The Double Tax Avoidance Agreement (DTAA) is essentially a bilateral agreement entered into between two countries. The basic objective is to promote and foster economic trade and investment between two Countries by avoiding double taxation.
Objective of tax treaties:
International double taxation has adverse effects on the trade and services and on movement of capital and people. Taxation of the same income by two or more countries would constitute a prohibitive burden on the tax-payer. The domestic laws of most countries, including India
The double tax treaties (also called Double Taxation Avoidance Agreements or “DTAA”) are negotiated under public international law and governed by the principles laid down under the Vienna Convention on the Law of Treaties.
Need for DTAA
The need for Agreement for Double Tax Avoidance arises because of conflicting rules in two different countries regarding chargeability of income based on receipt and accrual, residential status etc. As there is no clear definition of income and taxability thereof, which is accepted internationally, an income may become liable to tax in two countries.
In such a case, the two countries have an Agreement for Double Tax Avoidance, in which case the possibilities are:
1. The income is taxed only in one country.
2. The income is exempt in both countries.
3. The income is taxed in both countries, but credit for tax paid in one country is given against tax payable in the other country.
In India
In exercise of the powers conferred by sub-section (3) of section 90A of the Income-tax Act, 1961 (43 of 1961), the Central Government hereby notifies that where an agreement entered into by any specified association in India with any specified association in the specified territory outside India and adopted by the Central Government by way of notification in the official Gazette, for granting relief of tax, or as the case may be, avoidance of double taxation, provides that any income of a resident of India "may be taxed" in the other country, 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 (43 of 1961), and relief shall be granted in accordance with the method for elimination or avoidance of double taxation provided in such agreement.
Scope of the provision - In case of conflict between Income-tax Act and provisions of DTAA, provisions of DTAA would prevail over provisions of Income-tax Act. Section 90(2) makes it clear that the Act gets modified in regard to the assessee insofar as the agreement is concerned if it falls within the category stated therein - CIT v. P.V.A.L. Kulandagan Chettiar [2004] 137 Taxman 460/267 ITR 654 (SC).
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 Double Taxation Agreement - CIT v. Vishakhapatnam Port Trust [1983] 144 ITR 146 (AP).
The Double Taxation Avoidance Agreement (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 - CIT v. Hindustan Paper Corporation Ltd. [1994] 77 Taxman 450 (Cal.).
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 other - CIT v. P.V.A.L. Kulandagan Chettiar [2004] 137 Taxman 460/267 ITR 654 (SC).
When foreign assessment is not final - The law requires that an application for double taxation relief should be made on the basis of taxes paid both in India
Agreement with Malaysia - In absence of permanent establishment in India in regard 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 - CIT v. P.V.A.L. Kulandagan Chettiar [2004] 137 Taxman 460/267 ITR 654 (SC).
In terms of the Treaty wherever 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 is income and, therefore, the relevant article of DTAA would be attracted - CIT v. P.V.A.L. Kulandagan Chettiar [2004] 137 Taxman 460/267 ITR 654 (SC).
Agreement with Mauritius - Circular No. 789, dated 13-4-2000, clarifying that FIIs, etc., which are resident in Mauritius, would not be taxable in India on income from capital gains arising in India on sale of shares is valid and efficacious. Being a circular within the meaning of section 90, it must have the legal consequences contemplated by sub-section (2) of section 90. In other words, the Circular shall prevail even if inconsistent with the provisions of Income-tax Act, 1961 insofar as assessees covered by the provisions of the DTAA are concerned. There is no merit in the contention that the delegate of a legislative power cannot exercise the power of exemption in a fiscal statute. Section 90 enables the Central Government to enter into a DTAA with the foreign Government. When the requisite notification has been issued thereunder, the provisions of sub-section (2) of section 90 spring into operation and an assessee who is covered by the provisions of the DTAA is entitled to seek benefits thereunder, even if the provisions of the DTAA are inconsistent with the provisions of the Act. One cannot accept the contention that the DTAA with Mauritius is ultra vires the powers of the Central Government under section 90 on account of its susceptibility to ‘treaty shopping’ on behalf of the residents of third countries - Union of India v. Azadi Bachao Andolan [2003] 132 Taxman 373/263 ITR 706 (SC).
