1

INTERNATIONAL TAXATION

C.I.T. v. P.V.A.L. KULANDAGAN CHETTIAR [(2004) 267 ITR 654 (SC)]

SHIVAM GOEL

[B.Com (H), Delhi University; LL.B., Faculty of Law, Delhi University; LL.M., NUJS

(Kolkata)]

2

INDEX

PAGE NO.

INTRODUCTION 3

CHAPTER 1: DOUBLE TAXATION AVOIDANCE AGREEMENT

9

CHAPTER 2: PRINCIPLES OF INTERPRETATION OF TAX

TREATIES

13

CHAPTER 3: IMPORTANCE OF DOUBLE TAXATION

AVOIDANCE AGREEMENT

17

CHAPTER 4: THE CASE OF C.I.T. v. P.V.A.L. KULANDAGAN

CHETTIAR

21

CONCLUSION

26

BIBLIOGRAPHY

30

3

INTERNATIONAL TAXATION

C.I.T v. P.V.A.L KULANDAGAN CHETTIAR1

Introduction:

The Constitution of India has conferred the sovereign power to levy taxes and to enforce

collection and recovery thereof on the State under Article 265 of the Constitution of India, by

mandatorily providing that no tax shall be levied or collected except by authority of law. The

power to levy taxes are conferred on the Union of India in respect of matters falling within its

domain in List I of Schedule VII to the Constitution while the powers to levy taxes conferred

on the State Legislatures are relatable to and fall within the scope of List II to Schedule VII.

There are also certain areas falling in the Concurrent List, namely, List III of Schedule VII

but by and large matters falling under List III relate to the administration of the States,

maintenance of law and order etc. The specific entry in the Seventh Schedule; empowers the

Union of India to enter into treaties and agreements with foreign counties and implementation

of such treaties, agreements and conventions with foreign countries is entry 14 of List I in

Schedule VII to the Constitution of India.2

Accordingly, the Union of India is empowered to enter into treaties and agreements with

foreign countries and herein fall the scope of the power of the Union of India to enter into

DTAAs between India and different foreign countries. The power being conferred on the UOI

in this regard is the natural corollary of the UOI having full powers under Entry 10 to deal

with all foreign affairs and matters which bring the Union into relation with any foreign

country. Entry 11 of List I of Schedule VII covers diplomatic, consular and trade

representations and, therefore, the tax treaties including those for avoidance of double

taxation fall within the exclusive domain of the Central Government in view of the

constitutional authority conferred on it. The powers of the UOI to enter into various treaties

for arrangements and agreements with foreign countries for bilateral understanding of each

other‟s area of operation and role to play in matters relating to finance, commerce, trade,

industry and business between the two countries, whether between the States or between the

citizens of both the countries, have been highlighted by the Full Bench of the Allahabad High

1 Citation: [2004] 267 ITR 654 (SC)

2 See: R. Santhanam, Handbook on Double Taxation Avoidance Agreement & Tax Planning for Collaborations,

Commercial Law Publishers (India) Pvt. Ltd., 7th

Edition- 2007, Chapter 13: Double Taxation Relief, p. 1.583-1.584

4

Court in Motilal v. Government of Uttar Pradesh3 and the Calcutta High Court in Nirmal v.

Union India4.

The expression „double taxation‟ is often used in different senses, namely, in its strict legal

sense of direct double taxation and in its popular sense of indirect double taxation.5 However,

double taxation relief may be defined as an arrangement to prevent the same income from

being taxed twice, particularly when a shareholder and a company are domiciled in different

countries.6

Double taxation means taxation of same income of a person in more than one country. This

results due to countries following different rules for income taxation. There are two main

rules of income taxation that is, the source of income rule and the residence rule7,

further there may be some countries following the mixture of the two rules. Thus,

problem of double taxation arises if a person is taxed in respect of any income on the basis of

source income in one country and on the basis of residence in another country or on the basis

of mixture of both the two rules.

Juridical v. Economic Double Taxation8-

Juridical Double Taxation: It occurs when two or more states levy taxes on same entity or

person, as to on the same income for identical periods. It is the result of a conflict between

two tax systems and arises due to overlapping claims of tax jurisdictions on inter-related

economic activities.

Economic Double Taxation: It occurs when same economic transaction, item or income is

taxed in two or more states during the same period but in the hands of different taxpayers.

Double tax, as between the states, is eliminated by-

3 AIR 1961 All 257 (FB)

4 AIR 1959 506 (Cal)

5 See: Sri Krishna Das v. Town Area Committee [(1990) 183 ITR 401, 410 (SC)]; M.K. Pithisaria & Mukesh

Pithisaria, Tax Law Dictionary: Legal Maxims, Latin Terms, and Words & Phrases, Lexis Nexis Butterworths Wadhwa Nagpur Publications, 2013 Edition, p.268 6 Ibid 5

7 As per the source of income rule, the income may be subject to tax in the country where the source of such

income exists (i.e. where the business establishment is situated or where the asset/property is located) whether the income earner is a resident in that country or not. On the other hand, the income earner may be taxed on the basis of his residential status in that country. For example, if a person is resident of a country, he may have to pay tax on any income earned outside that country as well. 8 See: International Taxation: A Compendium, The Chamber of Tax Consultants, Volume I, Third Edition- March

2013, Anil D. Doshi & Tarunkumar Singhal, Chapter 2: Overview of DTAAs, p.I-25

5

1. Allocation of exclusive right to tax;

2. Sharing taxing rights;

3. Provision of giving credit for taxes paid in the source state by the residence state.

In India, the liability under the Income-tax Act arises on the basis of the residential status of

the assessee, during the previous year. In case the assessee is resident in India, he also has to

pay tax on the income which accrues or arises outside India, and also received outside India.

The position in many other countries being also broadly similar, it frequently happens that a

person may be found to be resident in more than one country or that the same item of his

income may be treated as accruing, arising or received in more than one country with the

result that the same item becomes liable to tax in more than one country.9 It is to prevent this

hardship that the necessary provisions have been incorporated in Chapter IX of the Income

Tax Act, 1961.10

Chapter IX of the Income Tax Act, 1961 comprises of the following sections, which

necessarily deal with Double Taxation Avoidance Agreements11

-

Section 9012

: Agreement with foreign countries or specified territories;

Section 90A13

: Adoption by Central Government of agreement between specified

associations for double taxation relief;

9 See: Dr. Girish Ahuja & Dr. Ravi Gupta, Concise Commentary on Income Tax, Bharat Law House Pvt. Ltd., 8

th

Edition: 2007-08, Chapter 37: Double Taxation Relief [Sections 90, 90A & 91], p. 1590 10

See: U.K. Bhargava, Income Tax Act- As amended by Finance Act, 2013, Taxmann Publications Pvt. Ltd., 57th

Edition, Chapter IX: Double Taxation Relief, p.1.542 11

A DTAA only creates rights and obligation for the states, not third parties. Once agreed and notified, they create rights for taxpayers. They are agreements between two countries and not between two taxpayers. Treaties limit taxing power of each state and involve a negotiated sharing of tax revenues by two States. Treaties do not impose tax but relieve them. 12

Jurisprudence behind Section 90 of the ITA, 1961 is suggestive of the realisation and affirmation by India that- DTAAs remove barriers and facilitate cross border flow of goods, services, capital, technology and people by:

1. Elimination of Double Taxation; 2. Providing certainty of Tax Treatment; 3. Reduced Tax Rates; 4. Lower Compliance Costs; 5. Prevention of Fiscal Evasion; 6. Prevention of Tax Discrimination; 7. Resolution of Tax Disputes; 8. Provision for Tax Sparing.

