Overview- Double Taxation Avoidance Agreements (DTAA)
Double Taxation Avoidance Agreements (DTAA) form an essential part of international tax law, ensuring that income earned across borders is not taxed twice. In a globalized economy where individuals and corporations frequently earn income from foreign jurisdictions, DTAA plays a crucial role in eliminating double taxation, facilitating smooth business operations, promoting international investment, and preventing tax evasion. India has entered into more than 90 DTAAs with various countries, each structured to align with constitutional principles, domestic tax law, and international standards such as the OECD and UN Model Conventions. For law students, DTAA is a cornerstone topic because it intersects domestic taxation statutes, public international law, treaty interpretation principles, and judicial reasoning from landmark cases.
Need for Double Taxation Avoidance
Double taxation arises when the same income is taxed twice—once in the country where it is earned (source country) and again in the country of residence (residence country). Without treaty protection, this dual taxation can discourage foreign trade, investment, mobility of professionals, and international financial transactions. Businesses may face severe tax burdens, individuals may lose significant income, and governments may witness reduced cross-border economic activity. The Supreme Court in P.V.A.L. Kulandagan Chettiar v. CIT held that when a DTAA exists, treaty provisions prevail over domestic law to the extent of inconsistency, highlighting the dominance of treaty protection in mitigating double taxation.
Tip: Always read DTAA alongside Section 90 and Section 91 of the Income Tax Act to understand how domestic and treaty provisions coordinate.
Legal Basis: Section 90 and 91 of the Income Tax Act
Section 90 – Agreement with Foreign Countries
Section 90 empowers the Central Government to enter into a tax treaty with any other country for the purpose of:
- Avoiding double taxation,
- Exchanging information,
- Preventing evasion, and
- Facilitating mutual cooperation.
The Supreme Court in Union of India v. Azadi Bachao Andolan upheld the binding nature of DTAAs, confirming that treaty shopping cannot be lightly condemned unless expressly prohibited. This judgment strengthened India’s commitment to international tax agreements and clarified that DTAAs are a legitimate tool to attract foreign investment.
Section 91 – Unilateral Relief
Even in the absence of a bilateral DTAA, Section 91 grants unilateral relief to residents who have paid taxes abroad. This ensures that double taxation is mitigated even without a treaty relationship. The provision reflects India’s commitment to taxpayer fairness and international harmonization.
Key Concepts in DTAA
Resident vs. Non-Resident
The applicability of a DTAA depends largely on the taxpayer’s residential status. Each treaty contains “tie-breaker rules” to resolve dual residency conflicts — often using criteria like permanent home, center of vital interests, habitual abode, and nationality. The Morgan Stanley & Co. case clarified that PE-related rules must harmonize with treaty obligations and domestic law.
Source Rule and Residence Rule
DTAAs coordinate these two principles:
- Source rule: Tax is levied where income arises.
- Residence rule: Tax is levied where the taxpayer resides.
Treaties prevent double taxation by allowing one country to tax and obligating the other to provide relief.
Methods of Relief
Two primary methods exist under DTAAs:
- Exemption Method: Income taxed in one country is exempt in the other.
- Credit Method: Tax paid in one country is credited against tax liability in the other.
Most Indian treaties use the credit method to ensure equitable distribution.
Permanent Establishment (PE)
PE is the backbone of business taxation under DTAA. It determines whether a foreign company is liable to tax in the source country. A PE may include:
- Fixed place PE (office, branch, factory),
- Agency PE (dependent agents),
- Service PE (furnishing services for a prescribed duration).
The Supreme Court in Formula One World Championship Ltd. v. CIT held that even temporary structures may constitute a PE if they meet the threshold of permanence and functionality. This case clarified the modern approach to PE, especially for events, entertainment, and sporting businesses.
Tip: Always identify PE before computing tax liability under a DTAA—PE presence changes everything.
Taxation of Different Income Categories Under DTAA
Income from Business
Taxation depends on whether a PE exists. If no PE exists, the business income is taxable only in the state of residence. If PE exists, tax is applied only to profits attributable to that PE.
Income from Salary
Salary is typically taxed in the country where employment is exercised. Exceptions exist for short-term assignments under the “183-day rule.”
Also Read: Introduction to Taxation Law
Income from Dividend, Interest, and Royalty
Most treaties prescribe reduced tax rates (5%–15%) compared to domestic law.
The Engineering Analysis Centre v. CIT judgment clarified that software royalty will not be taxed as royalty under DTAAs if it does not involve transfer of copyright, demonstrating how treaties override domestic provisions.
Capital Gains
Some treaties allocate taxing rights exclusively to the residence country, while others, such as the India–Mauritius and India–Singapore treaties, initially granted exemption for capital gains arising from share transfers. Amendments and protocols later restructured these benefits to prevent treaty misuse.
Fees for Technical Services (FTS)
India follows the “make-available” clause in many treaties: FTS is taxable only when technical knowledge is made available to the recipient. The De Beers India Minerals case highlighted the importance of substance over form when determining technical services.
DTAA and Anti-Avoidance
DTAAs incorporate anti-abuse provisions such as:
- Limitation of Benefits (LOB) clauses,
- Principal Purpose Test (PPT),
- Exchange of information articles.
Following BEPS (Base Erosion and Profit Shifting) recommendations, India has renegotiated several treaties to curb abuse. The Multilateral Instrument (MLI) further modified the tax treaty framework to prevent evasion while maintaining investment flows.
Tip: Always check whether the treaty is modified by the Multilateral Instrument (MLI) before applying its provisions.
Judicial Approach to DTAA
Indian courts follow well-settled principles for interpreting treaties:
- Treaties must be interpreted liberally,
- Ambiguities must favor taxpayers,
- Treaties override domestic law unless domestic law is more beneficial (Section 90(2)).
Cases like Eli Lilly & Co., Samsung Electronics, and Azadi Bachao Andolan provide strong judicial guidance on treaty interpretation.
Conclusion
Double Taxation Avoidance Agreements form the backbone of India’s international tax structure. They reduce tax burdens, encourage global investment, and ensure that income is not subject to unfair dual taxation. For law students and tax professionals, understanding DTAA is crucial because it brings together statutory provisions, international treaty interpretation, and judicial precedents. With globalization expanding rapidly, mastery of DTAA principles is indispensable in contemporary tax practice.
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