Double Tax Avoidance Agreement under the Income Tax Act, 1961
Double Tax Avoidance Agreement (DTAA) also referred to as the Tax Treaty is a bilateral economic agreement between two nations that aims to avoid or eliminate double taxation of the same income in two countries.
Sections 90 and 91 of the Income Tax Act, 1961 provide for double taxation relief in India.
Section 90 (1) provides that the Central Government may enter into an agreement with the government of any country outside India or specified territory outside India,-
- For the granting of relief in respect of –
- income on which income-tax has been paid both in India and in that country or specified territory; or
- income-tax chargeable under this Act and under the corresponding law in force in that country or specified territory to promote mutual economic relations, trade and investment; or
- for the avoidance of double taxation of income under this Act and under the corresponding law in force in that country or specified territory; or
Accordingly, the Central Government has notified that where such an agreement provides that any income of a resident of India may be taxed in the other country then, such income shall be included in his total income chargeable to tax in India in accordance with the provisions of the Income-tax Act, 1961, and relief shall be granted in accordance with the method for elimination or avoidance of double taxation provided in such
- For exchange of information for the prevention of evasion or avoidance of income-tax chargeable under this Act or under the corresponding law in force in that country or specified territory or investigation of cases of such evasion or avoidance; or AN ANALYSIS OF JUSTICE LODHA
- For recovery of income-tax under this Act and under the corresponding law in force in that country or specified territory.
Where the Central Government has entered into such an agreement with the Government of any country outside India or specified territory outside India for granting relief of tax, or for avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, the provisions of this Act shall apply to the extent they are more beneficial to that assessee.
The DTAA’s under Section 90 is intended to provide relief to the taxpayer, who is a resident of one of the contracting countries to the agreement. Such taxpayer can claim relief by applying the beneficial provisions of either the treaty or the domestic law. However, in many cases, taxpayers who were not residents of a contracting country also resorted to claiming the benefits under the agreement entered into by the Indian Government with the Government of the other country. In effect, third-party residents claimed the unintended treaty benefits.
Therefore, section 90(4) provides that the non-resident to whom the agreement referred to in section 90(1) applies, shall be allowed to claim the relief under such agreement if a Tax Residence Certificate (TRC) obtained by him from the Government of that country or specified territory is furnished declaring his residence of the country outside India or the specified territory outside India, as the case may be.
Also, section 90(5) requires the assessee referred to under section 90(4) to provide such other documents and information as may be prescribed.
Therefore, a certificate issued by the Government of a foreign country would constitute proof of tax residency, without any further conditions regarding furnishing of “prescribed particulars” therein. In addition to such certificate issued by the foreign Government, the assessee would be required to provide such other documents and information, as may be prescribed, for claiming the treaty benefits.
The position of law is that the double taxation avoidance treaties entered into by the Government of India override the domestic law. This has been clarified by the CBDT Circular No.333 dated April 2, 1982, which provides that a specific provision of the DTAA will prevail over the general provisions of the Income-tax Act, 1961. Therefore, where a DTAA provides for a particular model of computation of income, this mode will take precedence over the Income-tax Act, 1961. However, where there is no specific provision in the treaty, then the Income-tax Act will apply.