13 Section 90-A was inserted for adoption by the Central Government of the agreements entered into between

any specified association in India with any specified association in a special territory outside India. The charge of tax in respect of a company incorporated in the specified territory outside India at a rate higher than the

6

Section 9114

: Countries with which no agreement exists.

India has comprehensive DTAAs (Double Taxation Avoidance Agreements) with 88

countries (signed 88 DTAAs out of which 85 DTAAs have come into force as of 8th

March,

2013).

Section 90 of the ITA, 1961 deals with „bilateral relief‟, under this method, the Government

of two countries can enter into an agreement to provide relief against double taxation by

mutually working out the basis on which relief is to be granted. Bilateral relief may be

granted in either one of the following methods:

a. Exemption Method- Where two countries agree that income from various specified

sources which are likely to be taxed in both the countries should either be taxed only

in one of them or that each of the two countries should tax only a particular specified

portion of the income so that there is no overlapping. Such an agreement will result in

a complete avoidance of double taxation of the same income in two countries. This is

known as exemption method of relief.

b. Tax Credit Method- This method does not envisage any such scheme of single

taxability but merely provides that, if any item of income is taxed in both the

countries, the assessee should get relief in a particular manner. Under this method, the

assessee is liable to have his income taxed in both the countries but is given a

deduction, from the tax payable by him in the county of residence, of a part of the

taxes paid by him thereon, in the source country usually the lower of the two taxes

paid. This is known as tax credit method of relief.

In practice the former type of method also works in the same way as the latter. Also, if the

agreement with the foreign country is under (b), for relief against double taxation and not

under (a) for the avoidance of double taxation, the assessee must show that the identical

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 1 to Section 90-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. “Specified territory” means any area outside India which may be notified as such by the Central Government for the purposes of this section. 14

In order that this section may apply, it is necessary that the foreign tax should be levied in a country with which India has no agreement for relief against or avoidance of double taxation, but it is immaterial that tax paid in such a foreign country is in respect of income arising in another foreign country with which India has such an agreement.

7

income has been doubly taxed and that he has paid tax both in India and in the foreign

country, on the same income. Further, relief from Indian income tax is to be granted on the

production of proof of assessment in that country.15

In the case of CIT v. ITC Ltd.16

, it was held that- Section 90 applies to those countries with

which India has got a Double Taxation Avoidance Agreement. In such a case, the recipient

gets relief as per the Double Taxation Avoidance Agreement. The DTAAs have over-riding

effect on Income-Tax Act, 1961. However, assessee has an option either to be taxed as per

DTAA or as per the normal provisions of the Income Tax Act, 1961, whichever is favourable

to the assessee.

Section 91 of the ITA, 1961 deals with „unilateral relief‟, this method provides for relief of

some kind by the home country where no mutual agreement has been entered into between

the countries. No country can be expected to have DTAAs with all countries of the world for

all times. The hardship of the taxpayer, however, is a crippling one in all such cases.

Henceforth, some relief may be provided even in such cases by home country irrespective of

whether the other country concerned has any agreement with India or has otherwise provided

for any relief at all in respect of such double taxation. This relief is known as unilateral relief.

As per Section 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 the

deduction from the Indian income-tax payable by him of a sum calculated on such doubly

taxed income at the Indian rate of tax or the rate of tax of the said country, whichever is

lower, or at the Indian rate of tax if both the rates are equal.

In other words, where Section 90 does not apply, unilateral relief will be available, if the

following conditions are satisfied-

a. The assessee in question must have been resident in India in the previous year.

b. That some income must have accrued or arisen to him outside India during the

previous year and it should also be received outside India.

15

See: Dr. Girish Ahuja & Dr. Ravi Gupta, Professional Approach to Direct Taxes: Law & Practice (including Tax Planning), Bharat Law House Pvt. Ltd., 28

th Edition- 2013, Chapter 36: Double Taxation Relief, p. 1463

16 [2002] 82 ITD 239 (Kolkata)

8

c. Before any such relief is computed, the assessee has to prove that such income is not

deemed to accrue or arise in India during the previous year.

d. The income should be taxed both in India and in a foreign country.

e. There should be no reciprocal arrangement for relief or avoidance from double

taxation with the country where income has accrued or arisen.

f. In respect of that income, the assessee must have paid by deduction or otherwise tax

under the law in force in the foreign country in question in which the income outside

India has arisen.

If all the above conditions are satisfied, such person shall be entitled to deduction from the

Indian income-tax payable by him of a sum calculated on such doubly taxed income-

1. At the average Indian rate of tax or the average rate of tax of the said country,

whichever is the lower17

, or

2. At the Indian rate of tax if both the rates are equal.18

Note: Unilateral relief under Section 91 is available only in respect of the doubly taxed

income i.e. that part of income which is included in the total income of the assessee; the

amount deducted under Chapter VIA is not doubly taxed and therefore no relief is allowable

in respect of such amount.19

Also, the section contemplates granting the relief calculated on the income country-wise and

not on the basis of aggregation or amalgamation of income from all foreign countries.20

The position of law as so prevalent in India is that, the DTAAs entered into by the GOI

override the domestic law. This has been clarified by the CBDT (Central Board for Direct

Taxes) vide Circular No. 333, dated 02-04-1982, which provides that a specific provision of

the DTAA will prevail over the general provisions of the ITA, 1961. However, where there is

no specific provision in the treaty, then ITA, 1961, will apply.21

17

Average rate of tax means the tax payable on total income, after deduction of any relief due under the provisions of the ITA, 1961 but before deduction of any relief due under Chapter IX of the ITA, 1961, divided by the total income. 18

Supra 9 19

See: CIT v. Dr. R.N. Jhanji [(1990) 185 ITR 586 (Raj)] 20

See: CIT v. Bombay Burmah Trading Corporation Ltd. [(2003) 259 ITR 423 (Bom)] 21

See: Direct Tax Laws, http://law.incometaxindia.gov.in/Directtaxlaws/act2005/sec_090.htm, Visited on: 05-04-2014

9

CHAPTER 1: DOUBLE TAXATION AVOIDANCE AGREEMENT

Objectives of DTAAs:

From the perspective of the Governments of the States-

1. DTAA limits the exercising of taxing jurisdictions of each State.

2. The restrictions are based on reciprocal flows as between the two States.

3. DTAAs encourage foreign investments and also assist the investors of country to

participate in overseas trade development.

