

  (e)  a workshop ;

   (f)  a mine, an oil or gas well, a quarry or any other place of extraction of natural resources ;

  (g)  a warehouse in relation to a person providing storage facilities for others ;

  (h)  a premises used as a sales outlet ;

   (i)  an installation or structure used for the exploration of natural resources provided that the activities continue for more than 183 days.

3. A building site or construction, installation or assembly project constitutes a permanent establishment only where such site or project continues for a period of more than six months.

4. Notwithstanding the preceding provisions of this Article, the term “permanent establishment” shall be deemed was to include :

  (a)  the use of facilities solely for the purpose of storage or display of goods or merchandise belonging to the enterprise ;

  (b)  the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage or display ;

  (c)  the maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise ;

  (d)  the maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise or of collecting information, for the enterprise ;

  (e)  the maintenance of a fixed place of business solely for the purpose of advertising, for the supply of information, for scientific research, or for other activities which have a preparatory or auxiliary character, for the enterprise ;

   (f)  the maintenance of a fixed place of business solely for any combination of activities mentioned in sub-paragraphs (a) to (e), provided that the overall activity of the fixed place of business resulting from this combination is of preparatory or auxiliary character.

5. Notwithstanding the provisions of paragraphs 1 and 2 where a person other than an agent of an independent status to whom paragraph 6 applies is acting in one of the Contracting States on behalf of an enterprise of the other Contracting State, that enterprise shall be deemed to have a permanent establishment in the first-mentioned Contracting State, if :

  (a)  he has and habitually exercises in that Contracting State an authority to conclude contracts on behalf of the enterprise, unless, his activities are limited to the purchase of goods or merchandise for the enterprise ; or

  (b)  he has no such authority, but habitually maintains in the first-mentioned Contracting State a stock of goods or merchandise from which he regularly delivers goods or merchandise on behalf of the enterprise.

6. An enterprise of one of the Contracting States shall not be deemed to have a permanent establishment in the other Contracting State merely because it carries on business in that other Contracting State through a broker, general commission agent or any other agent of an independent status, provided that such persons are acting in the ordinary course of their business. However, when the activities of such an agent are devoted wholly or almost wholly on behalf of that enterprise, he will not be considered an agent of an independent status within the meaning of this paragraph if it is shown that the transactions between the agent and the enterprise were not made under at arm’s length conditions.

7. The fact that a company which is a resident of one of the Contracting States controls or is controlled by a company, which is a resident of the other Contracting State, or which carries on business in that other Contracting State (whether through a permanent establishment or otherwise), shall not of itself constitute either company a permanent establishment of the other.

ARTICLE 6 - Income from immovable property - 1. Income derived by a resident of a Contracting State from immovable property (including income from agriculture or forestry) situated in the other Contracting State may be taxed in that other Contracting State.

2. The term “immovable property” shall have the meaning which it has under the law of the Contracting State in which the property in question is situated. The term shall in any case include property accessory to immovable property, rights to which the provisions of general law respecting landed property apply, usufruct of immovable property and rights to variable or fixed payments as consideration for the working of, or the right to work, mineral deposits, sources and other natural resources. Ships, boats and aircraft shall not be regarded as immovable property.

3. The provisions of paragraph 1 shall also apply to income derived from the direct use, letting, or use in any other form of immovable property.

4. The provisions of paragraphs 1 and 3 shall also apply to the income from immovable property of an enterprise and to income from immovable property used for the performance of independent personal services.

ARTICLE 7 - Business profits - 1. The profits of an enterprise of one of the Contracting States shall be taxable only in that Contracting State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other Contracting State but only so much of them as is attributable to that permanent establishment.

2. Subject to the provisions of paragraph 3, where an enterprise of one of the Contracting States carries on business in the other Contracting State through a permanent establishment situated therein, there shall in each Contracting State be attributed that permanent establishment the profits which it might be expected to make, 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. In any case where the correct amount of profits attributable to a permanent establishment is incapable of determination or the determination thereof presents exceptional difficulties, the profits attributable to the permanent establishment may be estimated on the basis of an apportionment of the total profits of the enterprise to its various parts, provided, however, that the result shall be in accordance with the principles contained in this Article.

3. (a) In determining the profits of a permanent establishment, there shall be allowed as deduction expenses which are incurred for the purposes of the permanent establishment, including executive and general administrative expenses so incurred, whether in the Contracting State in which the permanent establishment is situated or elsewhere, in accordance with the provisions of and subject to the limitations of the taxation laws of that Contracting State. Provided that where the law of the Contracting State in which the permanent establishment is situated imposes a restriction on the amount of the executive and general administrative expenses which may be allowed, and that restriction is relaxed or overridden by any Convention, Agreement or Protocol signed after 1-1-1990 between that Contracting State and a third State which is a member of the OECD, the competent authority of that Contracting State shall notify the competent authority of the other Contracting State of the terms of the corresponding paragraph in the Convention, Agreement or Protocol with that third State immediately after the entry into force of that Convention, Agreement or Protocol and, if the competent authority of the other Contracting State so requests, the provisions of that paragraph shall apply under this Convention from that entry into force.

(b) However, no such deduction shall be allowed in respect of amounts, if any, paid (otherwise than towards reimbursement of actual expenses) by the permanent establishment to the head office of the enterprise or any of its other offices, by way of royalties, fees or other similar payments in return for the use of patents or other rights, or by way of commission for specific services performed or for management, or, except in the case of a banking enterprise, by way of interest on moneys lent to the permanent establishment. Likewise, no account shall be taken, in the determination of the profits of a permanent establishment, for amounts charged (otherwise than towards reimbursement of actual expenses), by the permanent establishment to the head office of the enterprise or any of its other offices, by way of royalties, fees or other similar payments in return for the use of patents or other rights, or by way of commission for specific services performed or for management, or, except in the case of a banking enterprise, by way of interest on moneys lent to the head office of the enterprise or any of its other offices.

4. No profits shall be attributed to a permanent establishment by reason of the mere purchase by that permanent establishment of goods or merchandise for the enterprise.

5. For the purpose of the preceding paragraphs, the profits to be attributed to the permanent establishment shall be determined by the same method year by year unless there is good and sufficient reason to the contrary.

6. Where profits include items of income which are dealt with separately in other Articles of this Convention, then the provisions of those Articles shall not be affected by the provisions of this Article.

ARTICLE 8 - Air transport - 1. Profits derived by an enterprise of a Contracting State from the operation of aircraft in international traffic shall be taxable only in that Contracting State.

2. The provisions of paragraph 1 shall also apply to profits from the participation in a pool, a joint business or an international operating agency.

3. For the purpose of this article, interest on funds connected with the operation of aircraft in international traffic shall be regarded as profits derived from the operation of such aircraft, and the provisions of article 12 shall not apply in relation to such interest.

4. The term “operation of aircraft” shall mean business of transportation by air of passengers, mail, livestock or goods carried on by the owners or lessees or charterers of aircraft, including the sale of tickets for such transportation on behalf of other enterprises, the incidental lease of aircraft and any other activity directly connected with such transportation.

ARTICLE 9 - Shipping - 1. Profits derived by an enterprise of a Contracting State from the operation of ships in international traffic shall be taxable only in that Contracting State.

2. Notwithstanding the provisions of paragraph 1, such profits may be taxed in the other Contracting State from which they are derived, provided the tax so charged shall not exceed :

  (a)  during the first five fiscal years after the entry into force of this Convention, 50 per cent, and

  (b)  during the subsequent five fiscal years, 25 per cent,

of the tax otherwise imposed by the internal law of that Contracting State. Subsequently, only the provisions of paragraph 1 shall be applicable.

3. The provisions of paragraphs 1 and 2 shall also apply to profits from the participation in a pool, a joint business or an international operating agency engaged in the operation of ships.

4. For the purposes of this article interest arising on funds connected, with the operation of ships in international traffic shall be regarded as profits derived from the operation of such ships, and the provisions of article 12 shall not apply in relation to such interest.

ARTICLE 10 - Associated enterprises - Where :

  (a)  an enterprise of a Contracting State participates directly or indirectly in the management, control or capital of an enterprise of the other Contracting State, or

  (b)  the same persons participate directly or indirectly in the management, control or capital of an enterprise of a Contracting State and an enterprise of the other Contracting State,

and in either case conditions are made or imposed between the two enterprises in their commercial or financial relations which differ from those which would be made between independent enterprises, then any profits which would, but for those conditions, have accrued to one of the enterprises, but, by reason of those conditions have not so accrued, may be included in the profits of that enterprise and taxed accordingly.

ARTICLE 11 - Dividends - 1. Dividends paid by a company which is resident of a Contracting State to a resident of the other Contracting State may be taxed in that other Contracting State.

1[2. However, such dividends may also be taxed in the Contracting State of which the company paying the dividends is a resident and according to the laws of that Contracting State, but if the recipient is the beneficial owner of the dividends, the tax so charged shall not exceed 10 per cent of the gross amount of the dividends.]

3. (a) A resident of India who receives dividends from a company which is a resident of France which, if received by a resident of France, would entitle such resident to a tax credit (avoir fiscal), shall be entitled from the French Treasury to a payment equal to such tax credit (avoir fiscal) subject to the deduction of tax as provided for under paragraph 2 of this article.

(b) The provisions of sub-paragraph (a) of this paragraph shall apply only to a resident of India who is :

   (i)  an individual ; or

  (ii)  a company which holds directly or indirectly less than 10 per cent of the capital of the French company paying the dividends.

(c) The provisions of sub-paragraph (a) of this paragraph shall not apply if the recipient of the payment from the French Treasury provided for in sub-paragraph (a) of this paragraph is not subject to Indian tax in respect of the payment.

(d) Payments from the French Treasury provided for under sub-paragraph (a) of this paragraph shall be deemed to be dividend for the purpose of this Convention.

4. When the prepayment (precompte) is levied in respect of dividends paid by a company which is a resident of France to a resident of India who is not entitled to the payment from the French Treasury referred to in paragraph 3 of this article with respect to such dividends, such resident shall be entitled to the refund of that prepayment, subject to the deduction of the withholding tax with respect to the refunded amount in accordance with paragraph 2 of this article.

5. As used in this article the term “dividends” means income from shares or other rights, not being debt-claims participating in profits, as well as income from other corporate rights treated in the same manner as income from shares by the taxation laws of the Contracting State of which the company making the distribution is a resident and any other item (other than interest which falls within the provisions of article 12) treated as a dividend or distribution under that law.

6. The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the dividends, being a resident of a Contracting State, carries on business in the other Contracting State of which the company paying the dividends is a resident, through a permanent establishment situated therein or performs in that other Contracting State independent personal services from a fixed base situated therein, and the holding in respect of which the dividends are paid is effectively connected with such permanent establishment or fixed base. In such case, the provisions of article 7, or article 15, as the case may be, shall apply.

7. Where a company which is a resident of a Contracting State derives profits or income from the other Contracting State, that other Contracting State may not impose any tax on the dividends paid by the company except in so far as such dividends are paid to a resident of that other Contracting State or in so far as the holding in respect of which the dividends are paid is effectively connected with a permanent establishment or a fixed base situated in that other Contracting State, nor subject the company’s undistributed profits to a tax on the company’s undistributed profits, even if the dividends paid or the undistributed profits consist wholly or partly of profits or income arising in such other Contracting State.

ARTICLE 12 - Interest - 1. Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other Contracting State.

1[2. However, such interest may also be taxed in the Contracting State in which it arises, and according to the laws of that State, but if the recipient is the beneficial owner of the interest, the tax so charged shall not exceed 10 per cent of the gross amount of the interest.]

3. Notwithstanding the provisions of paragraph 2 :

  (a)  interest arising in a Contracting State shall be exempt from tax in that Contracting State provided it is derived and beneficially owned by :

   (i)  the Government, a political sub-division or local authority of the other Contracting State; or

  (ii)  the “Reserve Bank of India” in the case of India and the ‘Banque de France’ 2[and “Agence Francaise de Developpement”] in the case of France; or

(iii)  any other institution as may be agreed from time to time between the competent authorities of the Contracting States;

  (b)  interest arising in a Contracting State shall be exempt from tax in that Contracting State if it is beneficially owned by a resident of the other Contracting State and is derived in connection with a loan or credit extended or endorsed by :

   (i)  in the case of France, the Banque Francaise du Commerce Exteriur, or the Compagnie Francaise d’Assurance pour le Commerce Exterieur (COFACE) ;

  (ii)  in the case of India, the Export-Import Bank of India ;

(iii)  any institution of the other Contracting State in charge of the public financing of external trade.

4. The term “interest” as used in this article means income from debt-claims of every kind, whether or not secured by mortgage and whether or not carrying a right to participate in the debtor’s profits, and in particular, income from Government securities and income from bonds or debentures, including premiums and prizes attaching to such securities, bonds or debentures. Penalty charges for late payment shall not be regarded as interest for the purpose of this article.

5. The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the interest, being a resident of a Contracting State, carries on business in the other Contracting State in which the interest arises, through a permanent establishment situated therein, or performs in that other Contracting State independent personal services from a fixed base situated therein, and the debt-claim in respect of which the interest is paid is effectively connected with such permanent establishment or fixed base. In such case, the provisions of article 7 or article 15, as the case may be, shall apply.

6. Interest shall be deemed to arise in a Contracting State when the payer is that Contracting State itself, a political sub-division, a local authority or a resident of that Contracting State. Where, however, the person paying the interest, whether he is a resident of a Contracting State or not, has in a Contracting State a permanent establishment or a fixed base in connection with which the indebtedness on which the interest is paid was incurred, and such interest is borne by such permanent establishment or fixed base, then such interest shall be deemed to arise in the Contracting State in which the permanent establishment or fixed base is situated.

7. Where, by reason of a special relationship between the payer and the beneficial owner or between both of them and some other person, the amount of the interest, having regard to the debt-claim for which it is paid, exceeds the amount which would have been agreed upon by the payer and the beneficial owner in the absence of such relationship, the provisions of this article shall apply to the last mentioned amount. In such case, the excess part of the payments shall remain taxable according to the laws of each Contracting State, due regard being had to the other provisions of this Convention.

ARTICLE 13 - Royalties and fees for technical services and payments for the use of equipment - 1. Royalties, fees for technical services and payments for the use of equipment arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other Contracting State.

1[2. However, such royalties, fees and payments may also be taxed in the Contracting State, in which they arise and according to the laws of that Contracting State, but if the recipient is the beneficial owner of these categories of income, the tax so charged shall not exceed 10 per cent of the gross amount of such royalties, fees and payments.]

3. The term “royalties” as used in this article means payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work including cinematograph films, or films or tapes used for radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience.

4. The term “fees for technical services” as used in this Article means payments of any kind to any person, other than payments to an employee of the person making the payments and to any individual for independent personal services mentioned in Article 15, in consideration for services of a managerial, technical or consultancy nature.

5. The term “payments for the use of equipment” as used in this Article means payments of any kind received as a consideration for the use of, or the right to use, industrial, commercial or scientific equipment.