Agreement with U.S.A. - Where respondent-non-resident company entered into agreement with a group company MSAS, incorporated in India, for support services by latter, respondent-company could not be said to have a fixed place PE in India under article 5(1) of DTAA as MSAS would be performing only back office operations in India; nor was there an agency PE as MSAS had no authority to enter into or conclude contracts; nor would stewardship activity of respondent-company in India constituted a PE under article 5(2)(1); however deputationists of respondent-company in India would constitute a service PE - DIT (International Taxation) v. Morgan Stanley & Co. Inc. [2007] 162 Taxman 165/292 ITR 416 (SC).
Agreement between the Government of India and the Government of Malaysia for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to taxes on income was entered into on 1-4-1977. This Agreement is applicable to persons who are resident of one or both of the Contracting States. Under Article II taxes which are the subject of the Agreement are as follows :—
IN MALAYSIA
(i) the income-tax;
(ii) the supplementary income-tax, that is, profits tax, development tax and timber profits tax; and
(iii) the petroleum income-tax;
IN INDIA
(i) the income-tax and any surcharge on income-tax imposed under the Income-tax Act, 1961 (43 of 1961);
(ii) the surtax imposed under Companies (Profits) Surtax Act, 1974 (7 of 1964)
This agreement also applies to any other taxes of a substantially similar character to those referred to in the preceding paragraph imposed in either Contracting State
“ARTICLE IV
Fiscal Domicile
1. In this Agreement, unless the context otherwise requires :—
(a) the term “resident of Malaysia
(i) an individual who is ordinarily resident in Malaysia
(ii) a person other than individual who is resident in Malaysia
for the basis year for a year of assessment for the purpose of Malaysian tax;
(b) the term “resident of India ” means a person who is treated as a resident of India
(c) the terms “resident of one of the Contracting States” and “resident of the other Contracting State ” mean a resident of Malaysia or a resident of India
2. Where by reason of the provisions of paragraph 1 of this Article an individual is a resident of both Contracting States
(a) he shall be deemed to be a resident of the Contracting State Contracting State
(b) if the Contracting State with which his personal and economic relations are closer 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
(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
(d) if he is a citizen of both Contracting State
3. Where by reason of the provisions of paragraph 1 of this Article 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 States, then it shall be deemed to be a resident of the Contracting State in which its place of effective management is situated.
ARTICLE V
Permanent Establishment
1. For the purposes of this Agreement, the term “permanent establishment” means a fixed place of business in which the business of the enterprise is wholly or partly carried on.
2. The term “permanent establishment” shall include especially :
(a) a place of management;
(b) a branch;
(c) an office;
(d) a factory;
(e) a workshop;
(f) a warehouse;
(g) a mine, oil well, quarry or other place of extraction of natural resources;
(h) a building site or construction, installation or assembly project which exists for more than six months;
(i) a farm or plantation;
(j) a place of extraction of timber or forest produce.
3. The term “permanent establishment” shall not be deemed to include:
(a) the use of facilities solely for the purpose of storage, display or delivery 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, display or delivery.
(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 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 similar activities which has a preparatory or auxiliary character, for the enterprise.
4. An enterprise of one of the Contracting States shall be deemed to have a permanent establishment in the other Contracting State if:
(a) it carries on supervisory activities in that other Contracting State for more than six months in connection with a construction, installation or assembly project which is being undertaken in that other Contracting State
(b) it carries on a business which consists of providing the services of public entertainers (such as stage, motion picture, radio or television artistes and musicians) or athletes in that other Contracting State unless the enterprise is directly or indirectly supported, wholly or substantially, from the public funds of the Government of the first-mentioned Contracting State in connection with the provision of such services.