From the perspective of the Taxpayer-

DTAA ensures him a tax system, which he is expected to face if he invests in or works in or

moves temporarily to another State, thereby providing certainty as to tax implications and tax

costs.

Need for Double Taxation Avoidance Agreements: Where a taxpayer is resident in one

country, but has a source of income situated in another country, it gives rise to possible

double taxation22

. This arises from two basic rules that enable the country of residence as

well as the country where the source of income exists to impose tax, namely, the source rule

and the residence rule. However, if both these rules apply simultaneously to a business entity

and it were to suffer tax at both ends, the cost of operating in an international scale would

become prohibitive and deter the process of globalisation. It is from this point of view that

DTAAs became very significant23

.

The DTAAs are negotiated under public international law and are governed by the principles

laid down under the Vienna Convention on the Law of Treaties. It is in the interest of all

countries to ensure that undue tax burden is not cast on persons earning income by taxing

22

Fiscal Committee, OECD Model Double Taxation Convention on Income and Capital, 1977, defines “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. Double Taxation Avoidance Agreements are also termed as ‘Tax Treaties’. 23

Double Taxation Avoidance Agreements can be divided into two main categories i.e. limited agreements and comprehensive agreements. Limited agreements are generally entered into to avoid double taxation relating to income derived from operation of aircrafts, ships, carriage of cargo and freight. While, comprehensive agreements are very elaborate documents which lay down in detail how incomes under various heads may be dealt with. Limits under various heads like income from immovable property, capital gains, dividends, interest, royalties, fees for technical services, etc. and the manner of taxing the same are generally laid down in the comprehensive agreements. Some of the agreements provide for taxation of annuities and pensions.

10

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.

In India, the Central Government under Section 90 of the ITA, 1961 has been authorised to

enter into DTAAs with other countries. Most of the DTAAs also specify a Mutual Agreement

Procedure24

which is invoked when interpretation of treaty provisions is disputed. Also to

prevent the abuse of treaty concessions, treaties increasingly incorporate restrictions and

rules, such as a GAAR (General Anti-Avoidance Rule), that allow tax authorities to

determine if a transaction is only undertaken for tax avoidance or not.

Various Models of Double Taxation Avoidance Agreements (Tax Treaties)25

: Although

treaties entered into by various countries cannot be exactly identical, a certain amount of

uniformity is desirable in its framework; with this in view, tax treaties have been based on

models such as-

1. The OECD Model (Organisation of Economic Co-operation and Development)26

;

2. The U.N. Models Double Taxation Convention between developed and developing

countries, 198027

.

Most of India‟s treaties are based on OECD models or mixture of two models. India is

member of U.N. Model whereas it is conferred status of observer in OECD Model.

Effect of Double Taxation Avoidance Agreement: If an agreement is entered into under

Section 90 of the ITA, 1961, the effect of the same shall be as under-

24

Mutual Agreement Procedures: Article 25(3) of the OECD Model Convention permits competent authorities to “resolve by mutual agreement any difficulties or doubts arising as to the interpretation or application of the Convention”. The mutual agreement can be either- interpretative to avoid doubts or difficulties, or legislative to avoid double taxation. As subsequent agreements, they should be treated similar to context [VCLT Article 31(3)], or at least as supplementary data [VCLT Article 32]. These interpretation agreements among competent authorities may or may not be binding on the Courts under domestic law. 25

See: Michael Lennard, The U.N. Model Tax Convention as compared with the OECD Model Tax Convention- Current Points of Difference & Recent Developments, http://www.taxjustice.net/cms/upload/pdf/Lennard_0902_UN_Vs_OECD.pdf, Visited on: 06-04-14 26

See: OECD Model, http://www.oecd.org/tax/treaties/1914467.pdf, Visited on: 06-04-14 27

See: UN Model, http://www.un.org/esa/ffd/tax/2013ITCSD/Presentation_Trepelkov.pdf, Visited on: 06-04-14; Also see: UN Model, http://www.un.org/esa/ffd/documents/UN_Handbook_DTT_Admin.pdf, Visited on: 06-04-14

11

1. If no tax liability is imposed under the ITA, 1961, the question of resorting to the

agreement would not arise. An agreement cannot impose any tax liability where the

liability is not imposed by the Act.28

2. The person has to be a resident in at least one of the two countries entering into

DTAA. If he is resident of both the countries then the „tie breaker rule‟ will apply to

decide of which country he will be considered to be resident for the purpose of such

DTAA.29

3. If the tax is levied in India as well as in the other country or specified territory as the

case may be-

a. The income may be taxed in only one country; or

b. 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.

4. In case of difference between the provisions of the ITA, 1961 and of an agreement

under Section 90, the provisions of agreement prevail over the provisions of the ITA

and can be enforced by the Appellate Authorities and the court. However, as per sub-

section 2 of Section 90, the provisions of this Act (ITA, 1961) apply to the assessee in

the event these are more beneficial to the assessee.30

5. Where there is no specific provision in the agreement, it is the basic law that the ITA,

1961 will govern the taxation of income.

6. Where the Government of a State certified that a person is a resident of that State or

has a permanent establishment in that State, the certificate is binding on the other

Government.31

Government cannot withdraw exemptions under double taxation treaty with

retrospective effect:

28

See: CIT v. R.M. Muthaiah [(1993) 202 ITR 508 (Karn)], the decision in this case was affirmed subsequently, in the case of UOI v. Azadi Bachoo Andolan [(2003) 263 ITR 706 (SC)] 29

Tie Breaker Rule: Tax liability arising in respect of a person residing in both contracting states has to be determined with reference to his close personal and economic relations with one or the other. 30

For example: If as per DTAA signed with a foreign country or specified territory, fee for technical services is to be taxed @ 30%, where-as it is taxable under Section 115-A @ 20%, then it will be beneficial to apply Section 115-A. On the other hand, if as per provisions of DTAA, it is taxable @ 10%, then it will be better to apply DTAA instead of Section 115-A of the ITA, 1961. 31

See: UOI v. Azadi Bachao Andolan [(2003) 263 ITR 706 (SC)]; Arabian Express Line Ltd. v. UOI [(1995) 212 ITR 31 (Guj.)]

12

In a landmark judgement, the Income-tax Appellate Tribunal held that the Central

Government cannot withdraw from the tax payer exemptions granted under a double taxation

avoidance treaty with another country.

Upon an appeal filed by Tata Steel, the tribunal bench, consisting of H.C. Srivastava and

G.C. Gupta, held that the tax exemption available to the company under the country‟s tax

treaty with Germany of 1959 will be applicable, even as the treaty was amended later by

withdrawing the tax break. “A treaty will not have effect to place a tax payer in a worse

position than he was under the provisions of an earlier treaty”, the tribunal noted.32

32

See: Tax Treaties, http://expressindia.indianexpress.com/fe/daily/19980811/22355494.html, Visited on: 06-04-2014

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CHAPTER 2: PRINCIPLES OF INTERPRETATION OF TAX TREATIES

Principles of interpretation of Tax Treaties33

:

Dual Nature of Treaties34

: Tax Treaties need to be interpreted taking duly in consideration

both the Vienna Convention35

& the Domestic Tax Law.