6. The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the royalties, fees for technical services or the payments for the use of equipment being a resident of a Contracting State, carries on business in the other Contracting State in which the royalties, fees for the technical services or the payments for the use of equipment arises, through a permanent establishment situated therein, or performs in that other Contracting State independent personal services from a fixed base situated therein, and the royalties, fees for technical services or the payments for the use of equipment are effectively connected with such permanent establishment or fixed base. In such case the provisions of Article 7 or Article 15, as the case may be, shall apply.

7. Royalties, fees for technical services or payments for the use of equipment shall be deemed to arise in a Contracting State when the payer is that Contracting State itself, a political sub-division, a local authority or a resident of that Contracting State. Where, however the person paying the royalties, fees for technical services or the payments for the use of equipment, whether he is a resident of a Contracting State or not has in a Contracting State a permanent establishment or a fixed base in connection with which the contract under which the royalties, fees for technical services or the payments for the use of equipment, are paid was concluded and such royalties, fees for technical services or payments for the use of equipment, are borne by such permanent establishment or fixed base, then such royalties, fees for technical services or payments for the use of equipment shall be deemed to arise in the Contracting State in which the permanent establishment or fixed base is situated.

8. Where, by reason of a special relationship between the payer and the beneficial owner or between both of them and some other person, the amount of the royalties, fees for technical services or the payments for the use of equipment, having regard to the royalties, technical services or the use of equipment for which they are paid, exceeds the amount which would have been agreed upon by the payer and the beneficial owner in the absence of such relationship, the provisions of this Article shall apply only to the last-mentioned amount. In such case, the excess part of the payment shall remain taxable according to the laws of each Contracting State, due regard being had to the other provisions of this Convention.

ARTICLE 14 - Capital gains - 1. Gains derived by a resident of a Contracting State from the alienation of immovable property, referred to in article 6, and situated in the other Contracting State may be taxed in that other Contracting State.

2. Gains from the alienation of movable property forming part of the business property of a permanent establishment which an enterprise of a Contracting State has in the other Contracting State or of movable property pertaining to a fixed base available to a resident of a Contracting State in the other Contracting State for the purpose of performing independent personal services, including such gains from the alienation of such a permanent establishment (alone or together with the whole enterprise) or of such fixed base, may be taxed in that other Contracting State.

3. Gains from the alienation of ships or aircraft operated in international traffic or movable property pertaining to the operation of such ships or aircraft shall be taxable only in the Contracting State of which the alienator is a resident.

4. Gains from the alienation of shares of the capital stock of a company the property of which consists directly or indirectly principally of immovable property situated in a Contracting State may be taxed in that Contracting State. For the purposes of this provision, immovable property pertaining to the industrial or commercial operation of such company shall not be taken into account.

5. Gains from the alienation of shares other than those mentioned in paragraph 4 representing a participation of at least 10 per cent in a company which is a resident of a Contracting State may be taxed in that Contracting State.

6. Gains from the alienation of any property other than that mentioned in paragraphs 1, 2, 4 and 5 shall be taxable only in the Contracting State of which the alienator is a resident.

ARTICLE 15 - Independent personal services : 1. Income derived by an individual or a partnership of individuals who is a resident of a Contracting State from the performance of professional services or other independent activities of a similar character shall be taxable only in that Contracting State except in the following circumstances when such income may also be taxed in the other Contracting State :

  (a)  if he has a fixed base regularly available to him in the other Contracting State for the purpose of performing his activities; in that case, only so much of the income as is attributable to that fixed base may be taxed in that other Contracting State ; or

  (b)  if his stay in the other Contracting State is for a period or periods amounting to or exceeding in the aggregate 183 days in the relevant “fiscal year”; in that case, only so much of the income as is derived from his activities performed in that other Contracting State may be taxed in that other Contracting State.

2. The term “professional services” includes independent scientific, literary, artistic, educational or teaching activities, as well as the independent activities of physicians, surgeons, lawyers, engineers, architects, dentists and accountants.

ARTICLE 16 - Dependent personal services - (1) Subject to the provisions of articles 17, 18, 19, 20, 21 and 22, salaries, wages and other similar remuneration derived by a resident of a Contracting State in respect of an employment shall be taxable only in that Contracting State unless the employment is exercised in the other Contracting State. If the employment is so exercised, such remuneration as is derived therefrom may be taxed in that other Contracting State.

2. Notwithstanding the provisions of paragraph 1, remuneration derived by a resident of a Contracting State in respect of an employment exercised in the other Contracting State shall be taxable only in the first-mentioned Contracting State if :

  (a)  the recipient is present in the other Contracting State for a period or periods not exceeding in the aggregate 183 days in the relevant “fiscal year”; and

  (b)  the remuneration is paid by, or on behalf of, an employer who is not a resident of the other Contracting State; and

  (c)  the remuneration is not borne by a permanent establishment or a fixed base which the employer has in the other Contracting State.

3. Notwithstanding the preceding provisions of this article, remuneration derived in respect of an employment exercised aboard a ship or aircraft operated in international traffic by an enterprise of a Contracting State may be taxed in that Contracting State.

ARTICLE 17 - Directors’ fees - Directors’ fees and similar payments derived by a resident of a Contracting State in his capacity as a member of the Board of Directors of a company which is a resident of the other Contracting State may be taxed in that other Contracting State.

ARTICLE 18 - Income earned by entertainers and athletes - 1. Notwithstanding the provisions of articles 15 and 16, income derived by a resident of a Contracting State as an entertainer such as a theatre, motion picture, radio or television artiste or a musician or as an athlete, from his personal activities as such exercised in the other Contracting State may be taxed in that other Contracting State.

2. Where income in respect of personal activities exercised by an entertainer or athlete in his capacity as such accrues not to the entertainer or athlete himself but to another person, that income may, notwithstanding the provisions of articles 7, 15 and 16, be taxed in the Contracting State in which the activities of the entertainer or athlete are exercised.

3. Notwithstanding the provisions of paragraph 1, income derived by an entertainer or an athlete who is a resident of a Contracting State from his personal activities as such exercised in the other Contracting State, shall be taxable only in the first-mentioned Contracting State, if the activities in the other Contracting State are supported wholly or substantially from the public funds of the first-mentioned Contracting State, including any of its political sub-division or local authorities.

4. Notwithstanding the provisions of paragraph 2 and articles 7, 15 and 16, where income in respect of personal activities exercised by an entertainer or any athlete in his capacity as such in Contracting State accrues not to the entertainer or athlete himself but to another person, that income shall be taxable only in the other Contracting State, if that other person is supported wholly or substantially from the public funds of that other Contracting State, including any of its political sub-divisions or local authorities.

ARTICLE 19 - Remuneration and pensions in respect of Government service - 1. (a) Remuneration, other than a pension, paid by a Contracting State or a political sub-division or a local authority thereof or out of public funds of that Contracting State to an individual in respect of services rendered to that Contracting State or sub-division or authority shall be taxable only in that Contracting State.

(b) However, such remuneration shall be taxable only in the other Contracting State if the services are rendered in that other Contracting State and the individual is a resident of that other Contracting State who is a national of that other Contracting State without being a national of the Contracting State to which the services are rendered.

2. Any pension paid by, or out of funds created by a Contracting State or a political sub-division or a local authority thereof to an individual in respect of services rendered to that Contracting State or sub-division or authority shall be taxable only in that Contracting State.

3. The provisions of articles 16, 17 and 20 shall apply to remuneration and pensions in respect of services rendered in connection with a business carried on by a Contracting State or a political sub-division or local authority thereof.

ARTICLE 20 - Non-Government pensions and annuities - 1. Any pension, other than a pension referred to in article 19, or any annuity derived by a resident of a Contracting State from sources within the other Contracting State shall be taxable only in the first-mentioned Contracting State.

2. The term “pension” means a periodic payment made in consideration of past services or by way of compensation for injuries received in the course of performance of services.

3. The term “annuity” means a stated sum payable periodically at stated times during life or during a specified or ascertainable period of time, under an obligation to make the payments in return for adequate and full consideration in money or money’s worth.

4. Notwithstanding the provisions of paragraph 1, pensions paid and other payments made under a public scheme which is a part of the social security system of a Contracting State or a political sub-division or a local authority thereof shall be taxable only in that Contracting State.

ARTICLE 21 - Payments received by students and apprentices - A student or business apprentice who is or was a resident of one of the Contracting States immediately before visiting the other Contracting State and who is present in that other Contracting State solely for the purpose of his education or training, shall be exempt from tax in that other Contracting State on payments made to him by persons residing outside that other Contracting State for the purposes of his maintenance, education or training.

ARTICLE 22 - Payments received by professors, teachers and research scholars - 1. A professor, teacher, or a research scholar who is or was a resident of one of the Contracting States immediately before visiting the other Contracting State for the purpose of teaching or engaging in research, or both, at a university, college, school or other approved institution in that other Contracting State shall be taxable only in the first-mentioned Contracting State on any remuneration for such teaching or research for a period not exceeding two years from the date of his arrival in that other Contracting State.

2. This article shall not apply to income from research if such research is undertaken primarily for the private benefit of a specific person or persons.

3. For the purposes of this article and article 21, an individual shall be deemed to be a resident of a Contracting State if he is resident in that Contracting State in the “fiscal year” in which he visits the other Contracting State or in the immediately preceding “fiscal year”.

4. For the purposes of paragraph 1, “approved institution” means an institution which has been approved as an educational or research institution by the appropriate authority of the concerned Contracting State.

ARTICLE 23 - Other income - 1. Subject to the provisions of paragraph 2, items of income of a resident of a Contracting State, wherever arising, which are not expressly dealt with in the foregoing articles of this Convention, shall be taxable only in that Contracting State.

2. The provisions of paragraph 1, shall not apply to income, other than income from immovable property as defined in paragraph 2 of article 6, if the recipient of such income, being a resident of a Contracting State, carries on business in the other Contracting State through a permanent establishment situated therein, or performs in that other Contracting State independent personal services from a fixed base situated therein, and the right or property in respect of which the income is paid is effectively connected with such permanent establishment or fixed base. In such case, the provisions of article 7 or article 15, as the case may be, shall apply.

3. Notwithstanding the provisions of paragraphs 1 and 2, items of income of a resident of a Contracting State not dealt with in the foregoing articles of this Convention, and arising in the other Contracting State may be taxed in that of the Contracting State.

ARTICLE 24 - Capital - 1. Capital represented by immovable property referred to in article 6 or rights treated as immovable property, owned by a resident of a Contracting State and situated in the other Contracting State, may be taxed in that other Contracting State.

2. Capital represented by shares of the capital stock of a company the property of which consists directly or indirectly principally of immovable property situated in a Contracting State may be taxed in that Contracting State. For the purposes of this provision, immovable property pertaining to the industrial or commercial operation of such company shall not be taken into account.

3. Capital represented by movable property forming part of the business property of a permanent establishment which an enterprise of a Contracting State has in the other Contracting State or by movable property pertaining to a fixed base available to a resident of a Contracting State in the other Contracting State for the purpose of performing independent personal services may be taxed in that other Contracting State.

4. Capital represented by ships and aircraft operated in international traffic and by movable property pertaining to the operation of such ships and aircraft shall be taxable only in the Contracting State in which the place of effective management of the enterprise is situated.

5. All other elements of capital of a resident of a Contracting State shall be taxable only in that Contracting State.

ARTICLE 25 - Elimination of double taxation - 1. Double taxation shall be avoided in the following manner :

In the case of India :

  (a)  Where a resident of India derives income or owns capital which, in accordance with the provisions of this Convention, may be taxed in France, India shall allow as a deduction from the tax on the income of that resident an amount equal to the income-tax paid in France, whether directly or by deduction; and as a deduction from the tax on the capital of that resident an amount equal to the capital tax paid in France. Such deduction in either case shall not, however, exceed that part of the income-tax or capital tax (as computed before the deduction is given) which is attributable, as the case may be, to the income or the capital which may be taxed in France. Further, where such resident is a company by which surtax is payable in India, the deduction in respect of income-tax paid in France shall be allowed in the first instance from income-tax payable by the company in India and as to the balance, if any, from surtax payable by it in India.

  (b)  Where a resident of India derives income which, in accordance with the provisions of this Convention, shall be taxable only in France, India may include this income in the tax base but shall allow as a deduction from the income-tax that part of the income-tax which is attributable to the income derived from France.

2. In the case of France :

  (a)  Profits and other positive income arising in India and which are taxable in that Contracting State in accordance with the provisions of this Convention, are taken into account for the computation of the French tax where such income is received by a resident of France. The Indian tax shall not be deductible from such income. The beneficiary shall be entitled to a tax credit against French tax attributable to such income. Such tax credit shall be equal :

   (i)  in the case of income referred to in paragraph 2 of article 9, articles 11, 12, 13, paragraph 5 of article 14, paragraph 3 of article 16, article 17, paragraphs 1 and 2 of article 18 and paragraph 3 of article 23, to the amount of tax paid in India in accordance with the provisions of those articles. However, it shall not exceed the amount of French tax attributable to such income ;

  (ii)  in the case of other income, to the amount of French tax attributable to such income, which is thus exempted. This provision shall apply also to remuneration referred to in article 19 and in paragraph 4 of article 20.

  (b)  As regards the application of sub-paragraph (a) to income referred to in articles 12 and 13, where the amount of tax paid in India in accordance with the provisions of these articles exceeds the amount of French tax attributable to such income, the resident of France receiving such income may present his case to the French competent authority. If it appears that such a situation results in taxation which is not comparable to taxation on net income, that competent authority may allow the non-credited amount of tax paid in India as a deduction from the French tax levied on other income from foreign sources derived by that resident. The provisions of this sub-paragraph shall not apply where tax is deemed to be paid in India according to the provisions of sub-paragraphs (c) and (d).

  (c)  For the purposes of the tax credit referred to in sub-paragraph (a) (i) the term “tax paid in India” shall be deemed to include any amount which would have been payable as Indian tax under the laws of India, and within the limits provided for by this Convention, for any year but for an exemption from, or reduction of, tax granted for that year under :

   (i)  section 10(4), 10(4B), 10(15)(iv) covering interest, section 10(6)(viia) covering salaries and section 80L covering interest and dividends, of the Income-tax Act, 1961 (43 of 1961), so far as they were in force on, and have not been modified since, the date of the signature of this Convention, or have been modified only in minor respects so as not to affect their general character ; or

  (ii)  any other provisions which may be enacted after this Convention enters into force granting a deduction in computing the taxable income or an exemption or reduction from tax which the competent authorities of the Contracting States agree to be for the purposes of the economic development of India, if it has not been modified thereafter or has been modified only in minor respects so as not to affect its general character.

  (d)  For the purposes of the tax credit referred to in sub-paragraph (c), where the Indian tax actually levied on interest arising in India is lower than the tax India may levy according to sub-paragraphs (a) and (b) of paragraph 2 of Article 12, then the amount of tax paid in India on such interest shall be deemed to have been paid at the rates of tax mentioned in the said provisions.

        However, if the general tax rates under Indian law applicable to the aforementioned interest are reduced below those mentioned in the foregoing sentence these lower rates shall apply for the purposes of that sentence.