5. Subject to the provisions of paragraph 6 of this Article, a person acting in one of the Contracting States on behalf of an enterprise of the other Contracting State shall be deemed to be a permanent establishment in the first-mentioned Contracting State if:
(a) he has, and habitually exercises in that first-mentioned 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 maintains in the first-mentioned Contracting State
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
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 or the other:
TAXATION OF INCOME
ARTICLE VI
Income from Immovable Property
1. Income from immovable property may be taxed in the Contracting State
2. The term “immovable property” shall be defined in accordance with the law of the Contracting State
3. The provisions of paragraph 1, of this Article shall 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 of this Article shall also apply to the income from immovable property of an enterprise.
ARTICLE VII
Business Profits
1. The income or 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 Contracting State
2. Where an enterprise of one of the Contracting State carries on business in the other Contracting State through a permanent establishment situated therein, there shall be in each Contracting State be attributed to that permanent establishment the income or 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.
3. In the determination of the Income or profits of a permanent establishment, there shall be allowed as deductions expenses which are incurred for the purposes of the permanent establishment including executive and general administrative expenses so incurred, whether in the State in which the permanent establishment is situated or else-where.
4. In so far as it has been customary in a Contracting State to determine the income or profits to be attributed to a permanent establishment on the basis of an apportionment of the total income or profits of the enterprise to its various parts, nothing in paragraph 2 or paragraph 3 of this Article shall preclude such Contracting State from determining the income or profits to be taxed by such an apportionment as may be customary; the method of apportionment adopted shall, however, be such that the result shall be in accordance with the principles laid down in this Article.
5. No income or profits shall be attributed to a permanent establishment by reason of the mere purchase by that permanent establishment of goods or merchandise for the purpose of export to the enterprise of which it is the permanent establishment.
6. Where income or profits include items of income which are dealt with separately in other Articles of this Agreement, then the provisions of those Articles shall not be affected by the provisions of this Article.
ELIMINATION OF DOUBLE TAXATION
ARTICLE XXII
1. The laws in force in either of the Contracting States will continue to govern the taxation of income in the respective Contracting States except where provisions to the contrary are made in this Agreement.
2. (a) The amount of Malaysian tax payable, under the laws of Malaysia, and in accordance with the provisions of this Agreement, whether directly or by deduction, by a resident of India, in respect of income from sources within Malaysia which has been subjected to tax both in India and Malaysia, shall be allowed as a credit against the Indian tax payable in respect of such income but in an amount not exceeding that proportion of Indian tax which such income bears to the entire income chargeable to Indian tax.
(b) For the purposes of the credit referred to in sub-paragraph (a) above, there shall be deemed to have been paid by the resident of India
(i) the amount of tax which would have been paid in respect of royalties but for the exemption provided in paragraph 2 of Article 13; and
(ii) the amount of tax which would have been paid if the Malaysian tax had not been reduced or relieved in accordance with the special incentive means as designed to promote economic development in Malaysia—
(aa) which are set forth in sections 21, 22 and 26 of the Investment Incentives Act, 1968 of Malaysia
(bb) which may be introduced in future in the Income-tax Act, 1967, Supplementary Income-tax Act, 1967, Petroleum (Income-tax) Act, 1967 or Investment Incentives Act, 1968 in modification of or in addition to the existing measures :
Provided an agreement is made between the two Contracting States in respect of the scope of the benefit accorded by the said measures.
3. (a) The amount of Indian tax payable, under the laws of India and in accordance with the provisions of this Agreement, whether directly or by deduction, by a resident of Malaysia, in respect of income from sources within India which has been subjected to tax both in India and Malaysia, shall be allowed as a credit against Malaysian tax payable in respect of such income, but in an amount not exceeding that proportion of Malaysian tax which such income bears to the entire income chargeable to Malaysian tax.