Various Rules of Interpretation: Words used in the Tax Treaties are to be interpreted based on

common intent of the parties.

Prior to 1969: Interpretation was based on international Customary Law which was similar to

statutory constructions followed in municipal law in most countries and could be classified in

four broad categories-

1. The objective, literal or contextual meaning;

2. The subjective meaning or the intention of the parties, at the time of conclusion of the

Treaty;

3. The object and the purpose method, when the language is not explicit or clear (known

as judicial legislation);

4. Principle of Effectiveness i.e. better to have effect than to be made void.

33

Supra 8, p. I-39 34

Following points should be considered while interpreting domestic law and tax treaties: 1. Tax treaties are governed by Customary International Law; therefore their interpretation should be

based on the rules of interpretation under public international law. 2. Domestic law seeks to impose tax in specific circumstances and covers specific heads of income and

expenses whereas tax treaties specify general taxing principles to avoid double taxation. 3. Tax treaties tend to be less precise and require a broad purposive interpretation therefore; they

should be interpreted more liberally than the statutes in the context of their object and purpose. 4. Tax treaties may be or may not be the part of the Domestic Law. It may or may not have legal effect.

Different countries follow different approaches for giving legal effect to the provisions of Tax treaties. As for example- a. International treaties automatically become a part of domestic law as soon as they come into

effect, without the need for a parliamentary approval. [Belgium, Netherlands and U.S.A.] b. International treaties have no domestic legal effects unless legally approved. [Germany and Italy] c. A transformation of conventional (treaty) provisions into domestic legislation is necessary.

[Denmark, Israel, New Zealand and U.K.] 35

Section 3 of the Vienna Convention, includes Article 31 to 33 that deal with interpretation of treaties. It has been well established now that the provisions for interpretation of treaties contained in these Articles of Vienna Convention reflect pre-existing customary international law, and thus, may be (unless there are particular indications to the contrary) applied to treaties concluded before entering into force of the Vienna Convention in 1980. Section 3 of the Vienna Convention reads as, “Interpretation of Treaties”; Article 31, 32 & 33 of Section 3 of the Vienna Convention read as follows- Article 31: General rule of interpretation; Article 32: Supplementary means of interpretation; Article 33: Interpretation of treaties authenticated in two or more languages.

14

Tax Treaties are mainly governed by International Law, especially by the Vienna Convention

on Law of Treaties of May 23, 1969. These Rules of Vienna Convention are held to be

declaratory of customary law.

Integrated Approach- Vienna Convention of 1969 adopted integrated approach by adopting

composite provision in Article 31 thereof i.e. good faith approach in accordance with

ordinary meaning.

India36

: In CIT v. Visakhapatnam Port Trust37

, Justice J Rao held:

“In view of the standard OECD Model which is being used in various countries, a

new area of general “international tax law” is now in the process of developing. Any

person interpreting a tax treaty must now consider decisions and rulings worldwide

relating to similar treaties. The maintenance of uniformity in the interpretation of a

rule after its international adaptation is just as important as the initial removal of

divergences. Therefore, the judgements rendered by Courts in other countries or

rulings by other tax authorities would be relevant.”

Following are the rules laid down by the Judiciary on interpretation of tax treaties-

1. If the literal rules result in an ambiguity or absurdity, the court should try to interpret

in another manner.38

2. Office of the Judge is not for to legislate, but to express intention of the legislature.

We are to take the whole statute together and construe it all together.39

3. The approach should be purposive and integrative, which seek to give effect to the

intention of legislation.40

4. The „Principles‟ and „rules‟ are not binding force, they are aid to construction,

presumption or pointers. It is the Judiciary who must look at all relevant

circumstances and decide as a matter of judgement what weight to attach to any

particular rule.41

36

See: International Taxation: A Compendium, The Chamber of Tax Consultants, Volume I, Third Edition- March 2013, T.P. Ostwal, Chapter 3: Principles of Interpretation of Tax Treaties, p.I-43 37

(1983) 144 ITR 146 (India) 38

See: River Wear Commissioners v. Adamson [(1876-77) L.R. 2 App Cas 743] 39

See: Stock v. Frank Jones (Tipton) Ltd. [(1978) 1 W.L.R 231] 40

See: Inco Europe Ltd. v. First Choice Distribution [(1999) 1 W.L.R 270] 41

See: Maunsell v. Olins [(1975) 1 All E.R. 16]

15

5. The rules of interpretation in respect of International treaties are different to those

applicable in respect of domestic law.42

6. Treaties are agreements and are required to be interpreted in accordance with

particular rules.43

7. To apply to treaties, the strict canons appropriate to the construction of domestic

legislation would often tend to defeat rather than serve this purpose.

8. Tax treaty is an agreement. It is not a taxing statute on this basis in the wisdom of the

Judiciary in Union Texas Petroleum Corporation v. Critchley (Inspector of Texas)44

it

was held that Tax treaty as agreement should be construed, as all agreements are

generally construed.

9. The words which have already in a particular context received judicial interpretation;

may be presumed to be used in the sense already judicially imputed to them.45

10. The Courts are prepared to look at much extraneous material that bears upon the

background against which the legislation was enacted.46

11. The expression “may be taxed” used in the DTAA does not mean that there is no

prohibition or embargo from taxing that category under the Income Tax Act, 1961.

An enabling form of language cannot be taken advantage of by the Revenue to bring

the assessment of income that is covered by the clause in the agreement. This view

has been criticised by a leading commentator, Philip Baker.

12. The observation that a commentary on the model convention such as OECD is of no

use and utility and is not a safe or reliable guide or aid for construction is- it is

submitted- too wide and incorrect. As pointed out earlier, this observation was made

in view of the wide difference between the DTAA with Malaysia and the OECD

model and should not be construed as a ground to completely ignore such

commentaries.