  (e)  Notwithstanding the provisions of sub-paragraphs (a) and (c), dividends paid by a company which is a resident of India to a company which is a resident of France, shall be exempt from French Corporation tax to the extent that the dividends would have been exempt under French law if both companies had been residents of France.

   (f)  Residents of France who own capital taxable in India may also be taxed in France on such capital. The French tax is computed by allowing a tax credit equal to the amount of tax paid in India in accordance with the provisions of article 24. However, such credit shall not exceed the French tax attributable to such capital.

ARTICLE 26 - Non-discrimination - 1. Nationals of one of the Contracting States shall not be subjected in the other Contracting State to any taxation or any requirement connected therewith, which is other or more burdensome than the taxation and connected requirements to which nationals of the other Contracting State in the same circumstances are or may be subjected. The provision shall, notwithstanding the provisions of Article 1, also apply to persons who are not residents of one or both of the Contracting States.

2. Except where the provisions of paragraph 3 of Article 7 apply the taxation on a permanent establishment which an enterprise of one of the Contracting States has in the other Contracting State shall not be less favourably levied in that other Contracting State than the taxation levied on enterprises of that other Contracting State carrying on the same activities.

3. The provision of paragraph 2 shall not be construed as obliging one of the Contracting States to grant to residents of the other Contracting State any personal allowances, reliefs and reductions for taxation purposes on account of civil status or family responsibilities which it grants to its own residents.

4. Except where the provisions of Article 10, paragraph 7 of Article 12 or paragraph 8 of Article 13, apply, interest, royalties and other disbursements paid by an enterprise of one of the Contracting States to a resident of the other Contracting State shall, for the purpose of determining the taxable profits of such enterprise, be deductible under the same conditions as if they had been paid to a resident of the first-mentioned Contracting State.

Similarly, any debts of an enterprise of one of the Contracting States to a resident of the other Contracting State shall, for the purpose of determining the taxable capital of such enterprise, be deductible under the same conditions as if they had been contracted to a resident of the first-mentioned Contracting State.

5. Enterprises of one of the Contracting States, the capital of which is wholly or partly owned or controlled, directly or indirectly, by one or more residents of the other Contracting State, shall not be subjected in the first-mentioned Contracting State to any taxation or any requirement connected therewith which is other or more burdensome than the taxation and connected requirements to which other similar enterprises of the first-mentioned Contracting State are or may be subjected.

ARTICLE 27 - Mutual agreement procedure - 1. Where a resident of a Contracting State considers that the actions of one or both of the Contracting States result or will result for him in taxation not in accordance with this Convention, he may, notwithstanding the remedies provided by the national laws of those Contracting States, present his case to the competent authority of the Contracting State of which he is a resident. This case must be presented within three years of the date of receipt of notice of the action which gives rise to taxation not in accordance with the Convention.

2. The competent authority shall endeavour, if the objection appears to it to be justified and if it is not itself able to arrive at an appropriate solution, to resolve the case by mutual agreement with the competent authority of the other Contracting State, with a view to avoidance of taxation not in accordance with the Convention. Any agreement reached shall be implemented notwithstanding any time limits in the national laws of the Contracting States.

3. The competent authorities of the Contracting States shall endeavour to resolve by mutual agreement any difficulties or doubts arising as to the interpretation or application of the Convention. They may also consult together for the elimination of double taxation in cases not provided for in the Convention.

4. The competent authorities of the Contracting States may communicate with each other directly for the purpose of reaching an agreement in the sense of the preceding paragraphs. When it seems advisable in order to reach agreement to have an oral exchange of opinions, such exchange may take place through a Commission consisting of representatives of the competent authorities of the Contracting States.

5. The competent authorities of the Contracting States may, jointly or separately, if they consider it necessary, settle the mode of application of the Convention and, especially the requirements to which the residents of Contracting State shall be subjected in order to obtain, in the other Contracting State, the tax reliefs or exemptions provided for by the Convention.

ARTICLE 28 - Exchange of information - 1. The competent authorities of the Contracting States shall exchange such information (including documents) as is necessary for carrying out the provisions of the Convention or of the domestic laws of the Contracting States concerning taxes covered by the Convention, insofar as the taxation thereunder is not contrary to the Convention, in particular, for the prevention of fraud or evasion of such taxes. Any information received by a Contracting State shall be treated as secret in the same manner as information obtained under the domestic laws of that Contracting State. However, if the information is originally regarded as secret in the transmitting State, it shall be disclosed only to persons or authorities (including courts and administrative bodies) involved in the assessment or collection of, the enforcement or prosecution in respect of, or the determination of appeals in relation to, the taxes which are the subject of the Convention. Such persons or authorities shall use the information only for such purposes but may disclose the information in public court proceedings or in judicial decisions.

2. In no case shall the provisions of paragraph 1 be construed so as to impose on a Contracting State the obligation :

  (a)  to carry out administrative measures at variance with the laws or administrative practice of that or of the other Contracting State ;

  (b)  to supply information or documents which are not obtainable under the laws or in the normal course of the administration of that or of the other Contracting State ;

  (c)  to supply information or documents which would disclose any trade, business, industrial, commercial or professional secret or trade process or information the disclosure of which would be contrary to public policy.

ARTICLE 29 - Diplomatic and consular activities - Nothing in this Convention shall affect the fiscal privileges of diplomatic or consular officials under the general rules of international law or under the provisions of agreement concluded between the parties to this Convention.

ARTICLE 30 - Entry into force - 1. Each of the Contracting States shall notify to the other the completion of the procedure required by its law for the bringing into force of this Convention. This Convention shall enter into force on the first day of the second month following the date of reception of the later of these notifications and shall thereupon have effect :

  (a)  in India ;

   (i)  in respect of income arising in any fiscal year beginning on or after the first day of April following the calendar year in which the Convention enters into force ;

  (ii)  in respect of capital which is held on the last day of any fiscal year beginning on or after the first day of April following the calendar year in which the Convention enters into force ;

  (b)  in France :

   (i)  in respect of income arising in any calendar year or accounting period beginning on or after the first of January following the calendar year in which the Convention enters into force ;

  (ii)  in respect of capital owned on the first day in any calendar year following the calendar year in which the Convention enters into force.

2. The Agreement between the Government of French Republic and the Government of the Republic of India for the avoidance of double taxation in respect of taxes on income signed in Paris on March 26, 1969 shall be terminated and its provisions shall cease to have effect when the corresponding provisions of this Convention shall become effective.

ARTICLE 31 - Termination - 1. This Convention shall remain in force indefinitely. However, either Contracting State may, on or before the thirtieth day of June in any calendar year beginning after the expiration of a period of five years from the date of its entry into force, give the other Contracting State through diplomatic channels, written notice of termination and, in such event, this Convention shall cease to have effect :

(a) in India :

   (i)  in respect of income arising in any fiscal year beginning on or after the first day of April following the calendar year in which the notice of termination is given ;

  (ii)  in respect of capital which is held on the last day of any fiscal year beginning on or after the first day of April following the calendar year in which the notice of termination is given ;

  (b)  in France :

   (i)  in respect of income arising in any calendar year or accounting period beginning on or after the first day of January following the calendar year in which the notice of termination is given ;

  (ii)  in respect of capital owned on the first day of any calendar year following the calendar year in which the notice of termination is given.

IN WITNESS WHEREOF the undersigned, being duly authorised thereto, have signed the present Convention.

DONE in duplicate at Paris on this twenty nineth day of September, one thousand nine hundred and ninety two in the Hindi, French and English languages, all the texts being equally authentic.

PROTOCOL

At the time of proceeding to the signature of the Convention between France and India for the avoidance of double taxation with respect to taxes on income and on capital, the undersigned have agreed on the following provisions which shall form an integral part of the Convention :

1. For the purposes of this Convention, it is understood that the words “political sub-division” wherever they occur shall mean political sub-division of India.

2. With respect to paragraph 1 of Article 7 (Business Profits), it is understood that if in both India’s new tax Conventions, Agreements or Protocols, with the United Kingdom and Federal Republic of Germany, it is provided that the profits of an enterprise of a Contracting State carrying on business through a permanent establishment in the other Contracting State may be taxed in that other Contracting State as are attributable directly or indirectly to that permanent establishment or attributable to: (a) Sales in that other Contracting State of goods or merchandise of the same or similar kind as those sold through that permanent establishment; or (b) other business activities carried on in that other State, of the same or similar kind as those effected through that permanent establishment, such provisions shall also apply to the extent so provided to the present Convention with respect from the date from which the later of those two Conventions, Agreements or Protocols between India and United Kingdom and the Federal Republic of Germany enters into force. It is understood that only the provisions included in both new Conventions, Agreements or Protocols between India and U.K. and F.R.G. shall apply to the present Convention.

3. In respect of paragraphs 1 and 2 of Article 7, where an enterprise of one of the Contracting States sells goods or merchandise or carries on business in the other Contracting State through a permanent establishment situated therein, the profits of that permanent establishment shall not be determined on the basis of the total amount received by the enterprise, but shall be determined only on the basis of the remuneration which is attributable to the actual activity of the permanent establishment for such sales or business. Especially, in the case of contracts for the survey, supply, installation or construction of industrial, commercial or scientific equipment or premises, or of public works, when the enterprise has a permanent establishment, the profits of such permanent establishment shall not be determined on the basis of the total amount of the contract, but shall be determined only on the basis of that part of the contract which is effectively carried out by the permanent establishment in the Contracting State where the permanent establishment is situated. The profits related to that part of the contract which is carried out by the head office of the enterprise shall be taxable only in the Contracting State of which the enterprise is a resident.

4. It is understood that with respect to paragraph 2 of Article 7, no profits shall be attributed to a permanent establishment by reason of the facilitation of the conclusion of foreign trade or loan agreements or the mere signing thereof.

5. Where the law of the Contracting State in which a permanent establishment is situated imposes in accordance with the provisions of sub-paragraph (a) of paragraph 3 of Article 7 a restriction on the amount of the executive and general administrative expenses which may be allowed as a deduction in determining the profits of such permanent establishment, it is understood that in determining the profits of such permanent establishment, the deduction in respect of such executive and general administrative expenses in no case shall be less than what is allowable under the Indian Income-tax Act as on the date of signature of this Convention.

6. Where tax has been levied at source in excess of the amount of tax chargeable under the provisions of Article 11, 12 or 13, applications for the refund of the excess amount of tax have to be lodged with the competent authority of the Contracting State having levied the tax, within a period of three years after the expiration of the calendar year in which the tax has been levied.

7. In respect of articles 11 (Dividends), 12 (Interest) and 13 (Royalties, fees for technical services and payments for the use of equipment), if under any Convention, Agreement or Protocol signed after 1-9-1989, between India and a third State which is a member of the OECD, India limits its taxation at source on dividends, interest, royalties, fees for technical services or payments for the use of equipment to a rate lower or a scope more restricted than the rate of scope* provided for in this Convention on the said items of income, the same rate or scope as provided for in that Convention, Agreement or Protocol on the said items income shall also apply under this Convention, with effect from the date on which the present Convention or the relevant Indian Convention, Agreement or Protocol enters into force, whichever enters into force later.

8. It is understood that any amount which is payable in respect of any default or omission in relation to the taxes to which this Convention applies or which represents a penalty imposed relating to those taxes is not considered as an interest for the purposes of article 12 (Interest) and is not considered as tax for the purpose of article 25 (Elimination of double taxation).

9. In respect of Article 13 (Royalties, fees for technical services and payments for the use of equipments) notwithstanding the provisions of paragraph 2 of this Article, royalties, fees for technical services and payments for the use of equipment arising in France and paid to a resident of India, shall not be taxable in France.

10. It is understood that in case India applies a levy, not being a levy covered by Article 2, such as the Research and Development Cess on payments meant in Article 13, and if after the signature of this Convention under any Convention or Agreement or Protocol between India and third State which is a member of the OECD, India should give relief from such levy, directly by reducing the rate or the scope of the levy, either in full or in part, or, indirectly by reducing the rate or the scope of the Indian tax allowed under the Convention, Agreement or Protocol in question on payments as meant in Article 13 of this Convention with the levy, either in full or in part, then, as from the date on which the relevant Indian Convention, Agreement or Protocol enters into force, such relief as provided for in that Convention, Agreement or Protocol shall also apply under this Convention.

11. As regards article 16 (Dependent Personal Services), it is understood that the provisions of this article apply to remuneration derived by a resident of a Contracting State in his capacity as an official in a top level managerial position of a company which is a resident of the other Contracting State. It is clear that in respect of the remuneration due from a resident of this other Contracting State, the provisions of paragraph 2 of article 16 shall not apply.

12. As regards the application of paragraph 1 of Article 26, it is understood that    an individual, legal person, partnership or association which is a resident of a Contracting State shall not be deemed to be in the same circumstances as an individual, legal person, partnership or association which is a resident of the other Contracting State. This shall also apply where such individuals, legal persons, partnership or association are, in applying paragraph 1.1 of Article 3 (General definitions), deemed to be nationals of the Contracting State of which they are residents.

13. In respect of article 25 (Elimination of double taxation), it is understood that for the purposes of sub-paragraph 2(a)(ii), income which is exempt totally or partially in India shall also be considered as income taxable in India.

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Understanding  Double Tax Avoidance Agreement (DTAA) with Latest Case Laws

In Today’s modern world of advanced globalization, businessis not restricted to a single geographical territory & crosses all border of the countries. This had emerged a complex world of business along with complex world of Accounting & Taxation.

The country has a right to tax on the profits earned in its land by anyone and also to tax the global income of its residence. This leads to taxation of same income more than once in different countries.

To avoid this double taxation of same income, countries are entering into Double tax avoidance agreement (DTAA) with each other. There is generally bi-lateral agreement which is entered between two countries. However, there are also Multi –lateral agreements which are entered between more than two countries.

The Meaning of Tax Treaty (DTAA) means a tax treaty is a formally concluded and ratified agreement between two independents nations (bilateral treaty) or more than two nations (multilateral treaty) on matters concerning taxation normally in written form.

There are two kinds of DTAA.  Comprehensive Agreements & Limited Agreements. Comprehensive Agreements scope is to addressing all source of income whereas Limited Agreements scope to cover only

(a)  Income from Operation of Aircrafts & Ships

(b)  Estates

(c)  Inheritance &

(d)  Gifts

Currently there are 90   Comprehensive Agreements & 13 Limited Agreements India. All this DTAA are available in the website: http://incometaxindia.gov.in/

The DTAA will provide bilateral relief to the assessee under section 90 of the Income Tax Act, 1961 and in the case where there is no DTAA with the country then the assessee can get unilateral relief under section 91 of the Income Tax Act, 1961. Now let us read section 90, 90A & 91 of the Income Tax Act, 1961.

“Agreement with foreign countries or specified territories.

90. (1) The Central Government may enter into an agreement with the Government of any country outside India or specified territory outside India,—

(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 specified territory, as the case may be, or

(ii)   income-tax chargeable under this Act and under the corresponding law in force in that country or specified territory, as the case may be, 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 specified territory, as the case may be, 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 specified territory, as the case may be, 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 or specified territory, as the case may be,

and may, by notification in the Official Gazette, make such provisions as may be necessary for implementing the agreement.