(b) For the purposes of the credit referred to in sub-paragraph (a) above, there shall be deemed to have been paid by the resident of Malaysia the amount which would have been paid if the Indian tax had not been reduced or relieved in accordance with the special incentive measures designed to promote economic development in India—
(i) in relation to royalties, as set forth in the relevant annual Finance Act of India; and
(ii) in relation to other income as set forth in the following sections of the Income-tax Act, 1961 of India or which may be introduced in future in the Indian tax laws in modification of or in addition to the existing measures, provided that an agreement is made between the two Governments in respect of the scope of the benefit accorded by the said measures:—
(aa) Section 10(15)(iv)(b) and (c) - relating to exemption from tax of (a) an approved foreign financial institution in respect of interest on moneys lent by it to an industrial undertaking in India under a loan agreement; and (b) a non-resident in respect of interest on moneys lent or credit facilities allowed by him to an industrial undertaking in India for the purchase outside India of raw materials or capital plant and machinery;
(bb) Section 33 - relating to development rebate in respect of ships, machinery or plant;
(cc) Section 80J - relating to deduction in respect of profits and gains from eligible industrial undertaking or ships or hotels;
(dd) Section 80K - relating to deduction in respect of dividends attributable to profits and gains from eligible industrial undertakings or ships or hotels; and
(ee) Section 80M - relating to deduction in respect of certain dividends received by a company from a domestic company. This sub-clause shall apply in relation to a company which is a resident of Malaysia
(iii) any other incentive measure as may be agreed from time to time between the two Contracting States.”
11. Now, we shall first deal with the argument advanced on behalf of the Union of India by the learned Attorney General.
Here in these appeals we are concerned with income arising from immovable property. We will proceed on the basis that fiscal connection arises in relation to taxation either by reason of residence of the assessee or by reason of the location of the immovable property which is the source of income. In the clauses which we have set out above fiscal domicile is set out in Article IV which states that in a case where the person is a resident in both the Contracting States fiscal domicile will have to be determined with reference to the fact that if the Contracting State with which his personal and economic relations are closer he shall be deemed to be a resident of the Contracting State in which he has an habitual abode. This implies that tax liability arises in respect of a person residing in both the Contracting State has to be determined with reference to his close personal and economic relations with one or the other.
12. The immovable property in question is situate in Malaysia India in regard to carrying on the business of rubber plantations in Malaysia India because of closer economic relations between the assessee and Malaysia
13. We need not to enter into an exercise in semantics as to whether the expression “may be” will mean allocation of power to tax or is only one of the options and it only grants power to tax in that State and unless tax is imposed and paid no relief can be sought. Reading the Treaty in question as a whole when it is intended that even though it is possible for a resident in India to be taxed in terms of sections 4 and 5, if he is deemed to be a resident of a Contracting State where his personal and economic relations are closer, then his residence in India will become irrelevant. The Treaty will have to be interpreted as such and prevails over sections 4 and 5 of the Act. Therefore, we are of the view that the High Court is justified in reaching its conclusion, though for different reasons from those stated by the High Court.
14. The contention put forth by the learned Attorney General that capital gains is not income and, therefore, is not covered by the Treaty cannot be accepted at all because for purposes of the Act capital gains is always treated as income arising out of immovable property though subject to different kinds of treatment. Therefore, the contention advanced by the learned Attorney General that it is not a part of the Treaty cannot be accepted because in the terms of Treaty wherever any expression is not defined the expression defined in the Income-tax Act would be attracted. The definition of ‘income’ would, therefore, include capital gains. Thus, capital gains derived from immovable property is income and therefore Article 6 would be attracted.
15. The question as to whether by reason of the sale of the property not having been used whether such income is covered by the Treaty, in the Treaty it is specifically provided in sub-clause (2) of Article II that the agreement shall also apply to any other taxes of a substantially similar character to those referred to in the preceding paragraphs imposed in either Contracting State after the date of signature of this agreement. And Income-tax is specifically set out in sub-clause (b) of clause (1) of Article II. Tax is levied on capital gains and certainly when capital gains is treated as one kind of income-tax it also becomes income and assumes substantially similar character of tax referred to in the preceding paragraph.