Note: It is not proper to apply the principles of statutory construction while interpreting

DTAAs. The SC in India has overtime pointed out that treaties are negotiated and entered

into at a political level and have several considerations as their basis. DTAAs are in the

42

See: UOI v. Azadi Bachao Andolan [(2003) 263 ITR 706 (SC)] 43

See: Government of Belgium v. Postlethwaite [(1987) 3 W.L.R. 365] 44

(1990) 63 TC 244 45

Approach adopted by Lord Atkin 46

See: Pepper (Inspector of Taxes) v. Hart [(1992) U.K.H.L 3]

16

nature of treaties and have to be interpreted in accordance with the principles laid down in the

Vienna Convention.47

Article 31 to 33 of the Vienna Convention on the Law of Treaties (VCLT) provide rules for

interpretation of treaties and may be referred while interpreting tax treaties. Although India is

not a signatory to the treaty, the principles laid therein are useful to interpret the meaning

given to the various terms in the treaty. It must be mentioned that the Vienna Convention is

not only to tax treaties but applies to all international treaties. It is significant that 96

countries had signed the Treaty by 2004 but several countries including India, Israel,

Singapore and South Africa have not. It is also interesting to note that although the U.S. has

signed the Convention, it has not yet ratified the treaty. The VCLT is based on existing

principles of international law. Further, each DTAA also contains a provision regarding

interpretation of treaties.48

47

See: UOI v. Azadi Bachao Andolan [263 ITR 706, (2004) 10 SCC 1]; Ram Jethmalani v. UOI [339 ITR 107, (2011) 8 SCC 1] 48

See: Arvind P. Datar, Kanga & Palkhivala’s- The Law and Practice of Income Tax, LexisNexis Publication, Volume II, Tenth Edition- 2014, Chapter IX: Double Taxation Relief, p.1718- 1719

17

CHAPTER 3: IMPORTANCE OF DOUBLE TAXATION AVOIDANCE

AGREEMENT

Importance of DTAAs: The Supreme Court of India has dealt with the importance of

DTAAs in various cases. Some important cases are-

1. Turquoise Investments Case [300 ITR 1]: Tax Credit Method for elimination of

double taxation shall be applicable only if the tax is payable in both the countries. In

terms of Article XI of DTAA with Malaysia49

, dividend income derived by assessee

from a company in Malaysia was not liable to be taxed in its hands in India.

2. Morgan Stanley and Co. Inc. Case [292 ITR 416]: Where it was clear from the

agreement with the Indian company that the Indian company would be engaged in

supporting the front office functions of the USA company (applicant) in fixed income

and equity research and providing IT enabled services such as data processing support

centre and technical services as also reconciliation of accounts. It was held that as the

Indian company would be performing in India only back office operations, it would

not constitute a fixed place permanent establishment in India, but it is deemed

permanent establishment in relation to deputed members of staff. Further, the

transactional net margin method was the appropriate method of quantifying the profits

of the foreign company in the case of a service permanent establishment (as in this

case) because under the transactional net margin method the total operating profit

arising from the transaction was apportioned on the basis of sales, costs, assets, etc.50

3. C.I.T v. Visakhapatnam Port Trust [(1983) 144 ITR 146 (A.P.)]: The provisions of

Section 90 prevail over those of Sections 4, 5 and 9, and therefore, even where a

business connection is established the profits of a company could be free from tax if

they are covered by a DTAA.

49

See: Article XI, Clause 1 of Double Taxation Avoidance Agreement between India and Malaysia- “Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State”. Article XI, Clause 2 of Double Taxation Avoidance Agreement between India and Malaysia- “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 percent of the gross amount of the interest.” Beneficial ownership clause in treaties ensures that mere residence in another State should not result in a source State requiring to give-up its taxation rights. State S is not obliged to limit its taxing rights over dividend income merely because dividend is received by a resident of State R. It is essential that the beneficial owner of the dividends is a resident of State R. See: Rajesh Kadakia and Nilesh Modi, The Law and Practice of Tax Treaties: An Indian Perspective, Wolters Kluwer (India) Pvt. Ltd., 2008 Edition, Article 10: Dividend, p.421 50

See: Girish Ahuja & Ravi Gupta, Concise Commentary on Income Tax, Bharat Law House Pvt. Ltd., 8th

Edition (2007-08), Chapter 39: Special Provisions Relating to Avoidance of Tax, p.1661

18

4. Vodafone Case [341 ITR 1 (SC)]: When the Government of India sold

telecommunication licenses from 1990s onwards few Indian business houses had

money to buy licenses or appetite to hold them until they become profitable. So the

Government allowed them to bring foreign partners. Essar brought in as foreign

partner Hutchinson Whampoa, the company of Sir Ka-shing Li one of the richest

persons in the world. Hutchinson sold its stake to Dutch subsidiary of Vodafone in

2007. The transaction was made in Cayman Islands. Sir Li made good profits, but he

was in Hong Kong, beyond the reach of Government of India. Indian tax authorities-

the CBDT- sent a notice to Vodafone that it had bought an Indian business and asked

it to shell out $ 2.5 billion tax. Vodafone went to court against the notice. The Court

held that the transaction took place offshore and is not taxable. The Government got

further setback when the Court rejected its plea for review. The Government had to

subsequently refund with interest an amount as so deposited by Vodafone in

November 2010.51

The bone of contention in this case was whether transfer of shares of a foreign

company which indirectly held shares of an Indian company was taxable in India. The

three member bench of the SC ruled that the transaction of transfer of one share of a

Cayman Island Company which indirectly held shares in Indian Company by

Hutchison Group to Vodafone Group was not taxable in India. Therefore, no tax was

recoverable from Vodafone for failure on its part to deduct tax at source while making

payment to Hutchison. In the process the SC reiterated the well established

principle, that is, tax planning within the framework of law is permissible. The

SC ruling almost accepted the position of holding company and subsidiary company

structures and ruled that subsidiary company can be considered to be part of holding

company only if subsidiary company functions like a puppet. The power to appoint

directors or guiding the affairs of the subsidiary does not make the subsidiary

company as part of the holding company, considering the same the Supreme Court

laid out the principle that “dissecting approach” is not the approach to be adopted

while dealing with holding and subsidiary company relationship, but the “look out”

approach should be emphasised upon. In this context the SC made a distinction

between “having the power” and “persuasive position”.

51

See: Divya Sharma, National Law University Delhi, Jurisprudence of Vodafone: A web of conundrums and contradictions, Lawyers Update, June 2012, http://lawyersupdate.co.in/LU/1/865.asp, Visited on: 11.04.2014

19

5. CIT v. Hyundai Heavy Industries Co. Ltd. [291 ITR 482]: Where an assessee, a

Korean company, entered into agreement with ONGC for designing, fabrication, hook

up and commissioning of a platform in Bombay High in India and the contract was

entered into two parts; one was for fabrication of platform in Korea and other was

installation and commissioning of said platform in Bombay High, it was held that

since the installation „permanent establishment‟ in India came into existence only on

conclusion of transaction giving rise to supplies of fabricated platform and emerged

only after contract with ONGC stood concluded and fabricated platform was

delivered in Korea to agents of ONGC, profits that accrued to assessee for Korean

Operations were not liable to tax in India.

6. Ishikawajima Harima Heavy Industries Ltd. v. Director of Income-tax, Mumbai

[288 ITR 408]: Mere existence of business connection may not result in income to

non-resident assessee from transaction with such a business connection accruing or

arising in India. It would be wrong to equate permanent establishment with a business

connection, since former is for purpose of assessment of income of a non-resident

under a Double Taxation Avoidance Agreement, and latter is for application of

Section 952

.

For Section 9 (1) (vii) to be applicable, it is necessary that services provided by a non-

resident assessee under a contract should not only be utilized within India, but should

also be rendered in India or should have such a live link with India that entire income

from fees, etc., becomes taxable in India; thus, for a non-resident to be taxed on

income for services, such a service needs to be rendered within India, and has to be a

part of a business or profession carried on by such person in India. Whatever is

payable by a resident to a non-resident by way of fees for technical services would not

always come within purview of Section 9 (1) (vii) but it must have sufficient

territorial nexus with India so as to furnish a basis for imposition of tax.