(2) Where the Central Government has entered into an agreement with the Government of any country outside India or specified territory outside India, as the case may be, 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.

(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 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.

Explanation 2.—For the purposes of this section, “specified territory” means any area outside India which may be notified as such by the Central Government.]

Adoption by Central Government of agreement between specified associations for double taxation relief.

90A. (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 corres-ponding 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 corres-ponding law in force in that specified territory outside India, or investigation of cases of suchevasion or avoidance, or

(d)   for recovery of income-tax under this Act and under the corres-ponding 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 Gazette5 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 favourable 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.]

Countries with which no agreement exists.

91. (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 thededuction 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 [***] 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 [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. “

Generally the treaty obligations, which a country enters with another country have sometimes become law of the land without the formality of law enacted by the legislature. It is because Government of the day may have been given power to negotiate and arrive at such treaty .  It is note that all treaties become part of the domestic law( as in the case of US). It is in this context that it had to be incorporated in the Indian constitution with the result that the Government of the day is authorized to enter into international agreements but in most matters, such agreements may have to be followed up by local legislation as was found in respect of arbitrations, patents etc. The Tax payer may opt to be governed by the Act of the tax treaty, whichever is more beneficial but cannot pick & choose the provisions.

-       Circular  No. 333 of 1982

-       Azadi Bachao Andolan 263 ITR 706 (SC)

-       Vishakapatnan Port Trust 144 ITR 146 (AP)

Now, to understand the DTAA , following should be understood first in respect of DTAA:

-       Meaning

-       Objectives

-       Formation

-       Types

-       Coverage

-       Treaty Position in India

-       Structure

-       Discussion of the Articles

DTAA MODELS:

There are Two major types of DTAA Model

OECD Models are generally adopted by developed nations and their emphasis is on the residency based taxation.

UN Model emphasis is on the source based taxation and generally adopted by the developing nations.

There are also US model Convention & Indian Model Convention too.

In this Treaties Importance has been given to Residence than citizenship. The Tax Treaties follow a fairly well established procedure which is given below:

(1)  Negotiation

(2)  Initialing

(3)  Signature

(4)  Ratification

(5)  Entry into force

(6)  Effective Date

Components of Tax Treaty

An analysis of any tax treaty would have the following components:

1)    The date on which it come into effect.

2)    Applicability – Applies to a person who is resident of one or both the countries.  “Resident” is defined under domestic law of different counties differently. Article 4 expects that it should based upon domicile, physical residence, place of management or such other criteria but makes it clear that where a person is a resident in both the countries, it is the location of the permanent home or where vital interests are located or where there is fixed abode or where he is citizen, in that order, will decide the residential status.

There may be cases, when it has been found that the assessee is resident in both the countries then tie-breaker rule has to apply to determine the residential status.

(a)  In the case of individual his personal & economic ties determine his residential  status.

(b)  In the case of others, it is the place of effective management.

3)    General Definitions – Article 3 of DTAA generally covers general definition of Person, Company, contracting state, Enterprise of a contracting state, Competent Authority, national etc, which all are applicable to the respective DTAA.

4)    The Tax which it covers – What kind of tax the treaty covers should be known as there are different form of tax in different countries & the DTAA will provide the relief on the specified tax as mentioned in the DTAA.

5)    The definition which will be applicable in both countries irrespective of domestic law, as for example on such vital issues as residence, which may be different from the residential statute in local law with greater stress on nexus between source & income, definition of certain categories’ like technical services etc.

6)    Permanent Establishment and its parameters –

(a)  PE means a fixed place from where the business of the enterprise is carried on.

(b)  PE includes place of management, branch, office, factory, workshop, mine , quarry, an oil or gas well, a construction site for long duration, a service location for a long duration and a dependent agency with power to conclude contracts.

7)    The definition of concepts like immovable property, dividend, business profits, royalty, technical fees, salaries etc.

8)    Different ways of tax-sharing depending upon the residential statute, permanent establishment, fixed base or tax sharing with both countries giving agreed part of relief.

9)    Stipulation as to the method of relief either by way of exempting income or where it is taxable, taxing it at stipulated rate, which may be lower than the domestic rate, or by unilaterally giving credit for tax paid in the other country.

10) Exchange of information with special reference to the concept of associated enterprises primarily to tackle diversion of income to avail treaty benefit or evasion of tax in one or the other country.

11)  Provision for elimination of double taxation.

12)  Provision for non- discrimination etc.

13)  Other clauses to suit the requirement of the participating countries.

Concept of Active & Passive Income and others in DTAA

Now let us analyze some of the Judicial decisions which comes in last one year .

Atlanta

Australia

Austria

Belgium

Canada

DENMARK

France

Germany

Ireland

Italy

Korea

MAURITIUS

Netherland

NewZeaLand

Others

(i)            To constitute “royalty”, it is not necessary that the process should be a “secret process”, nor that that the instruments through which the “process” is carried on should be in the control or possession of the payer. The context and factual situation has to be kept in mind to determine that whether the process was “used” by the payer. The fact that the telecasting companies are enabled to telecast their programmers by up linking and down linking the same with the help of that process shows that they have “use” of the same. Time of telecast and the nature of programme, all depends upon the telecasting companies and, thus, they are using that process;

(ii) The consideration paid by telecasting companies to satellite companies is for the purpose of providing “use of the process” and consequently

assessable as “royalty” under the Act and the DTAA.

Singapore

South Africa

Switetzerland

United Kingdom

United State of America

United State of Amirates

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Double Tax Avoidance Agreement – DTAA

India has comprehensive Double Taxation Avoidance Agreements (DTAA) with 79 countries. This means that there are agreed rates of tax and jurisdiction on specified types of income arising in a country to a tax resident of another country.

Double taxation is the levying of tax by two or more jurisdictions on the same declared income, asset or financial transaction. It refers to a situation where the same income becomes taxable in the hands of the same company or individual (tax-payer) in more than one country.

Double Tax Avoidance Agreement

Section 90(2) of the Income Tax Act, 1961 cleared that in case of any conflict between the provisions of above two, the provision of DTAA would prevail over the provisions of the Act.

Hence, it is cleared that where there is conflict between the provisions of Income Tax Act & the provisions as contained in the tax treaty, a tax payer can take advantage of those provisions which are more beneficial to them.

Section 90 – Agreement with Foreign Countries or Specified Territories

(1) The Central Government may enter into an agreement with the Government of any foreign country or specified territory outside India for any of the following purposes:

(a) for the granting of relief in respect of

(i)  income on which have been paid both income tax under the Income Tax Act and income- tax in that country or specified territory, as the case may be, or

(ii) income tax chargeable under the Income Tax Act and under the corresponding law in force in that country or specified territory, as the case may be, 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 specified territory, as the case may be.

 

(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 specified territory, as the case may be, or investigation of cases of such evasion or avoidance, or

 

(d)       for mutual recovery of income-tax under this Act and under the corresponding law in force in that country or specified territory, as the case may be.

                                                                                                                                                          Further, as per section 90(2), the provisions of agreement will apply if they are beneficial to the assessee. If the Income Tax Act is more beneficial to the assessee, then the Income Tax Act shall apply.

NOTE:  For the above section, specified territory means any area outside India which may be notified as such by the Central Government.

 

The effect of DTAA is such that,

(i)  Income is taxed in only one country or

(ii) If income is being taxed in both the countries, then the tax paid in one country is allowed as deduction from the tax payable in the other country, as per the agreement.

For Example:

If as per the DTAA with a foreign country or specified territory; the royalty is to be taxed @ 35% then it will be beneficial to apply section 115A (i.e. Tax on Interest, Royalty, Technical Services Fee etc. in case of Non Residents & Foreign Companies) of the Income Tax Act where royalty is taxed @ 20%.

For Example:

If as per the DTAA with a foreign country or specified territory, the royalty is to be taxed @ 10%, then it will be beneficial to apply DTAA instead of section 115A of Income Tax Act.

Hence this lead to the conclusion that, if provisions of Income Tax Act are more beneficial to the assessee than DTAA, then the provisions of Income-Tax Act are applicable and if the  provisions of DTAA are beneficial, then DTAA will get applied.

Section 91 of Income Tax Act, 1961 provides for the grant of unilateral relief in the case of resident tax payers on income where there is no DTAA. The following requirements have to be satisfied in order to claim deduction on the double taxed income:

a)      The assessee must have been resident in India in the relevant previous year,

b)      The income must have accrued or arisen (not deemed to accrue or arise) to him outside India during that previous year, and

c)      In respect of income, he must have paid by deduction.

The assessee is entitled to deduction on such doubly taxed income at the Indian rate of tax or tax of that country, whichever is lower or at the Indian rate of tax, if both the rates are equal.

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India and Tanzania Signed Double Taxation Avoidance Agreement

The Government of the Republic of India signed a Double Taxation Avoidance Agreement (DTAA) with the United Republic of Tanzania for the avoidance of double taxation and for the prevention of fiscal evasion with respect to taxes on income on 27th May, 2011 at Dar-es-Salaam. The Agreement was signed by Shri K V Bhagirath, High Commissioner of India on behalf of the Government of India and by Mr Pereira Ame Silima, Deputy Minister of Finance on behalf of the United Republic of Tanzania in the presence of the Prime Minister, Dr Manmohan Singh and the President of Tanzania Mr Kikwete.

The DTAA provides that business profits will be taxable in the source state if the activities of an enterprise constitute a permanent establishment in the source state. Examples of permanent establishment include a branch, factory, etc. Profits of a construction, assembly or installation projects will be taxed in the state of source if the project continues in that state for more than 270 days.

Profits derived by an enterprise from the operation of ships or aircrafts in international traffic shall be taxable in the country of residence of the enterprise. Dividends, interest and royalties income will be taxed both in the country of residence and in the country of source. However, the maximum rate of tax to be charged in the country of source will not exceed a two-tier 5% or 10% in the case of dividends and 10% in the case of interest and royalties. Capital gains from the scale of shares will be taxable in the country of source.

The Agreement further incorporates provisions for effective exchange of information and assistance in collection of taxes between tax authorities of the two countries in line with internationally accepted standards including exchange of banking information and incorporates anti-abuse provisions to ensure that the benefits of the Agreement are availed of by the genuine residents of the two countries.

The Agreement will provide tax stability to the residents of India and Tanzania and facilitate mutual economic cooperation as well as stimulate the flow of investment, technology and services between India and Tanzania.

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India and Ethiopia Sign Double Taxation Avoidance Agreement

India signed a Double Taxation Avoidance Agreement (DTAA) with the Federal Democratic Republic of Ethiopia for the avoidance of double taxation and for the prevention of fiscal evasion with respect to taxes on income on 25th May, 2011 at Addis Ababa. The Agreement was signed by Shri S.M. Krishna, External Affairs Minister on behalf of the Government of India and by Mr. Sufian Ahmed, Minister of Ethiopia in the presence of the Prime Minister, Dr. Manmohan Singh and the Ethiopian Prime Minister. Mr. Meles Zenawi.

The DTAA provides that business profits will be taxable in the source State if the activities of an enterprise constitute a permanent establishment in the source State. Examples of permanent establishment include a branch, factory, etc. Profits of a construction, assembly or installation projects will be taxed in the State of source if the project continues in that State for more than 183 days. 

Profits derived by an enterprise from the operation of ships or aircrafts in international traffic shall be taxable in the country of residence of the enterprise. Dividends, interest, royalties and fees for technical services income will be taxed both in the country of residence and in the country of source. However, the maximum rate of tax to be charged in the country of source will not exceed 7.5% in the case of dividends and 10% in the case of interest, royalties and fees for technical services. Capital gains from the scale of shares will be taxable in the country of source. 

The Agreement further incorporates provisions for effective exchange of information and assistance in collection of taxes between tax authorities of the two countries in line with internationally accepted standards including exchange of banking information and incorporates anti-abuse provisions to ensure that the benefits of the Agreement are availed only by the genuine residents of the two countries. 

The Agreement will provide tax stability to the residents of India and Ethiopia and facilitate mutual economic cooperation as well as stimulate the flow of investment, technology and services between India and Ethiopia. 

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India and Tanzania Signed Double Taxation Avoidance Agreement

The Government of the Republic of India signed a Double Taxation Avoidance Agreement (DTAA) with the United Republic of Tanzania for the avoidance of double taxation and for the prevention of fiscal evasion with respect to taxes on income on 27th May, 2011 at Dar-es-Salaam. The Agreement was signed by Shri K V Bhagirath, High Commissioner of India on behalf of the Government of India and by Mr Pereira Ame Silima, Deputy Minister of Finance on behalf of the United Republic of Tanzania in the presence of the Prime Minister, Dr Manmohan Singh and the President of Tanzania Mr Kikwete. 

The DTAA provides that business profits will be taxable in the source state if the activities of an enterprise constitute a permanent establishment in the source state. Examples of permanent establishment include a branch, factory, etc. Profits of a construction, assembly or installation projects will be taxed in the state of source if the project continues in that state for more than 270 days. 

Profits derived by an enterprise from the operation of ships or aircrafts in international traffic shall be taxable in the country of residence of the enterprise. Dividends, interest and royalties income will be taxed both in the country of residence and in the country of source. However, the maximum rate of tax to be charged in the country of source will not exceed a two-tier 5% or 10% in the case of dividends and 10% in the case of interest and royalties. Capital gains from the scale of shares will be taxable in the country of source. 

The Agreement further incorporates provisions for effective exchange of information and assistance in collection of taxes between tax authorities of the two countries in line with internationally accepted standards including exchange of banking information and incorporates anti-abuse provisions to ensure that the benefits of the Agreement are availed of by the genuine residents of the two countries. 

The Agreement will provide tax stability to the residents of India and Tanzania and facilitate mutual economic cooperation as well as stimulate the flow of investment, technology and services between India and Tanzania. 

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Income deemed to accrue or arise in India

2010) 36 (II) ITCL 530 (Hyd `B'-Trib)

Asstt. CIT v. Louis Berger International Inc.

ORDER

All these appeals of the revenue are directed against the independent orders of the Commissioner (Appeals)-III, Hyderabad and pertains to the assessment years 1998-99, 1999-2000, 2000-01, 2001-02 and 2002-03. Since common issues arise for consideration in all these appeals, we have heard the same together and disposing of the same by this common order.

