Double taxation occurs when the same income is taxed in two countries (residence country and source country). India provides relief through two mechanisms: bilateral agreements (DTAA) under S.90/90A, and unilateral relief under S.91 where no treaty exists. The taxpayer can choose the more beneficial provision between the Act and the DTAA (S.90(2)).
Legal Framework
| Provision | Content |
|---|---|
| S.90 | Agreement with foreign countries (bilateral DTAA) |
| S.90A | Agreements between specified associations in India and foreign countries |
| S.91 | Unilateral relief: countries with which India has no DTAA |
| S.90(2) | Beneficial provision: assessee can choose between Act provisions and DTAA (whichever is more beneficial) |
| S.90(4) | Tax Residency Certificate (TRC) mandatory to claim DTAA benefit |
| S.90(5) | Form 10F: additional information required from non-resident |
Types of Relief
| Type | Section | Mechanism |
|---|---|---|
| Bilateral relief | S.90 | India enters DTAA with another country; income taxed as per treaty provisions |
| Unilateral relief | S.91 | India allows deduction of foreign tax paid from Indian tax on doubly-taxed income |
| Specified association relief | S.90A | Agreements between specified associations (e.g., airline agreements) |
DTAA: How It Works (S.90)
| Element | Detail |
|---|---|
| Nature | Agreement between India and another sovereign state |
| Effect | Overrides domestic law to the extent beneficial to assessee (S.90(2)) |
| Number of DTAAs | India has 90+ comprehensive DTAAs |
| Key treaty partners | USA, UK, Singapore, Mauritius, UAE, Germany, Japan, etc. |
| Methods of relief |
-
(a) Exemption method: income taxed only in one country
-
(b) Credit method: tax paid in source country credited against resident country tax |
| Treaty shopping | Using treaties of third countries for tax benefit; anti-abuse provisions (LOB, PPT) |
Unilateral Relief (S.91)
Where no DTAA exists, S.91 provides:
| Condition | Requirement |
|---|---|
| Assessee is resident in India | Mandatory |
| Income accrued outside India | Must have been taxed in a foreign country |
| No DTAA exists | Between India and that country |
| Relief quantum | Lower of: Indian rate on doubly-taxed income OR foreign tax actually paid |
| Formula | Relief = Doubly-taxed income × (lower of Indian rate or foreign rate) |
Why: Unilateral relief prevents double taxation even where India has no diplomatic agreement. The cap at the lower rate ensures India does not subsidize foreign taxation (by crediting more than what India would have charged).
Tax Residency Certificate (S.90(4))
| Element | Detail |
|---|---|
| Purpose | Prove residential status in the treaty country to claim DTAA benefits |
| Issued by | Government of the country where assessee claims to be resident |
| Mandatory | Yes, for claiming DTAA relief (from AY 2013-14) |
| Additional | Form 10F: must be furnished along with TRC (if TRC doesn't have specified details) |
| Indian residents claiming relief abroad | Certificate from Indian IT authorities |
Key DTAA Provisions (Typical Structure)
| Article | Subject |
|---|---|
| Art.1 | Personal scope (residents of contracting states) |
| Art.4 | Residence (tie-breaker rules) |
| Art.5 | Permanent Establishment (PE) |
| Art.7 | Business profits (taxable only if PE in source state) |
| Art.10 | Dividends (reduced withholding rates) |
| Art.11 | Interest (reduced withholding rates) |
| Art.12 | Royalties and Fees for Technical Services |
| Art.13 | Capital gains |
| Art.15 | Employment income |
| Art.23/24 | Methods for elimination of double taxation |
Recall Check
- What is the difference between S.90 (bilateral) and S.91 (unilateral) relief?
- What document must be obtained to claim DTAA benefit?
- Can an assessee choose between the domestic law and the DTAA?
Key Cases
Union of India v. Azadi Bachao Andolan (2003) Union-of-India-v-Azadi-Bachao-Andolan-2003 Issue: Whether the India-Mauritius DTAA allows capital gains exemption for Mauritius residents investing in Indian companies, even if they are shell entities. Rule: S.90; a DTAA once entered into is binding; the court will not look behind a TRC issued by a treaty partner. Held: Treaty shopping through Mauritius is legitimate. A valid TRC issued by the Mauritian government is sufficient proof of residence. India cannot go behind the TRC to deny treaty benefits. The DTAA must be honoured.
Engineering Analysis Centre of Excellence v. CIT (2021) Engineering-Analysis-Centre-v-CIT-2021 Issue: Whether payments for use of software are "royalties" under DTAA requiring TDS under S.195. Rule: S.90 read with relevant DTAA; the definition of "royalties" in treaty must be interpreted in context. Held: Payment for purchase of off-the-shelf software is not "royalty" under most DTAAs. It is payment for a copyrighted article (not the copyright itself). No TDS liability under S.195 for such payments.
Distinctions
| Feature | Bilateral Relief (S.90) | Unilateral Relief (S.91) |
|---|---|---|
| Basis | Treaty/Agreement between two countries | Domestic law provision |
| Applicability | Countries with which India has DTAA | Countries without DTAA |
| Scope | May exempt income entirely or provide credit | Only provides tax credit (lower of two rates) |
| Beneficial provision | Assessee chooses better of Act or DTAA (S.90(2)) | Only relief under S.91 (no choice) |
| TRC required | Yes (S.90(4)) | Not applicable |
| Treaty shopping | Possible (subject to anti-abuse) | Not applicable |
| Override domestic law | Yes, to extent more beneficial | No (domestic provision) |
Flashcards
Q: What is the bilateral mechanism for double taxation relief? A: Section 90: India enters into DTAA with foreign countries; assessee can choose more beneficial provision between Act and DTAA.
Q: What is the unilateral relief under S.91? A: Where no DTAA exists, India allows credit for foreign tax paid, limited to the lower of Indian tax rate or foreign tax rate on doubly-taxed income.
Q: What is a Tax Residency Certificate? A: A certificate issued by the government of a country confirming an assessee's tax residence in that country; mandatory for claiming DTAA benefits (S.90(4)).
Q: Can India look behind a TRC issued by a treaty partner? A: No. Per Azadi Bachao Andolan, a valid TRC is conclusive proof of residence for treaty purposes.
Q: How many comprehensive DTAAs does India have? A: Over 90 comprehensive Double Taxation Avoidance Agreements.
Q: What is the significance of S.90(2)? A: It allows the assessee to choose whichever provision (domestic Act or DTAA) is more beneficial.
Exam Scenario
ABC Inc, a company incorporated in the USA, earns Rs.50 lakh as fees for technical services from an Indian company. Under domestic law (S.115A), tax is 10% + surcharge + cess (effective ~10.4%). Under the India-USA DTAA, FTS is taxable at 15% in the source country if there is no PE. Advise on tax liability and treaty benefit.
Approach: Under S.90(2), the assessee can choose the more beneficial provision. Domestic law: 10.4% of Rs.50 lakh = Rs.5.2 lakh. DTAA rate: 15% = Rs.7.5 lakh. The domestic rate (10.4%) is more beneficial than the DTAA rate (15%). ABC Inc should opt for domestic law provisions. S.90(2) ensures the assessee never pays MORE than the lower of domestic or treaty rate. Here, the Act itself provides a lower rate, so the DTAA doesn't help.