7. Azadi Bachao Andolan Case [263 ITR 706]: It was held that the DTAAs are

negotiated and are entered into at a political level and have several considerations as

their bases. It was held that the main function of a DTAA should be seen in the

context of aiding commercial relations between treaty partners and as being

essentially a bargain between two treaty countries as to the division of tax revenues

between them in respect of income falling to be taxed in both jurisdictions. It was

52

Section 9 of the Income Tax Act, 1961: Income deemed to accrue or arise in India.

20

asserted that- the benefits and detriments of a DTAA in Tax Treaty will probably only

be truly reciprocal where the flow of trade and investment between treaty partners is

generally in balance. Where this is not the case, the benefits of the treaty may be

weighed more in favour of one treaty partner than the other, even though the

provisions of the treaty are expressed in reciprocal terms. This has been identified as

occurring in relation to Tax Treaties between developed and developing countries,

where the flow of trade and investment is largely one way.

Because treaty negotiations are largely a bargaining process with each side seeking

concessions from the other, the final Agreement will often represent a number of

compromises, and it may be uncertain as to whether a full and sufficient quid pro quo

is obtained by both sides.

8. Kulandagan Chettiar Case [267 ITR 654]: It was held that where the tax liability is

imposed by the ITA, 1961, the DTAA may be resorted to either for reducing the tax

liability or altogether avoiding the tax liability. Hence, the beneficial provision of the

DTAA should prevail over the Act (The Income Tax Act, 1961).

9. A.H.M Allaudin v. Additional ITO [(1964) 52 ITR 900 (Mad.)]: This case dealt with

the scope of Section 90, when the foreign assessment is not final. It was held that the

law requires that an application for double taxation relief should be made on the basis

of taxes paid both in India & abroad. Notwithstanding that a foreign assessment has

not become final, an application for refund made on the basis of a provisional

assessment in the foreign country is not opposed to the provisions of law or the rules

made there-under.53

10. C.I.T v. Hindustan Paper Corporation Ltd. [(1994) 77 Taxman 450 (Cal.)]: The

DTAA shall always prevail even when anomaly is noticed between the provisions of

the Act and the provisions of DTAA. Further, in view of Section 90(2), the assessee

has an option to claim that the provisions of the Act may be made applicable if these

are more beneficial to the assessee.

53

See: Scope of Section 90 of the Income Tax Act, 1961, http://www.incometaxindiapr.gov.in/incometaxindiacr/contents/DTL2011/casesec90.htm, Visited on: 11-04-14

21

CHAPTER 4: THE CASE OF C.I.T v. P.V.A.L KULANDAGAN CHETTIAR

C.I.T v. P.V.A.L Kulandagan Chettiar [(2004) 137 TAXMAN 460 (SC)]

Decision rendered by the Bench comprising of: S.R. Babu, C.J. and G. Mathur, J.

Judgement authored by: S.R. Babu, C.J.

Facts of the Case:

The Respondent-Firm was resident of India and owned some immovable properties in

Malaysia. During the course of the assessment year, the assessee earned income from rubber

estates in Malaysia. The Respondent also sold some property there and earned short-term

capital gains. The ITO held that both the incomes were assessable in India and brought the

same to tax.

On appeal, the Commissioner (Appeals) held that under Article 7(1) of the Agreement of

Avoidance of Double Taxation entered into between Government of India and Government

of Malaysia54

, unless the Respondent had a permanent establishment of business in India,

such business income in Malaysia could not be included in the total income of the assessee

and, therefore, no part of the capital gains arising to the Respondent in Malaysia could be

taxed in India. On appeal, the Tribunal confirmed the order of the Commissioner (Appeals).

On reference, the High-Court confirmed the Tribunal‟s order.

On appeal to the SC, the apex court framed the following issues, subject to the decision

rendered by the High-Court.

Issues:

1. Whether the Malaysian income cannot be subject to tax in India on the basis of the

Agreement of Avoidance of Double Taxation entered into between Government of

India and Government of Malaysia?

2. Whether the capital gains should be taxable only in the country in which the assets are

situated?

54

DTAA between India and Malaysia- Article 7: Business Profits Article 7(1): The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise caries 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 on so much thereof as is attributable to that permanent establishment.

22

Decision Rendered:

The Supreme Court held that the traditional view in regards to the concept of „double

taxation‟ is that to constitute double taxation, objectionable or prohibited, the two or more

taxes must be-

1. Imposed on the same property;

2. By the same State or Government;

3. During the same taxing period;

4. For the same purpose.

Also, there is no double taxation strictly speaking where-

a. The taxes are imposed by different States;

b. One of the impositions is not a tax;

c. One tax is against property and the other is not a property tax or the double taxation is

indirect rather than direct.55

Scope of the Provision (Section 90 of the Income Tax Act, 1961): In case of conflict between

the Income Tax Act, 1961 and the provisions of DTAA, the provisions of DTAA would

prevail over provisions of the Income Tax Act, 1961.

Section 90(2) makes it clear that the Act gets modified in regard to the assessee in so far as

the Agreement is concerned, if it falls within the category stated there-in. Moreover, Sections

4 and 5 of the Income Tax, 1961 provides for taxation of global income. These sections,

however, will have to make way where-ever there are provisions to the contrary in the

DTAA.56

Tax liability of a person residing in both contracting states: Tax liability arising in respect of

a person residing in both contracting states has to be determined with reference to his close

personal and economic relations with one or the other.57

Agreement with Malaysia58

: The Supreme Court affirmed that, the Agreement between the

Government of India and Government of Malaysia for Avoidance of Double Taxation and the

55

See: Para 6 of the Judgement 56

See: Para 5 of the Judgement 57

See: Para 11 of the Judgement

23

Prevention of Fiscal Evasion with respect to taxes on income was, entered into on 01-04-

1977. Also, the Agreement is applicable to persons who are resident of one or both the

Contracting States. It was re-asserted that under Article 2 of the Agreement, taxes which are

subject of the Agreement are as follows-

Malaysia- the income tax and the supplementary income tax, that is, profit tax, development

tax and timber profit tax; lastly the petroleum income tax.

India- the income tax and any surcharge on income tax imposed under the Income Tax Act,

1961 and surtax imposed under the Companies (Profits) Surtax Act, 1974.

In absence of permanent establishment in India in regards to carrying on of business of

rubber plantations in Malaysia, business income earned by assessee out of rubber plantations

could not be taxed in India.

In terms of treaty where-ever any expression is not defined, the expression defined in the Act

would be attracted. The definition of „income‟ would therefore, include capital gains. Thus,

capital-gains derived from immovable property are income and therefore the relevant Article

of DTAA would be attracted.