2. The learned Departmental Representative submitted that during the course of assessment proceedings, the assessing officer disallowed Rs. 8,55,58,000 towards expenditure claimed as reimbursable. According to learned Departmental Representative, the assessing officer also disallowed a sum of Rs. 16,69,069 under the article 12 of Double Taxation Avoidance Agreement between Government of India and USA. Referring to the agreement between the assessee and National Highway Authority of India, the learned Departmental Representative pointed out that the agreement has two parts. The first part contains General Clauses and the second part contains Special Clauses. In the agreement, there was no difference between reimbursable expenditure and the fee payable for technical services. Referring to section 9(1)(vii) of the Income Tax Act, the learned Departmental Representative submitted that all types of payment constitute fees for technical services, therefore, no deduction of any expenses would be allowed in case the assessee receives any amount in the guise of reimbursement of expenditure. Therefore, the entire amount payable including reimbursable expenditure has to be taken as a whole towards fee for technical service, under article 12 of the Double Taxation Avoidance Agreement with USA. The learned Departmental Representative further pointed out that for the purpose of claim of deduction under section 10(6A), the assessee has to get the approval of the Government of India. In this case, according to the learned Departmental Representative, no approval was obtained in respect of agreement entered into between the assessee and the National Highway Authority of India. According to learned Departmental Representative, the reimbursable expenditure cannot be allowed as deduction. Moreover, the assessee has also not entitled for exemption under section 10(6A) of the Income Tax Act, 1961. Referring to Commissioner (Appeals) order, the learned Departmental Representative submitted that tax was deducted to the extent of Rs. 2,11,63,425 including the reimbursable expenditure. Though originally, the assessee claimed all the TDS Certificates in the assessment year 2000-01. Subsequently, it was found that the assessee was following the Mercantile System of Accounting and the TDS has to be given credit for the assessment year 2000-01 only to the extent of Rs. 2,11,63,426 instead of Rs. 2,79,80,493. Referring to Page 15 of the Commissioner (Appeals) order, more particularly Para 19.2, the learned Departmental Representative pointed out that the Commissioner (Appeals) followed the judgment of the Calcutta High Court in the case of CIT v. Sandersons & Morgans (1970) 75 ITR 433 (Cal), Bombay High Court in the case of CIT v. Tanubai D. Desai (1972) 84 ITR 713 (Bom). According to the learned Departmental Representative, the case before the Calcutta High Court and Bombay High Court are entirely different, therefore, these Calcutta High Court and Bombay High Court judgment may not be applicable to the facts of the case. According to the learned representative, no case was made out before the Lower Authorities that the expenditure was incurred on behalf of National Highway Authority of India. According to learned representative, article 12 of Double Taxation Avoidance Agreement, between USA and India clearly says that any payment for rendering the services would amounts to payment for technical services. Therefore, the Commissioner (Appeals) is not correct in saying that section 44D and section 115A(3) are applicable only to the income and not to reimbursable expenditure. According to learned representative, even the reimbursable expenditure form part of the fee for technical services, therefore, there is no question of any exclusion of the same while computing the total income.

3. The learned Departmental Representative further pointed out that the assessing officer also disallowed a sum of Rs. 62,27,887 towards service tax reimbursed. According to learned Departmental Representative, service tax is liability of the service provider. Service provider may eventually pass over the same to the other person. However, the liability remains that of the service provider for payment of service tax. The learned Departmental Representative placed reliance on the judgment of the Calcutta High Court in the case of Chowringhee Sales Bureau (P.) Ltd. v. CIT (1977) 110 ITR 385 (Cal), Apex Court in the case of Sinclair Murray & Co. (P.) Ltd. v. CIT (1974) 97 ITR 615 (SC). Referring to the disallowance of tax deducted at source, the learned Departmental Representative submitted that the reimbursable expenditures are to be taxed. Therefore, the tax deducted at source are borne by the clients of the assessee are part of the technical services. The learned representative further submitted that since the tax payable by the assessee has to be borne by the respective clients, it has to be treated as part of the fee payable for technical services. The learned representative placed reliance on the judgment of the Andhra Pradesh High Court in the case of CIT v. Superintending Engineer, Upper Sileru (1985) 152 ITR 753 (AP)". Further, submitted that the judgment of the Andhra Pradesh High Court was approved by the Apex Court in the case of Transmission Corpn. of A.P. Ltd. v. CIT (1999) 239 ITR 587 (AP). The judgment of the Supreme Court further followed by the Kerala High Court in the case of Asian Development Service v. CIT (1999) 239 ITR 713 (Ker). Referring to the Commissioner (Appeals) order, more particularly. Para 24, the learned representative pointed out that the Industrial Policy notified by the Government of India dated 24-7-1991 was produced first time before the Commissioner (Appeals). According to the learned Departmental Representative, the Industrial Policy was notified on 24-7-1991, therefore, it was outdated and it is not relevant for the assessment year under consideration. The portion of the Industrial Policy reproduced by the Commissioner (Appeals) cannot be a basis for holding that the Government approval was obtained as required under section 10(6A) of the Income Tax Act, 1961. Further, the learned representative pointed out that reference to section 80-IA(4) by Commissioner (Appeals) is not relevant in the facts of the case. Therefore, according to learned representative, the assessee is not eligible for deduction under section 10(6/4) of the Act. Referring features for technical services, the learned representative pointed out that payment of any kind has to be considered as fee for technical services, therefore, there is no need for examining the nature of the payment. Referring to payment made to sub-contractor, the learned representative pointed out that the liability of the assessee to execute the work cannot be diluted by raising bill through sub-contractors. The learned representative placed reliance on the decision of this Tribunal in the case of Progressive Constructions Ltd. v. Jt. CIT (IT Appeal No. 482 (Hyd.) of 2001, dated 23-11-2006) and submitted that by assigning the work to the sub-contractor, there is no diversion of income by overriding title. According to learned representative, at the best the payment made to the sub-contractor may constitute an expenditure in the hands of the assessee as found by this Tribunal in the case of Progressive Constructions Ltd. (supra).

4. On the contrary, Shri Rama Rao, learned counsel for the assessee, submitted that the assessee-company is a Non-Resident Company incorporated in the USA. The assessee-company engaged in providing technical services to Government of India and the other Government organizations for developing infrastructure facilities. Most of the agreements entered into by the assessee were with National Highway Authority of India, State Government departments. The assessee has to provide technical services to the Government agencies. According to the learned counsel for the assessee, in the course of its business activity in India, the assessee has to incur expenditure on behalf of the National Highway Authority of India and other Government departments which engage the services of the assessee. The expenditure incurred by the assessee would be reimbursed in terms of the agreement. The learned counsel for the assessee pointed out that there is a maximum limit for such expenditure to be reimbursed by the National Highway Authority of India and other departments of Government.

5. According to learned counsel for the assessee, the assessee being a non-resident foreign company, assessable either under the provisions of the Income Tax Act, 1961 or in accordance with Double Taxation Avoidance Agreement between the Government of India and the USA. During the assessment proceedings, the assessee claimed reimbursable expenditure as not taxable, since the same does not represent the income of the assessee. According to the learned counsel for the assessee, the reimbursable expenditure is only to reimburse the expenditure incurred on behalf of the clients, therefore, it is a capital receipt. However, the Assessing Officer referring to article 12 of the Double Taxation Avoidance Agreement found that any some received by the assessee would constitute payment for technical services. Accordingly, the assessing officer assessed the entire gross amount including the reimbursable expenditure as the income of the assessee and estimated the profit at 15 per cent on such receipt. However, for the purpose of rate of tax, the assessing officer applied article 7 of the Double Taxation Avoidance Agreement and levied tax at 20 per cent. Referring to reimbursable expenditure, the learned counsel submitted that the reimbursement of expenditure by the National Highway Authority of India and other departments cannot partake the character of income. Therefore, such reimbursement of expenditure has to be excluded from the fee payable for technical services. According to learned counsel, reimbursement of expenditure is entirely different from the fee payable for technical services. The amount will be reimbursed by the Government or Government department when the expenditure was actually incurred on their behalf. In such an event, the assessee spends the amount on behalf of the Government or its department. Therefore, the said expenditure is only paid by the Government by way of reimbursement. The learned counsel further submitted that the assessee has also incurred expenditure on its own in the course of its business activity and as such expenditure was not claimed as reimbursable expenditure. The assessee claiming the expenditure incurred on behalf of its clients alone as reimbursable expenditure. According to the learned counsel, the expenditure incurred by the assessee on behalf of Government is a debt due from the Government. Therefore, it would amount to capital receipt in the hands of the assessee. Accordingly, the same is not taxable.

6. Referring to section 9(1)(vii) of the Income Tax Act, 1961 and section 115A, the learned counsel submitted that the amount received towards fee for rendering technical services are governed by section 9(1)(vii) and section 115A. Referring to Explanation to section 9(1)(vii), the learned counsel pointed out that the Legislature employed the words `for rendering any managerial, technical or consultancy services' for relevant consideration. Explanation to section 9(1)(vii) does not say that any amount received which is not for rendering any service also would form part of fee for services. In view of Explanation to section 9(1)(vii), according to the learned counsel, the reimbursable expenditure are not included in the definition fee for technical services in section 9(1)(vii) of the Act. Referring to article 12(4) of the Double Taxation Avoidance Agreement between Government of India and USA, the learned counsel submitted that any amount other than the amount received as consideration for services rendered cannot form part of fee for technical service. Therefore, the reimbursable expenditure cannot constitute fee paid/payable for the services rendered by the assessee. The learned counsel submitted that the reimbursable expenditure by the Government or its department cannot be treated as income of the assessee. Referring to section 44D of the Act, the learned counsel submitted that this section is applicable in respect of any sum received towards technical services and it is not applicable for reimbursable expenditure. According to the learned counsel, reimbursable expenditure would not be part of fee for technical services. Referring to article 12 of the Double Taxation Avoidance Agreement between the Government of India and USA, learned counsel submitted that what is stated in the article 12 of the agreement between Government of India and USA is only gross amount of fees. It does not refer to any reimbursable expenditure to be incurred by the clients. Therefore, the learned counsel submitted that the reimbursable expenditure cannot be considered to be an expenditure incurred by the assessee for its business. The learned counsel placed reliance on the judgment of the Bombay High Court in the case of CIT v. Siemens Aktiongesellschaft (2009) 310 ITR 320 (Bom) : (2009) 177 Taxman 81 (Bom) and submitted that the claim of reimbursement of expenditure was not taxable in India. The learned counsel also placed reliance on the decision of the Special Bench of this Tribunal in ITO v. Prasad Production (IT Appeal No. 663 (Mad.) of 2003, dated 9-4-2010) [reported in (2010) 33 (II) ITCL 504 (Chenn `B'-Trib)] and submitted that reimbursement expenditure need not be subjected to deduction of tax at source within the meaning of section 195(1) of the Act. The learned counsel also placed reliance on the decision of this Tribunal in the case of Cairn Energy (India) (P.) Ltd. v. Asstt. CIT (IT Appeal Nos. 208 to 211 (Mad.) of 2006, dated 20-2-2009) [reported in (2010) 31 (II) ITCL 210 (Chenn-Trib)]. The learned counsel again placed reliance on the decision of Delhi Bench of this Tribunal in the case of Asstt. CIT v. Modicon Network (P.) Ltd. (2007) 14 SOT 204 and submitted that reimbursement of expenditure does not amount to payment for technical services. The learned counsel also placed reliance on the judgment of the Apex Court in the case of CIT v. Tejaji Farasram Kharawalla Ltd. (1968) 67 ITR 95 (SC) and submitted that any amount received in respect of expenses incurred, would be exempt from taxation. Referring to the Calcutta High Court judgment in the case of Sandersons & Morgans (supra) and submitted that when the solicitors received money on behalf of his client, the same cannot be considered to be a revenue receipt. He also placed reliance on the judgement in the case of Bombay High Court in Tanubhai D. Desai's case (supra). The learned counsel also placed reliance on the decision of the Authority for Advance Ruling - Danfoss Industries (P.) Ltd., In re (2004) 268 ITR 1 (New Delhi) and submitted that there is no direct nexus between the actual cost incurred by the foreign company in providing services and fee payable to each individual company availing services. Therefore, the Authority of Advance Ruling held that the amount does not represent reimbursement of expenditure. Therefore, according to the learned counsel, this decision is not applicable to the facts of the case. Referring to the decision in the case of Progressive Constructions Ltd. (supra), the learned counsel submitted that this decision has no application to the facts of this case. In the case of Progressive Constructions Ltd. (supra), the entire payment was made otherwise than by way of crossed cheque/demand draft and the question was whether section 40A(3) are applicable or not. Referring to the exemption claimed by the assessee under section 10(6A) of the Act, the learned counsel submitted that for the purpose of exemption any one of the conditions shall be fulfilled. According to the learned counsel, when the agreement is with regard to a matter which was included in the Industrial Policy, approval of the Central Government was not required. Referring to Industrial Policy of Government of India 1991, the learned counsel submitted that item No. 11 of the Industrial Policy speaks of providing infrastructure facilities. Therefore, providing infrastructure facility is one of the policy of Government of India declared in the Industrial Policy. Referring to section 80-IA of the Act, the learned counsel submitted that the infrastructure facility includes development of roads. The agreement with Government of India and other Government departments are only for the purpose of providing infrastructure facility such as development of roads. Therefore, according to the learned counsel, the agreement with National Highway Authority of India and other Government department is in line with industrial policy declared by Government of India Moreover, according to the learned counsel, the agreement itself was entered into with Government departments and National Highway Authority of India which is a limb of the Government of India. Therefore, further approval of the agreement by the Central Government does not require. According to the learned counsel, specific approval of Government of India may be required, in case the assessee entered into agreement for providing technical service with any company which is not connected or associated with Government of India. Since the agreement itself with the Government and Government departments, no specific approval is required. Therefore, according to the representative, both the conditions laid down to section 10(6A) are fulfilled. Referring to the argument of the learned Departmental Representative with regard to the industrial policy declared in 1991, the learned counsel submitted that the Assessing Officer himself referred to the very same industrial policy for the assessment year 2003-04. The assessing officer for the assessment year 2003-04 has not referred any other industrial policy. Therefore, according to the learned representative, the revenue may not be correct in saying that the industrial policy declared in 1991 is outdated. According to the learned counsel, in the absence of any other industrial policy, the policy declared in 1991 has to be taken as such. Therefore, according to the counsel, the assessee is entitled for exemption under section 10(6A) of the Act.

7. Referring to rate of tax on the fee for technical services, the learned counsel submitted that article 12 of the Double Taxation Avoidance Agreement between Government of India and USA clearly says that tax be levied at 15 per cent and not 20 per cent. According to learned counsel, in 1998-99, 1999-2000, the assessee-company itself claimed that article 7 would apply. However, the assessing officer did not accept the claim of the assessee and levied tax under article 12 of the Double Taxation Avoidance Agreement. Referring to article 7 of the Double Taxation Avoidance Agreement, the learned counsel submitted that taxable income would be the amount received by the assessee as reduced by the expenses incurred. In other words, net income alone is assessable. Referring to article 12 of the Double Taxation Avoidance Agreement, the learned Counsel submitted that it speaks of taxability of gross income at the rate of 15 per cent. Referring to article 7 of the Double Taxation Avoidance Agreement, the learned counsel submitted that this article would be applicable only to business activity and not to the service provider. According to the learned counsel, the assessee has no other activity except providing technical services for establishing infrastructure facilities. According to the learned counsel, the assessing officer cannot take one stand by computing the gross receipt as required under article 12 and take another stand for the purpose of taxing the income at 20 per cent under article 7 of the Double Taxation Avoidance Agreement, read with section 115A of the Act. The learned counsel submitted that the Commissioner (Appeals) has rightly found that the tax has to be levied at 15 per cent and not 20 per cent. The learned counsel placed reliance on the decision of the Delhi Bench of this Tribunal in the case of SNC-Lavalin International Inc. v. Dy. CIT, International Taxation (2008) 26 SOT 155 (Del). The counsel also placed reliance on the decision of the Calcutta Bench in the case of Gentex Merchants (P.) Ltd. v. Dy. CIT (2006) 7 (II) ITCL 279 (Cal-Trib) : (2005) 94 ITD 211 (Cal).

8. Referring to levy of interest under section 234B of the Act, the learned counsel submitted that the assessee has to estimate the income as provided in Chapter XVII-C of the Act for the purpose of paying the advance tax. Further, the learned counsel submitted that the assessee has to estimate the income relevant to previous year and compute the tax payable thereon at the rate prescribed by the Finance Act for the relevant assessment year. According to the learned counsel for the assessee, the entire amount was received by the assessee from the Government and its agencies for the service rendered by it and tax was deducted at source. Therefore, according to the learned counsel, the assessee is not liable to pay any advance tax and there is no question of levy of interest under section 234B(1) of the Act. The learned counsel also placed reliance on the decision of Delhi Bench in SNC-Lavalin International Inc.'s case (supra) and the decision in the case of Asstt. DIT (International Taxation)/ Jt. DIT v. Kaiser Aluminium Technical Services Inc. (2008) 21 (II) ITCL 148 (Mum-Trib) : (2008) 20 SOT 226 (Mum.).

9. We have considered the rival submissions on either side and also perused the material on record. Let us first take up the issue of reimbursable expenditure. The assessing officer found that the reimbursable expenditure forms part of the fees for technical services. The assessing officer mainly placed reliance in article 12 of Double Taxation Avoidance Agreement (DTAA) between Government of India and USA and also the provisions of section 9(1)(vii) of the Income Tax Act, 1961. The learned Departmental Representative also placing reliance on the DTAA, more particularly on article 12, submitted that the reimbursable expenditure would form part of the fee payable for technical services. The question arises for consideration is whether the reimbursable expenditure received by the assessee in the course of its business activities would form part of the fees payable towards technical services.

10. We have carefully gone through the provisions of the agreement entered into between the assessee and the National Highways Authority of India (NHAI), the DTAA between the Government of India and the USA and the provisions of section 9(1)(vii) of the Act. As rightly pointed out by the learned Departmental Representative, the agreement executed by the assessee and the NHAI contains both general and special clauses. The copy of the agreement, executed on 20-4-2001 is available at page 7 of the Paper Book. Admittedly, the other agreement contains similar and identical clauses. As per this agreement, the assessee has to supervise the construction of roads, consultancy services in the formation of Golden Quadrilateral for four laning and strengthening of the existing two lanes structure in the States of Orissa and West Bengal. Remuneration and reimbursable expenditure payable to the assessee has been stated in clause 6.2 of the agreement besides payment for providing of consultancy services which reads as follows :

"6.1 Cost Estimates : Ceiling amount:

(a) An estimate of the cost of the Services payable in foreign currency is set forth in Appendix G. An estimate of the cost of the Servic es payable in local currency is set forth in Appendix H.

(b) Except as may be otherwise agreed under clause GC 2.6 and subject to clause GC 6.1(c), payments under this Contract shall not exceed the ceilings in foreign currency and in local currency specified in the SC. The Consultants shall notify the Client as soon as cumulative charges incurred for the Services have reached 80 per cent of either of these ceilings.

(c) Notwithstanding clause GC 6.1(b) hereof, if pursuant to clauses GC 5.3, 5.4 and 5.6 hereof, the Parties shall agree that additional payments in local and/or foreign currency, as the case may be, shall be made to the Consultants in order to cover any necessary additional expenditures and envisages in the cost estimates referred to in clause GC 6.1(a) above, the ceiling or ceilings, as the case may be, set forth in clause GC 6.1(b) above shall be increased by the amount or amounts, as the case may be, of any such additional payments.

6.2 Remuneration and Reimbursable Expenditures :

(a) Subject to ceilings specified in clause GC 6.1(b) hereof, the client shall pay the consultants (i) remuneration as set forth in clause GC 6.2(b) and (ii) reimbursable expenditure as set forth in clause GC 6.2(c). If specified in the SC, said remuneration shall be subject to price adjustment as specified in SC.

(b) Remuneration for the personnel shall be determined on the basis of time actually spent by such personnel in the performance of the services after the date determined in accordance with clause GC 2.3 and clause SC 2.3, (or such other date as the Parties shall agree in writing) (including time for necessary travel vz'athe most direct route) at the rates referred to and subject to such additional provisions as are set forth, in the SC.

(c) Reimbursable expenditure actually and reasonably incurred by the consultants in the performance of the services as specified in clause SC 6.3(b).

Clause 6.3(b) reads as follows :

(b) The SC shall specify which items of the remuneration and reimbursable expenditure shall be paid, respectively, in foreign and local currency."

11. In view of the above, we have to see the special clause for reimbursement of the expenditure in foreign currency and in local currency. As far as tax for technical services, which falls in clause 6.1 of the agreement, there is no dispute. The dispute is only in respect of reimbursable expenditure, which falls in clause 6.2 of the agreement. Special clause 6.3(b)(ii) provides for reimbursement of expenditure in foreign currency. For the purpose of convenience, we reproduce the special clause containing the agreement at clause 63(b)(ii) and 63(b)(iii) which read as follows :

"6.3(b)(ii) : The reimbursable expenditures in foreign currency shall be the following :

(1) a per diem allowance for each of the Expat Personnel for every day in which such personnel shall be absent from his home office and shall be outside India for the purpose of the services at the daily rate specified in Appendix G.

(2) The following transportation costs :

(i) the cost of international transportation of the foreign personnel and, as specified below, eligible dependents of the foreign personnel, by the most appropriate means of transport and the most direct practicable route to and from the Constants' home office, in the case of air travel, this shall be less than first class, i.e., economy class.

(ii) For any foreign key personnel, only one round trip shall be admissible for `economy class' regardless of any length of continuous stay on the project. In case the foreign key personnel as per agreed Manning Schedule is not required continuously for entire duration of his input period at a stretch but has to discontinue and resume later after some time gap, only in such cases the employer shall reimburse the consultant as per the requirements established by the Manning Schedule for that foreign key personnel only.

(iii) The cost of transportation to and from India of eligible dependants who shall be the spouse and not more than two (2) unmarried dependant children under eighteen (18) years of age of those of the foreign personnel assigned to resident duty in India for the purpose of the services for periods of six (6) consecutive months or longer. Only one round trip shall be admissible during the entire duration of the contract to any eligible dependant of the foreign key personnel whose input is continuously foreseen on the project. For other foreign personnel whose input is not continuous (as in the case of Pavement-cum-Material Engineer), the number of round trips of the dependants shall also be same as for the key personnel provided that the dependants shall stay after arrival in India for a minimum period of 3 (three) consecutive months and the remaining input is not less than 6 (six) months for such key personnel.

(iv) For the air travel of each of the foreign personnel, and each eligible dependant, the cost of excess baggage up to twenty (20) kilograms per person, or the equivalent in cost of unaccompanied baggage or air freight, and

(v) Miscellaneous travel expenses such as the cost of transportation to and from airports, airport taxes, passport, visas, travel permits, vaccinations, etc., at a fixed unit price per round trip as specified in Appendix G.

(3) The cost of shipment of personnel effects up to fifty kilograms weight.

(4) The cost of laboratory tests on materials, model tests and other technical services authorized or requested by the Client, as specified in Appendix G.

(5) The cost of training of the client's personnel outside India, as specified in Appendix G.

(6) The cost of items not covered in the foregoing but which may be required by the consultants for completion of the services, subject to the prior authorization in writing by the client.

(7) Any such additional payments in foreign currency for properl y procured items as the parties may have agreed upon pursuant to the provisions of clause GC 6.1(c).

(8) As required within India in accordance with the applicable Laws.

6.3 (b)(iii) The reimbursable expenditures in local currency shall be the following:

(1) a per diem allowance at a rate in local currency as per approved proposal of the consultants engaged for this contract (Appendix `G' and `H');

(2) a living allowance for each of the long-term foreign personnel (twelve) (12) months or longer consecutive stay in India) at the rates specified in Appendix H;

(3) the cost of the following locally procured items: local transportation, office accommodations, camp facilities, camp services, subcontracted services, soil testing, equipment rentals, supplies, utilities and communication charges arising in India, all if and to the extent required for the purpose of the services, at rates specified in Appendix H;

(4) the cost of equipment, materials and suppliers to be procured locally in India as specified in Appendix H;

(5) the local currency cost of any subcontract required for the services and approved in writing by the client;

(6) any such additional payments in local currency for properly procured items as the parties may have agreed upon pursuant to the provisions of clause GC 6.1(c); and

(7) the cost of such further items as may be required by the consultants for the purpose of the services, as agreed in writing by the client."

12. From the above clauses of the agreement, it is obvious that the expenditures narrated above are to be reimbursed to the assessee by NHAI in foreign currency and in local currency. The NHAI in addition to reimbursable expenditure, has to pay for the services rendered by the assessee. The contention of the learned Departmental Representative is that these expenditures are primary liability of the assessee and not the NHAI. We are unable to accept the contention of the learned Departmental Representative. The agreement entered into between the parties clearly shows that certain expenses are reimbursable in foreign currency and certain expenses are reimbursable in Indian currency besides payment of fee for technical services. Therefore, the expenditure reimbursable by the NHAI is the liability of the NHAI and not that of the assessee. At the initial stage in order to carry out the contract between the parties, the assessee has to incur the expenditure. However, the liability as agreed in the agreement rests with NHAI and they undertook to reimburse the expenditure that may be incurred by the assessee. In addition to reimbursable expenditure the NHAI has also agreed to pay fee for services which include the expenditure which has to be incurred by the assessee. Therefore, the reimbursable expenditures are in the nature of expenditure to be incurred by the NHAI in the course of its expansion programme of infrastructure. The assessee being a consultant has agreed to incur at the first instance on behalf of NHAI on condition that the same shall be reimbursed by the NHAI. Therefore, in our opinion, this reimbursable expenditure cannot form part of the fee payable for technical services.

13. We have carefully gone through the DTAA between the Government of India and USA. Article 12 of the DTAA defines royalty and fees for the services, we have carefully gone through clause 4 to article 12 of the DTAA. The contention of the learned Departmental Representative is that clause 4 of article 12 refers to payment of `any kind to any person' in consideration for rendering of technical or consultancy services. Therefore, the words `any kind to any person' include the reimbursable expenditure also. This clause 4 provides for payment of fees in respect of services included in the consultancy services. In the case before this Tribunal, the agreement clearly provides for consultancy services in the form of supervision. This is obvious from the preamble portion of the agreement. Therefore, all payments in connection with supervision of the forming of 4 lane road would form part of fee for consultancy services. Clause 6.1 of the agreement between the assessee and NHAI provides payment of fee for consultancy service. In addition to that NHAI has to incur certain expenditure as provided in clause 6.2 of the agreement. These additional expenditures are in respect of personnel/dependents who are away from India, allowances as approved and the materials procured locally. Therefore, in our opinion, the payment received by the assessee as reimbursable expenditure does not fall within the four corners of clause 4 to article 12 to the DTAA. The reimbursable expenditure are the expenditures of NHAI and the same were incurred by the assessee because of the agreement.

But for the agreement, the assessee would not have incurred this expenditure, therefore, the same do not in any way be included in the services to be provided by the assessee. Therefore, in our opinion, clause 4 to the DTAA may not be applicable to the facts of this case.

14. We have also carefully gone through the provisions of section 9(1)(vii) of the Act. The revenue placing reliance in Explanation 2 to section 9(1)(vii) contended that fee for technical services means any consideration for rendering of any managerial, technical or consultancy services. As observed earlier in the case before us, the assessee has received a separate fee for consultancy services provided in pursuance to the agreement. Apart from the consultancy services, the NHAI has agreed to reimburse certain expenditures which are to be incurred by the NHAI. In the ordinary circumstances such expenditures are to be incurred only by the NHAI and not by the assessee.

15. Let us now examine item-wise expenditure said to be reimbursed by the NHAI. A per diem allowance for each of the export personnel for every day in which such personnel shall be absent from his home office; and shall be outside India for the purpose of service at the daily rates. This expenditure shall be reimbursable by the NHAI. The question arises for consideration is whether this expenditure incurred by the assessee on behalf of the NHAI would form part of services as provided in clause 4(a) of article 12. In the DTAA itself example 2 in the Memorandum of Undertaking clarified that this kind of expenditure would not form part of the services. In fact, as per example 2, it has to be clarified as follows :

"Example 2:

Facts : An Indian manufacturing company produces a product that must be manufactured under sterile conditions using machinery that must be kept completely free of bacterial or other harmful deposits. An US company has developed special cleaning process for removing such deposits from that type of machinery. The US company entered into a contract with the Indian company under which the former will clean the latest machinery on a regular basis. As a part of the arrangement the US company leases to the Indian company a piece of equipment which allows the Indian company to ensure the level of bacterial deposit on its machinery in order for it to which when cleaning is required. All the payments for the services, fees for included services?

Analysis : In this example, the provision of cleaning services by the U.S. company and the rental of the monitoring equipment are related to each other. However, the clearly predominant purpose of the arrangement is the provision of cleaning services. Thus, although the cleaning services might be considered technical services, they are not ancillary and subsidiary to the rental of the monitoring equipment. Accordingly, the cleaning services are not included services within the meaning of paragraph 4(a)."

16. In this example, the provision of cleaning services by the US company and the rental of the monitoring equipment are related to each other. However, clearly predominant purpose of the arrangement is the provision for cleaning services. Thus, although the cleaning services might be considered as technical services, they are not ancillary and subsidiary to the rental of monitoring equipment. Accordingly, cleaning services are not included services within the meaning of paragraph 4(a). In the case before us also the predominant purpose of the agreement between the parties is to provide consultancy services in the formation of four lane road in the States of Orissa and West Bengal. In the course of formation of four lane road, the NHAI has to incur certain expenditure. The reimbursable expenditures are the expenditure incurred by the assessee which are otherwise the liability of the NHAI in the course of its formation of 4 lane road. The services of the assessee is to provide only consultancy services to the assessee in the formation of 4 lane road. Therefore, the payment relatable to the technical advice provided by the assessee in the formation of the road alone to be treated as fee for technical services. The payment for the personnel who are absent from India are not for the consultancy services. Merely because such personnel happen to be the employees of the assessee it does not mean that the expenditure has some connection with the services to be provided by the assessee in India. In our opinion, the reimbursable expenditure received by the assessee other than the consideration received for the services rendered cannot form part of the fee for technical services. In view of example 2 given in the Memorandum of Understanding, the payment reimbursed by the NHAI is not for the included services also. Therefore, in our opinion, it cannot be treated as fee for technical services.