The contention of the appellant that capital-gains are not income and, therefore, were not

covered by the Treaty could not be accepted at all because for purposes of the Act, capital

gains are always treated as income arising out of immovable property though subject to

different kinds of treatment. Hence, the contention of the appellant that it was not a part of

the Treaty could not be accepted because in terms of the Treaty, wherever any expression was

not defined, the expression defined in the Act would be attracted. The definition of „income‟

would, therefore, include capital gains. Thus, capital gains derived from immovable property

are income and hence, Article 6 would be attracted.59

Thus, all in all, scrutinizing the DTAA between India and Malaysia in context of the business

income derived from a Rubber Estate in Malaysia, the SC held that the Non- Resident cannot

be subjected to tax in India on such business income in view of there being no permanent

establishment in India and hence business profits derived from a Rubber Estate in Malaysia

cannot be taxed in India. It has further been made clear that the „residence‟ or „residential

58

Notification Number GSR 667(E) Dated 12-10-2004; Earlier Agreement was entitled into vide GSR 167(E), dated 01-04-1977 59

See: Para 14 of the Judgement

24

status‟ cannot by itself make the Non-Resident taxable in India of business profits derived

abroad unless the assessee has a permanent establishment in India, in view of Article 5 of the

DTAA between India and Malaysia. Further, income by way of capital gain derived from sale

of immovable property located in Malaysia, cannot be brought to tax in India as under the

DTAA between India and Malaysia, such income is taxable only in Malaysia in view of the

location of the immovable property in that country. Accordingly, such income cannot be

brought to tax in India in view of Articles 2 (1) (b), 4, 5, 6, 7 (1) and 22 (2) of the DTAA

between India and Malaysia.

Observation of the Apex Court:

Taxation policy is within the power of the Government and Section 90 of the Act enables the

Government to formulate its policy through treaties entered into it and even, such a Treaty

determines the fiscal domicile in one State or the other and, thus prevails over the provisions

of the Act. It would be un-necessary to refer the terms addressed in the OECD model or in

any of the decisions of foreign jurisdiction or in any other agreements.60

Ruling of the Supreme Court:

The Court held that there was no merit in the appeal and the same stood dismissed.61

Comment62

:

In C.I.T v. P.V.A.L. Kulandagan Chettiar [(2004) 267 ITR 654 (SC)], it has been held that in

terms of Agreement of Avoidance of Double Taxation entered into between the Government

of India and the Government of Malaysia, tax liability arising in respect of person residing in

both contracting States has to be determined with reference to his close personal and

economic relations with one or other. Review petition of the Department was rejected by the

SC both on merit as well as on the ground of delay.

In this judgement rendered by the SC, the SC interprets the “Agreement for the Avoidance of

Double Taxation of Income and Prevention of Fiscal Evasion of Tax between the

Government of India and the Government of Malaysia”. The ratio laid down by the SC

applies to numerous other treaties negotiated by India with other countries. It is felt that the

60

See: Para 16 of the Judgement 61

See: Para 17 of the Judgement 62

See: Narayan Jain & Dilip Loyalka, How to handle Income Tax problems, Book Corporation, Volume I, 22nd

Edition, Chapter 42: How to get relief in case of double taxation?; p.42.16- 42.17

25

principle laid down by the apex court may upset the traditional view of the Income-Tax

Department and the judgement can reduce the tax liability of a large number of assessee

(individuals, HUFs, firms and companies) whose residential status under Section 6 of the

Income Tax Act, 1961, is that of “residence in India”, and who derive income from a foreign

country.

26

CONCLUSION

It is necessary to take note of the following aspects, which too have been dealt with in the

case under discussion:

1. India‟s tax treaties are based on a combination of the OECD Model and the U.N.

Model. However, emphasis is laid more on “source” country taxation which is

consistent with the objective and rationale of the U.N. Model.63

2. Tax treaties are mini-legislations containing all the relevant aspects and features

which are at variance with the general taxation laws of the respective countries. Such

variance can, in some cases, be in the form of provisions in addition to existing local

tax laws. Where the DTAA provides a particular method of computation, that alone

has to be followed irrespective of the provisions of the Income Tax Act; it is only

when there is no provision in the agreement, that the basic tax law in force in that

country will be attracted and govern the taxation of such income.

3. As the language used in various agreements can differ, no one method or strait-

jacketed formula can be adopted unilaterally in all cases.

4. As a general rule, the country of residence enjoys complete power to tax an assessee

on all his global income. However, depending on the provisions of the relevant

DTAAs, in the country of residence, assessee either gets an exemption of income on

which taxes are paid in the source country or get credit for taxes paid in that country.

On the other hand, DTAAs place a number of restrictions on the source county‟s

power to tax an income. These limitations come, typically, in three forms:

a. The source country‟s power to tax that income is unlimited;

b. The source country‟s power to tax that income is limited; or

c. The source country has no power to tax that head of income.

“May be taxed”, “Shall be taxable only”: The first two cases use what the renowned

authority on double taxation, Philip Baker, calls “permissive” terminology, such as

63

The courts and tribunals in India have been inconsistent in following or not following OECD model commentaries. The AAR and the ITAT have frequently referred to the OECD model commentaries and so has the Supreme Court.

27

“may be taxed” or “may also be taxed”.64

In third case, the treaty typically states that

the income “shall be taxable only” in the country of residence.65

Importantly, in

DTAAs, there is no provision that grants the country of source the sole right to tax

income.66

5. There is a distinction between the avoidance of double taxation and relief against

double taxation. In the former, the assessee does not have to pay the tax first and then

apply for relief in the form of refund whereas he would be obliged to do so under the

second category. The difference in these two categories needs to be borne in mind

while referring to statutory provisions and relying on cases involving double

taxation.67

6. In the case of CIT v. VR. S.R.M. Firm [208 ITR 400; (1994) 120 CTR (Mad) 427],

Article VI of the DTAA with Malaysia dealt with immovable property and sought to

tax income from the use of such property. Article VI (3) applied to income derived

from the “direct use, letting or use in any other form of immovable property”. The

High Court held that the expression “direct use” or “use in any other form” are

sufficiently wide enough to include within its scope transfer, sale or exchange of the

property.

Affirming this view, the SC in the case of CIT v. P.V.A.L. Kulandagan Chettiar [267

ITR 654, 672; (2004) 6 SCC 235] went on to hold that a capital gain has always been

treated as income arising out of immovable property under the Indian Income Tax

Act. In terms of the treaty, wherever any expression is not defined, the expression

defined in the Income Tax Act would be attracted. Consequently, the definition of

income would include capital gains and Article VI would be attracted.68

7. In CIT v. P.V.A.L. Kulandagan Chettiar [267 ITR 654, 672; (2004) 6 SCC 235], the

SC re-affirmed the principles laid down in the case of UOI v. Azadi Bachao Andolan

[263 ITR 706; (2004) 10 SCC 1] in regards to Section 90 of the Income Tax Act,

1961 as follows-

64

For instance, see Articles 6, 7, 10 and 11 of the OECD model. 65

For instance, see Articles 7.1, 8.1 and 12 of the OECD model. 66

Supra 48 at p. 1719-1720 67

See: CIT v. Carew and Co. Ltd. [120 ITR 540, 548 (SC); AIR 1980 SC 252, (1980) 1 SCC 470], CIT v. VR. S.R.M Firm [208 ITR 400; (1994) 120 CTR (Mad) 427], CIT v. R.M. Muthaiah [(2002) ITR 508; (1993) 110 CTR (Kar) 153] 68

Supra 48 at p. 1720

28

a. A delegate (in this case i.e. Azadi Bachao Andolan, the Central Government) of

the legislature can exercise the power of exemption in a fiscal statute.

b. The validity of an agreement made under this section is to be determined by

ascertaining whether it is within the parameters of the legislative provision.

c. The principles governing the interpretation of treaties are not the same as those

governing the interpretation of statutory language.