17. Similarly Explanation 2 to section 9(1)(vii) speaks of the consideration for rendering managerial, technical or consultancy services. Therefore, any amount, received by the assessee for rendering consultancy services in the formation of four lane road alone can be considered as fee for technical services. This Explanation 2does not applicable for the amounts received by the assessee as reimbursable expenditure from the NHAI. As already observed reimbursable expenditures are the expenditures in the ordinary course to be incurred by the NHAI and not by the assessee. Merely because certain expenditures are relatable to the employees of the assessee it does not mean that the payment was in connection with providing of consultancy services. At best it may be said that the payment received in pursuance to the agreement between the parties and not in connection with providing consultancy services. Therefore, even under Explanation 2 to section 9(1)(vii), it cannot be treated as fee for technical services.

18. We have carefully gone through the decision of the Authority for Advance Ruling (AAR) in Timken India Ltd., In re (2005) 273 ITR 67 (New Delhi). In the case before the AAR, the Indian company was engaged in the business or manufacture and sale of bearings and other ancillary products. The Indian company was a subsidiary of USA non resident company. By an agreement dated 2-8-2000, Timken USA was to render in the USA services including management services, system development and computer usage, communication services, engineering services, etc. As per the agreement the Indian company has to pay only the actual cost incurred by the non-resident company in providing services and there is no profit element would be added to the cost. The Indian company before making payment to non-resident company approached the assessing officer under section 195(2) of the Act to remit the amount without deducting tax at source contending that the amount was only reimbursement of expenditure and the cost was incurred by non-resident company. The assessing officer rejected the claim of the assessee. The assessee approached the AAR. The AAR held that the assessee-company has to deduct tax while making payment under section 195(2) of the Act. The AAR further observed that the question of computing net income for the purpose of withholding the tax under section 195(2) did not arise. In the case before us it is not the case of deduction of tax while making the payment. The question is whether the reimbursable expenditure would form part of the fee for technical services. As already observed, NHAI agreed to incur the expenditure. Therefore, the liability is that of NHAI and not that of the assessee. The assessee has to separately incur expenditure, for which separate payment was made towards fees for services. Therefore, there is a clear distinction between the payment made for service and reimbursable expenditure. Therefore, the decision of the AAR may not be applicable to the facts of the case. The provisions of section 44D( b) would be applicable only in respect of deduction at source. In the case before us, we have to compute the net taxable income for the purpose of taxation. Therefore, the expenditure incurred by the assessee which are to be reimbursed by the NHAI are to be excluded from the net taxable income. In view of this factual situation, in our opinion, this decision of the AAR in the case of Timken (India) Ltd. (supra) may not be of any assistance to the revenue.

19. We have also carefully gone through the decision of the AAR in the case of A T & S India (P.) Ltd., In re (2006) 187 ITR 421 (New Delhi). In the case before the AAR, the Indian company was a subsidiary of AT & S, Australia, a non-resident company. The Indian company entered into an agreement with the Australian company under which the non-resident company undertook to assign or cause its subsidiary to assign its qualified employees to the Indian company. The non-resident company retained the right over the employees and had the power to remove from the Indian company. The only condition is that the Indian company has to replace such employees with the similarly qualified individual. The assessee has to compensate the non-resident company towards all costs that were arising directly or indirectly in connection with such employees. On this factual situation, the AAR ruled that the non-resident company offered the services of technical experts to the assessee and the AAR ruled that payments made by the assessee-company were for rendering services of technical or other personnel. Therefore, the assessee has to deduct tax under section 195(2) of the Act. In the case before the AAR, the very agreement is to depute the qualified employees to serve the Indian company. Therefore, the assessee reimbursed the salary and other expenditure payable to the employees by the non-resident company. Apart from the salary for the personnel employed in the Indian company, no other payment is required to be made by the Indian company. In other words, no other expenses are required to be met by the Indian company. In the case before us, apart from fees for technical services, NHAI has to incur certain expenditure in connection with the execution of the four lane road as per the agreement. Merely because such expenditures are relatable to the employees of the assessee it does not mean that will form part of the fee for technical services. Apart from the reimbursable expenditure, the NHAI is also liable to pay fee for technical services as provided in clause 6.1 of the agreement. But for the agreement, the assessee need not incur the expenditure. As already observed, in the ordinary course, the expenditure has to be incurred by the NHAI. the assessee was separately paid in respect of fee for technical services. Therefore, this decision of the AAR also may not of any assistance to the revenue.

20. We have also carefully gone through the decision of the AAR, in DVH Consultants BV, In re (2005) 277 ITR 97. In the case before the AAR the applicant-company, was a foreign company incorporated in the Netherlands engaged in the business of providing consultancy services. The foreign company sent its employees from the Netherlands to work on various projects in India. The employees during their stay in India continued to receive salary from the non-resident company. On this factual situation, the AAR ruled that the remuneration of the employees was borne by a permanent establishment. Therefore, the same is deductible while computing the permanent establishment's taxable profits in the source country. In the case before us it is not in dispute with regard to payment of salary to the employees of the non-resident company. The assessee is not claiming any deduction in respect of salary paid to its employees. As per the agreement, certain expenditure has to be incurred initially by the non-resident company which otherwise has to be incurred by the NHAI. However, it would be reimbursed by the NHAI. Therefore, such a reimbursed expenditure would not form part of the fee for technical services. The AAR in the case of DHV Consultants BV (supra) had no occasion to consider the reimbursable expenditure received by the assessee besides fee for technical services. In the case before us, it is not in dispute that the assessee itself offered for taxation in respect of fee for technical services in connection with the execution of the services. Therefore, this decision of the AAR also may not be of any assistance to the revenue. We have also carefully gone through the judgment of the Andhra Pradesh High Court in Superintending Engineer, Upper Sileru's case (supra) and that of the Apex Court in Transmission Corporation of A.P. Ltd. `s case (supra). In both the judgments, the court has considered the deduction of tax at source under section 195 of the Act. In both the cases, the court has no occasion to consider the reimbursable expenditure. Therefore, in our opinion, the same may not be applicable to the facts of the case.

21. We have also carefully gone through the judgment of the Delhi High Court in CIT v. Industrial Engg. Projects (P.) Ltd. (1993) 202 ITR 1014 (Del). In the case before the Delhi High Court, the assessee had agreement with M/s. ETAG, a Swiss company, for rendering services. The assessee would receive a minimum sum of Rs. 1,20,000 per month for the services rendered besides reimbursement of certain costs and expenditure incurred by the assessee while rendering the services as per the agreement. The Income Tax Officer disallowed the expenses incurred. On appeal by the assessee before the Delhi Bench of this Tribunal, it was held that the reimbursement of the expenditure did not constitute income as the expenses were incurred on behalf of the Swiss company. On a reference to the Delhi High Court at the instance of the revenue, the Delhi High Court after considering the judgment of the Apex Court in the case of Tejaji Farasram Kharawalla Ltd. (supra) held that the reimbursable expenditure cannot form part of the taxable income. Accordingly, it was held that the reimbursable expenditures are to be excluded from the total income. In view of this judgment of the Delhi High Court, in our opinion, the reimbursable expenditure received by the assessee for the purpose of rendering services cannot form part of the total income. Therefore, it has to be excluded.

22. We have also carefully gone through the judgment of the Calcutta High Court in Sandersons & Morgans `case (supra). In the case before the Calcutta High Court, a firm of solicitors received money from their clients. The question arose before the Calcutta High Court was whether the money received by the solicitors in the course of their professional activities would form part of the total income or not. The Calcutta High Court held that the money received by the solicitors was not revenue receipt. It was further held that when a solicitor received money from his clients he does not do so as a trading receipt but he receives the money from the principal in capacity as an agent. Therefore, the money received does not have any profit making quality. In this case also the money was received by the assessee on behalf of their clients for incurring the expenditure. Therefore, the money received did not have the profit making quality as held by the Calcutta High Court. In our opinion, this judgment of the Calcutta High Court also supports the case of the assessee.

23. We have also carefully gone through the judgment of the Apex Court in the case of Tejaji Farasram Kharawalla Ltd. (supra).The assessee before the Apex Court acted as a selling agent of Ciba (India) Ltd. The assessee was entitled to commission of 12.5 per cent on sales. Out of the 12.5 per cent, 7.5 per cent was treated as selling commission and 5 per cent as compensation in lieu of contingency expenses which it had to meet. The question arose before the Apex Court was whether the 5 per cent selling commission in lieu of the contingency expenditure would form part of the total income or not. The Apex Court held that 5 per cent of the expenses in lieu of the contingency expenses was for the expenditure incurred in the performance of the duties of the respondent as selling agent. Therefore, it will not form part of the taxable income. Accordingly, the same was exempt. In view of this judgment of the Apex Court, the reimbursable expenditure received by the assessee in pursuance to the agreement cannot form part of the taxable income. Accordingly, the same has to be excluded.

24. We have also carefully gone through the judgment of the Bombay High Court in Tanubai D. Desai's case (supra). In the case before the Bombay High Court, the assessee was a practising solicitor. In the course of carrying on his profession, the assessee used to receive money from or on behalf of his clients. The money received was deposited by him in separate current account with Imperial Bank of India. Subsequently the assessee withdrew a sum of Rs. 3.25 lakhs and placed the same in fixed deposit with Chartered Bank. The assessee renewed the account from time-to-time together with interest earned thereon. The assessee earned interest on the fixed deposit. The interest earned on the fixed deposit was not adjusted by apportioning it to different clients whose moneys were deposited in the bank account. The assessee did not show the interest in the return of income. The question arose before the Bombay High Court was whether the interest accrued in the fixed deposit with Chartered Bank was the income of the assessee or not. The Bombay High Court after elaborately examining the issue found that the moneys received by the solicitor from his clients are held by him in fiduciary capacity. Even the income received from such money must equally be held by the solicitor in a fiduciary capacity. What the solicitor actually does with the income, i.e., whether he appropriates it to himself or not is a matter of no consequence. If the solicitor appropriates the interest accrued on such deposit to himself that would amount to a breach of his fiduciary relationship and whatever may be the consequences in law would follow. But his unauthorised act of converting any part of the corpus or even the income derived therefrom would not convert those moneys held by him for his benefit. Accordingly, it was held that the interest income which was neither disclosed in the return of income nor adjusted to the clients was held to be not taxable. In the case before us, the facts are almost similar. The assessee received the money as a reimbursement after incurring the expenditure. In the case before the Bombay High Court, the money was received by the solicitor in advance. In the case before us, the money was received after incurring the expenditure by way of reimbursement. Therefore, the reimbursable expenditure received by the assessee cannot form part of the total income. In view of the above discussion, in our opinion, the reimbursable expenditure received by die assessee cannot form part of the total income.

Therefore, we do not find any infirmity in the order of the lower authority. Accordingly, the same is confirmed.

25. The next contention of the learned Departmental Representative is that the Government of India has not approved the agreement as required under section 10(6A) of the Income Tax Act, 1961. Admittedly, the assessee entered into agreement with State Governments or the agency of Central Government for the purpose of providing consultancy in formation of infrastructure facilities. The contention of the learned counsel for the assessee is that the industrial policy of Government of India is to develop infrastructure. Therefore, specific approval of the Central Government is not required for claiming exemption under section 10(6A) of the Act. We have carefully gone through the provisions of section 10(6A) of the Act which reads as follows :

"(6A) where in the case of a foreign company deriving income by way of royalty or fees for technical services received from Government or an Indian concern in pursuance of an agreement made by the foreign company with Government or the Indian concern after the 31-3-1976 but before the 1-6-2002 and,—

(a) where the agreement relates-to a matter included in the industrial policy, for the time being in force, of the Government of India, such agreement is in accordance with that policy; and

(b) in any other case, the agreement is approved by the Central Government, the tax on such income is payable, under the terms of the agreement, by Government or the Indian concern to the Central Government, the tax so paid."

26. For the purpose of claiming exemption under section 10(6A)an agreement needs to be entered into after 31-3-1976 but before the1-6-2002 in relation to matters included in the industrial policy of the Government of India. In any other case, the approval of the Government is required. The industrial policy of Government of India as disclosed in the year 1991 clearly shows that development of infrastructure is one of the policy included as item No. 11. The contention of the learned Departmental Representative is that the policy was declared in the year 1991.Therefore, it is outdated. The learned Departmental Representative, however, could not bring to the notice of the Bench any latest policy which was declared in the year relevant for the assessment year under consideration. Moreover, as rightly pointed out by the learned counsel for the assessee, the assessing officer himself refers to the very same industrial policy in some of the assessment years under consideration. Therefore, we have no hesitation in taking note of the industrial policy as declared by the Government of India in the year 1991 is applicable for the year under consideration also. It is not in dispute that development of infrastructure is one of the industrial policy of the Government of India as disclosed in item No. 11 of the policy. Once development of infrastructure falls in the industrial policy of the Government of India then, as rightly submitted by the learned counsel for the assessee, approval of the Central Government is not a pre-requirement for claiming exemption under section 10(6A) of the Act. Therefore, in our opinion, since the development of infrastructure falls within the industrial policy of Government of India specific approval may not be required for claiming exemption under section 10(6A) of the Act.

27. The next contention of the learned Departmental Representative is that in view of section 44D(b) and section 150A(3), the payment received by the assessee has to be construed as fee for technical services. We have carefully gone through the provisions of section 44D and section 150A of the Act. Section 44D provides special provisions for computation of income by way of royalty in the case of foreign company. Sub-clause (b) says that no deduction in respect of any expenditure or allowance shall be allowed in computing the income by way of royalty or fees for technical services received from the Government or an Indian concern. This section clearly says that while computing the income by way of royalty and technical services no deduction in respect of expenditure would be allowed under sections 28 to 44C of the Act. Therefore, any expenditure incurred by the assessee in relation to fees for technical services cannot be deducted. As rightly observed by the Commissioner (Appeals), the assessee received fee for technical services and has not claimed any expenditure from the fee for technical services. As we have already discussed, the reimbursable expenditure may not form part of the fee for technical services. Therefore, assessing officer may not be correct in placing reliance under section 44D( b) of the Act. The reimbursable expenditures are to be incurred by the NHAI and other clients. Therefore, it was the expenditure of NHAI and other clients and definitely it is not the expenditure of the assessee.

28. We have also carefully gone through the decision of the Tribunal in Progressive Constructions Ltd.'s case (supra). The facts in Progressive Constructions Ltd. `s case (supra) are definitely non-different set of facts. The Tribunal in that case has no occasion to consider whether the reimbursable expenditure would form part of fee for technical services. Therefore, this decision may not be of any assistance to the revenue.

29. Now coming to section 115A of the Act, this provision is for the purpose of computing expenses from the fee for technical services. As observed by the Commissioner (Appeals) it cannot be meant to say that reimbursable expenditure will be taxed as income. In fact, the expenditure incurred by the assessee in the course of carrying on its activities in India cannot be deducted in view of section 115A(3). However, the expenditure now reimbursed was the expenditure to be incurred by the NHAI. Therefore, it is the expenditure of the assessee's client and not that of the assessee. Therefore, section 115A(3) also has no application at all. In view of the above discussion, we do not find any infirmity in the order of the lower authority. Accordingly, the same is confirmed.

30. The next issue arises for consideration is reimbursement of service tax. Service tax has to be collected by the respective service providers from the clients and it has to be paid to the Government account. The liability of the assessee is only to collect and pay the same to the Government. The assessee need not pay from his pocket. There is a lot of difference between payment of service tax and income-tax. Service tax is just like sales tax. In the case of sales tax also the respective trader has to collect the tax and remit the same to Government account. Therefore, the liability to pay either sales tax or service tax is not on the trader or service provider. The liability of the trader/service provider is only to collect from the respective persons. In case of default, service provider/trader may be held responsible to pay the same. In the case before us, the agreement entered into between the parties clearly says that service tax payable shall be reimbursed separately on production of original receipt by the assessee. For the purpose of convenience, we are reproducing clause 1.10.3 in the agreement which is available at page 36 of the Paper Book :

"However, the consultancy service tax payable in India for providing this consultancy service shall be paid/reimbursed by the client separately. The consultant shall produce the original receipt to the client in this regard as evidence for claim."

31. In view of this clause what was received by the assessee is after paying the service tax and on production of the original receipt the respective client reimburses the same. In the normal circumstances, the assessee would have collected the service tax from the respective clients and would have paid the same. Therefore, in our opinion, reimbursement of the service tax cannot form part of the taxable income of the assessee. Fee for technical service is for the service rendered by the assessee. Service tax would not form part of fee for technical services. In other words, service tax is not an expenditure incurred by the assessee. It is a statutory levy on the person who availed the service from the assessee. The matter would stand entirely on a different footing in case the assessee collected the service tax and it was not paid to the Government account. That is not the case before us.

32. We have also carefully gone through the judgment of the Calcutta High Court in the case of Chowringhee Sales Bureau (P.) Ltd. (supra). In the case before the Calcutta High Court, the assessee collected the sales tax along with the price of the goods and credited the same in separate sales tax account. Since the amount was not paid into the Government account and it was credited in a separate account, it was held that the sales tax formed part of the trading receipt. In the case before us, it is not the case of the revenue that the assessee collected the service tax and kept the same separately. It is an admitted fact by both the parties that service tax was reimbursed on production of original receipt of payment to Government. Therefore, this judgment of the Calcutta High Court has no application to the facts of the present case.

33. We have also gone through the judgment of the Apex Court in the case of Sinclair Murray & Co. (P.) Ltd. (supra). In the case before the Apex Court, the assessee sold jute and charged sales tax under a separate head in the bill as sales tax. The sales tax was not paid to Government. On those facts, it was held that the sales tax collected by the assessee would form part of the trading receipt and it has to be included in the taxable income in case it is not paid. In the case before us, what was reimbursed is the service tax paid by the assessee to the Government account. Therefore, such an amount cannot form part of technical fee. In other words, it cannot be treated as trading receipt. In view of the above, in our opinion, the reimbursement of service tax cannot form part of the total income of the assessee.

34. The next ground of appeal is the rate of tax. We have considered the rival submissions on either side and perused the material on record. We have also carefully gone through the provisions of DTAA and the provisions of section 115A of the Act. The contention of the DR is that tax has to be levied at 20 per cent under section 115A, read with article 7 of DTAA. As observed by the Commissioner (Appeals), fee received by the assessee towards technical services/consultancy would fall under article 12 and not under article 7. Therefore, in our opinion, tax has to be levied only at 15 per cent and not at 20 per cent. Therefore, we do not find any infirmity in the order of the lower authority. Accordingly, the same is upheld.

35. The next ground arises for consideration in assessment years 1998-99, 1999-2000 and 2000-01 is levy of tax under section 234B of the Act. We have considered the rival submissions on either side and perused the material on record. As rightly submitted by the learned counsel for the assessee, all payments were received from the Government or its agencies. All payments were subjected to deduction of tax at source as required under section 195 of the Act. The Mumbai Bench of this Tribunal in the cases of SNC Lavalin International Inc. (supra) and Kaiser Aluminium Technical Services Inc. (supra) examined this issue and held that there is no liability to pay the advance tax wherever the tax was deducted at source. A similar view was taken by Special Bench of this Tribunal in Sumit Bhattacharyav. Assistant Commissioner (2008) 20 (II) ITCL 339 (Mum-Trib) (SB) : (2008) 112 ITD 1 (Mum-Trib). Therefore, interest was not chargeable under section 234B of the Act. In view of the above, we do not find any infirmity in the order of the lower authority. Therefore, the contention of the DR that interest has to be levied under section 234B has no merit. Accordingly, the same is cancelled.

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Double taxation avoidance agreements and taxation of controlled foreign companies (CFC) in Turkey

Although it has been long time to have CFC regulation in Turkey, in parallel with the increasing rate of growth of Turkish economy, many major entrepreneurs making Turkey related businesses required to focus on management of their taxation policies in consideration of CFC regime in Turkey

CFC rules of Turkey have came into effect with 5520 numbered Corporate Tax Law (“CTL”) of Turkey by being published in 26205 numbered Official Gazette dated 21 June 2006.

According to the article 7 of CTL, in some circumstances, the profit of Turkish company or the share capital of the legal person is subject to taxation in Turkey for the foreign company's profit even not paid any dividend. 

Consistent with this regulation it has been aimed to prevent the tax inequality in non-commercial and non-industrial investments between the taxpayers investing in Turkey and forwarding the third low-tax countries. 

Accordingly, the presence of the foreign controlled company is accepted as it is subject to presence of the following conditions; 

In practice and  the detection of  controlled foreign company, in cases where indirect participation's comprised in several stages, the relationships with shareholders are be considered as a whole, to the final indirect participation and it is not necessary either real persons are related with legal persons or not.

On the other hand commercial or industrial activities of foreign companies that derive the dividend of another foreign company does not change the nature of passive income of the company.   

However, in cases where all the income of a foreign company is derived by commercial, agricultural or professional activity (even the other conditions occurs), this company is not deemed as a CFC.

All of the above conditions take place, the unlimited taxpayer Turkish resident company's attributed income must be included in taxable income as of the month of the closing of the accounting period of the foreign subsidiary. In case of dividend distribution provided by foreign company, the previously taxed portion is not subject to corporate taxes again.

The corporate tax, income tax or similar taxes that are paid in the residing country of foreign company, will be deducted from the corporate tax that shall be calculated on earnings of CFC will be taxed in Turkey in accordance with the provisions of article 33 of Corporate Tax Law. 

The provisions of double taxation avoidance agreements do not preclude taxation of CFCs. In other words, CFCs shall be subject to taxation regardless of such agreements. 

According to the provisions double taxation avoidance agreement; only in case of exemption of dividend in Turkey, the only amount corresponds to the distributed dividend that has been taxed and distributed by CFC shall be refunded.

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India Signs Double Taxation Avoidance Agreement with Ethiopia

May 31 – India signed a double taxation avoidance agreement (DTAA) with the Federal Democratic Republic of Ethiopia on May 25, 2011 for the prevention of double taxation and fiscal evasion with respect to taxes on income. The contract was signed by External Affairs Minister of India on behalf of the Government of India and by Sufian Ahmed, Minister of Ethiopia in the attendance of the Prime Minister of India Manmohan Singh and the Ethiopian Prime Minister Meles Zenawi.

The DTAA offers that business profits will be taxable in the source state if the actions of an enterprise constitute a permanent establishment in the source state. Illustrations of permanent establishment comprise of a branch, factory, and other such entities. Profits from construction, assembly or installation projects will be levied in the state of source if the project continues in that state for more than 183 days.

Profits obtained by an endeavor from the operation of ships or aircrafts in international traffic shall be taxable in the country of residence of the enterprise. Dividends, interest, royalties and fees for technical services income will be taxed both in the country of residence and in the country of source. On the other hand, the maximum rate of tax to be charged in the country of source will not surpass 7.5 percent in the case of dividends and 10 percent in the case of interest, royalties and fees for technical services. Capital gains from the level of shares will be chargeable in the country of source.

The agreement would also allow efficient swapping of information, including banking data, and assistance in collection of taxes. It includes anti-abuse provisions to guarantee that the benefits of the agreement are availed of by the authentic residents of India and Ethiopia. The subject of black money and tax avoidance has become a serious issue in the last couple of years after instances of Indians supposedly hiding money away in hidden locations abroad came to light.

The DTAA will provide tax stability to the residents of India and Ethiopia and assist mutual economic cooperation as well as stimulate the flow of investment, technology and services between India and Ethiopia.

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Double taxation is the imposition of two or more taxes on the same income (in the case of income taxes), asset (in the case of capital taxes), or financial transaction (in the case of sales taxes). It refers to two distinct situations:

• Taxation of divided income without relief or credit for taxes paid by the company paying the dividend on the income from which the dividend is paid.

• Taxation by two or more countries of the same income, asset or transaction, for example income paid by an entity of one country to a resident of a different country. The double liability is often mitigated by tax treaties between countries.

INTERNATIONAL DOUBLE TAXATION AGREEMENT

It is not unusual for a business or individual who is a resident in one country to make a taxable gain in another. This person may find that he is obliged by domestic laws to pay tax on that gain locally and pay again in the country in which the gain was made. Since this is inequitable many countries make bilateral agreements with each other. In some cases, this requires that tax be paid in the country of residence and be exempt in the country of gain arises deducts tax at source and the tax payer receives a compensating foreign tax credit in the country of residence to reflect the fact that tax has already been paid. To do this, the tax payer must declare himself to be a non resident there. So the second aspect of the agreement is that the two taxation authorities exchange information about such declarations and so may investigate any anomalies that might indicate tax evasion.

INDIA MAURITIUS TAX TREATY

A large number of Foreign Institutional Investors who trade on the Indian stock markets operate from Mauritius. According to the tax treaty, capital gains arising from the sale of shares are taxable in the country of residence of the Company whose shares have been sold. Therefore, a company resident in Mauritius selling shares of an Indian company will not pay tax in India. Since there is no capital gains tax in Mauritius, the gain will escape tax altogether.

DOUBLE TAXATION WITHIN THE UNITED STATES

Double taxation can also happen within a single country when sub national jurisdictions have taxation powers and have competing claims. However when a person dies different states, may each claim that the person was domiciled in that state. Intangible property may then be taxed by each state making a claim.

India has adopted the system under which Income Tax on residents is imposed on the “total world income” i.e. income earned anywhere in the world. Whereas a tax payer’s own country has a sovereign right to tax him, the source of income may be in some other country which country also claims a right to tax the income arising in that country.

In case of non-resident, however, it is not the “total world income” but only that income is subjected to tax in India which is earned in this country. Since a resident is taxed in respect of foreign income in his own country as well as in the country where it is earned, he is subjected to tax in both the countries in respect of the same income the purpose of double tax avoidance agreement is to avoid such double taxation to the extent agreed upon.

Growth in international trade and commerce results in cross-country flow of capital, services and technology and globalization of economy. Residents of one country extend their business operations to other countries. The effort is, therefore, to ensure that heavy tax burden is not cast as a result of double or multiple taxation. The object is to achieved by governments entering into agreements with the other countries whereby the respective jurisdiction is so identified that a particular income is taxed in one country only or, in case it is taxed in both the countries, suitable relief is provided in one country to mitigate the hardship caused by taxation in another jurisdiction.

Such agreements are known as “Double Tax Avoidance Agreements” (DTAA) also termed as “Tax Treaties”. The statutory authority to enter into such agreements is vested in the Central Government by the provisions contained in Section 90 of the Income Tax Act in terms of which India has, by the end of March 2002, entered into 64 agreements of this nature which are comprehensive in the sense that they deal with different types of incomewhich may be subjected to double taxation. In addition there are 12 agreements which deal with only profit of enterprises engaged in operation of aircraft and 5 which are limited to shipping profit.

SALIENT FEATURES OF THE DOUBLE TAXATION AVOIDANCE AGREEMENT

A typical DTA agreement between India and another country covers only resident of India and the other contracting country who has entered into the agreement with India. A person who is not resident either of India or of the other contracting country cannot claim any benefit under the said DTA agreement. Such agreement generally provides that the laws of the two contracting states will govern the taxation of income in respective states except when express provision to the contrary is made in the agreement. Since the tax treaties are meant to be beneficial and not intended to put tax payers of a contracting state to a disadvantage. Some Double Taxation Agreements provide that income by way of interest, royalty or fee for technical services is charged to tax on net basis.

There are instances where as per the Income Tax Act; tax is required to be deducted at a rate prescribed in tax treaty. However this may require foreign companies to apply for refund. To obviate such difficulties Section 2(37A) provides that tax may be deducted at source at the rate applicable in a particular case as per Section 195 on the sums payable to non-residents or in accordance with the rates specified in DTA Agreements.

In order to avoid double taxation it is provided that if a resident of India becomes liable to pay tax either directly or by deduction in the other country in respect of income from any source, he shall be allowed credit against the Indian tax payable in respect of such income in an amount not exceeding the tax borne by him in the other country on that portion of the income which is taxed in the said other country. The same benefit is available to the resident of the other country, on income taxed in India.

TAXATION OF INCOME FROM AIR AND SHIPPING TRANSPORT UNDER DTA AGREEMENT

Income derived from the operation of Air transport in International traffic by an enterprise of one contracting state will not be taxed in the other contracting state. In respect of an enterprise of one contracting state, income earned in the other contracting state from the operation of ships in international traffic, will be taxed in that contracting state wherein the place of effective management of enterprise is situated. These provisions do not apply to coastal traffic.

TAXATION OF INCOME FROM ASSOCIATED ENTERPRISES UNDER DTA AGREEMENTS

A separate article in DTA agreement provides for taxing the notional income deemed to arise on account of an enterprise of one contracting state participating directly/indirectly in the management of another enterprise in the other contracting state or where some persons participate directly or indirectly in both the enterprises under conditions different from those existing between the independent enterprises.

TAXATION OF DIVIDEND INCOME UNDER DTA AGREEMENT

Dividend paid by a Company which is a resident of a Contracting State to a resident of the other Contracting State will be taxed in both the States.

TAXATION OF INTEREST INCOME UNDER DTA AGREEMENT

Interest paid in a Contracting State to a resident of the other Contracting State is chargeable in both the States.

TAXATION OF INCOME FROM ROYALTIES UNDER DTA AGREEMENT

Regarding Royalties arising in a Contracting State and paid to a resident of the other Contracting State:-

i. Some DTA agreements provide for taxation in the other for taxation in the other Contracting State.

ii. Some agreements provide for taxation in both the Contracting State.

iii. Some agreements provide for taxation in both the States

TAXATION OF INCOME FROM CAPITAL GAINS UNDER DTA AGREEMENT

Capital gains will be taxed in the state where the capital asset is situating at the time of sale.

TAXATION OF INCOME FROM PROFESSIONAL SERVICES UNDER DTA AGREEMENT

Income will be taxed in the state where the person is resident. However if he has a fixed in the other Contracting State, the income attributable to the fixed base will be taxed in the other Contracting State.

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