The court held that Section 90 does not empower the Central Government to enter

into an agreement with retrospective effect. The Bombay High Court in CIT v. Tata

Iron69

upheld the view that an agreement for the avoidance of double taxation cannot

apply retrospectively nor can it apply to contracts executed prior to the date of the

agreement.

8. An important and contentious issue relates to the meaning and scope of the expression

“permanent establishment”. Article 5 of the OECD model defines this expression as a

fixed place of business through which the business of an enterprise is wholly or partly

carried on. The significance of a permanent establishment is that a foreign enterprise

which has a branch office or other fixed place of business will be liable to Indian

Income Tax on the income that is earned or is attributable to the said permanent

establishment. An agency which is not exclusive but does work for other clients and

has an independent status cannot be treated as a permanent establishment.70

A non-

independent agent will be deemed to be a permanent establishment only if it can act

independently in the matter of concluding contracts.71

Similarly, an agent who has the

power to book orders, ensure clearance of imported goods and their further delivery to

customers in India is a permanent establishment. The income attributable to such a

permanent establishment will be liable to tax in India.

There could be little dispute that a branch office would normally constitute a

permanent establishment. By definition, it is a fixed place of business through which

the business of an enterprise is ordinarily carried on. But the branch office cannot

claim eligibility for relief meant for foreign exchange earnings.

In short, the words “permanent establishment” postulate the existence of a substantial

element of an enduring or permanent nature of a foreign enterprise in another country

69

248 ITR 190 70

See: Al Nisr Publishing, In Re [239 ITR 879 (AAR)] 71

See: TVM Ltd. v. CIT [237 ITR 230 (AAR)]

29

which can be attributed to a fixed place of business in that country. It should be of

such a nature that it would amount to a virtual projection of the foreign enterprise of

one country into the soil of another country.72

9. Issue as to „Fiscal Domicile‟: Generally, the country where a person is a resident can

levy tax on the global income of that person. However, if the person is a resident in

two contracting States, the tax liability will depend upon his “fiscal domicile”. This is

determined by ascertaining the country with reference to which his personal and

economic relationships are closer. By this test, if an assessee‟s personal and economic

relationships are closer to the other contracting State, his residence in India becomes

irrelevant and the DTAA will prevail over Sections 4 and 5.73

10. Pursuant to Section 90 (3), Notification No. 91/2008 dated August 28, 2008 has been

issued, which states that where the tax treaty provides that any income of a resident of

India “may be taxed” in other country, such income shall be included in his total

income chargeable to tax in India in accordance with the provisions of the Act and

relief shall be granted in accordance with the method of elimination or avoidance of

double taxation provided in the DTAA. This virtually overrules the decision of the

Supreme Court (CIT v. PVAL Kulandagan Chettiar [267 ITR 654; (2004) 6 SCC

235], review dismissed; CIT v. PVAL Kulandagan Chettiar, 300 ITR 5). While the

use of the powers under Section 90 (3) to nullify judgements of the SC is

questionable, it is submitted that this notification represents the correct position of

law.74

72

See: CIT v. Vishakapatnam Port Trust [144 ITR 146, 162; (1984) 38 CTR (AP) 1] 73

See: CIT v. PVAL Kulandagan Chettiar [267 ITR 654, 671-672; AIR 2004 SC 3411; (2004) 6 SCC 235] 74

Supra 48 at p. 1725

30

BIBLIOGRAPHY

Primary Sources-

Statutes, Agreements and Conventions referred to:

1. The Constitution of India, 1950

2. The Income Tax Act, 1961

3. The OECD Model Tax Convention on DTAA

4. The U.N. Model Tax Convention on DTAA

5. The Vienna Convention on Law of Treaties of 1969

Secondary Sources-

Books referred to:

1. Narayan Jain & Dilip Loyalka, How to handle Income Tax problems, Book

Corporation, Volume I, 22nd

Edition, Chapter 42: How to get relief in case of double

taxation?; p.42.16- 42.17

2. R. Santhanam, Handbook on Double Taxation Avoidance Agreement & Tax Planning

for Collaborations, Commercial Law Publishers (India) Pvt. Ltd., 7th

Edition- 2007,

Chapter 13: Double Taxation Relief, p. 1.583-1.584

3. Rajesh Kadakia and Nilesh Modi, The Law and Practice of Tax Treaties: An Indian

Perspective, Wolters Kluwer (India) Pvt. Ltd., 2008 Edition, Article 10: Dividend,

p.421

4. International Taxation: A Compendium, The Chamber of Tax Consultants, Volume I,

Third Edition- March 2013, T.P. Ostwal, Chapter 3: Principles of Interpretation of

Tax Treaties, p.I-43

5. Girish Ahuja & Ravi Gupta, Concise Commentary on Income Tax, Bharat Law House

Pvt. Ltd., 8th

Edition (2007-08), Chapter 39: Special Provisions Relating to Avoidance

of Tax, p.1661

6. Dr. Girish Ahuja & Dr. Ravi Gupta, Professional Approach to Direct Taxes: Law &

Practice (including Tax Planning), Bharat Law House Pvt. Ltd., 28th

Edition- 2013,

Chapter 36: Double Taxation Relief, p. 1463

7. U.K. Bhargava, Income Tax Act- As amended by Finance Act, 2013, Taxmann

Publications Pvt. Ltd., 57th

Edition, Chapter IX: Double Taxation Relief, p.1.542

31

8. M.K. Pithisaria & Mukesh Pithisaria, Tax Law Dictionary: Legal Maxims, Latin

Terms, and Words & Phrases, Lexis Nexis Butterworths Wadhwa Nagpur

Publications, 2013 Edition, p.268

9. International Taxation: A Compendium, The Chamber of Tax Consultants, Volume I,

Third Edition- March 2013, Anil D. Doshi & Tarunkumar Singhal, Chapter 2:

Overview of DTAAs, p.I-25

10. Arvind P. Datar, Kanga & Palkhivala’s- The Law and Practice of Income Tax,

LexisNexis Publication, Volume II, Tenth Edition- 2014, Chapter IX: Double

Taxation Relief, p.1718- 1719

Online Sources-

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