16. Taxation policy is within the power of the Government and section 90 of the Income-tax Act enables the Government to formulate its policy through treaties entered into by it and even such treaty treats the fiscal domicile in one State or the other and thus prevails over the other provisions of the Income-tax Act, it would be unnecessary to refer to the terms addressed in OECD or in any of the decisions of foreign jurisdiction or in any other agreements.
17. In this view of the matter, it is unnecessary to refer to the decisions cited before us since we have taken the view with reference to clauses set out under the Agreement. We, therefore, find no merit it in these appeals and they stand dismissed.
The agreement :
The Government of India has entered into various agreements (also called Conventions or Treaties) with Governments of different countries for the avoidance of double taxation and for prevention of fiscal evasion. One such agreement between the Government of India and the Government of Mauritius dated April 1, 1983, is the subject-matter of the present controversy. The purpose of this agreement, as specified in the preamble, is "avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and capital gains and for the encouragement of mutual trade and investment".
After completing the formalities prescribed in article 28 this agreement was brought into force by a notification dated December 6, 1983 (see [1984] 146 ITR (St.) 214), issued in exercise of the powers of the Government of India under section 90 of the Act read with section 24A of the Companies (Profits) Surtax Act, 1964. As stated in the Agreement, its purpose is to avoid double taxation and to encourage mutual trade and investment between the two countries, as also to bring an environment of certainty in the matters of tax affairs in both countries.
Some of the salient provisions of the Agreement need to be noticed at this juncture. The Agreement defines a number of terms used therein and also contains a residuary clause. In the application of the provisions of the Agreement by the Contracting States any term not defined therein shall, unless the context otherwise requires, have the meaning which it has under the laws in force in that Contracting State, relating to the words which are the subject of the convention. Article 3(e) defines "person" so as to include an individual, a company and any other entity, corporate or non-corporate "which is treated as a taxable unit under the taxation laws in force in the respective Contracting States". The Central Government in the Ministry of Finance (Department of Revenue), in the case of India , and the Commissioner of Income-tax in the case of Mauritius St. ) 214, 216) :
"Article 4 : Residents :
1. For the purposes of this Convention, the term ‘resident of a Contracting State’ means any person who under the laws of that State, is liable to taxation therein by reason of his domicile, residence, place of management or any other criterion of similar nature. The terms ‘resident of India ’ and ‘resident of Mauritius
2. Where by reason of the provisions of paragraph 1, an individual is a resident of both Contracting States, then his residential status for the purposes of this convention shall be determined in accordance with the following rules :
(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 (hereinafter referred to as his ‘centre of vital interests’) ;
(b) if the Contracting State in which he has his centre of vital interest cannot be determined, or if he does not have 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 State or in neither of them, he shall be deemed to be a resident of the Contracting State
(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 the Contracting States , then it shall be deemed to be a resident of the Contracting State
The agreement provides for allocation of taxing jurisdiction to different contracting parties in respect of different heads of income. Detailed rules are stipulated with regard to taxing of dividends under article 10, interest under article 11, royalties under article 12, capital gains under article 13, income derived from independent personal services in article 14, income from dependent personal services in article 15, directors’ fees in article 16, income of artistes and athletes in article 17, Governmental functions in article 18, income of students and apprentices in article 20, income of professors, teachers and research scholars in article 21, and other income in article 22.
Article 13 deals with the manner of taxation of capital gains. It provides that gains from the alienation of immovable property may be taxed in the Contracting State Contracting State Contracting State
Article 25 lays down the Mutual Agreement Procedure. It provides that 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 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. Thereupon, if the objection appears to be justified, the competent authority shall attempt to resolve the case by mutual agreement with the competent authority of the other Contracting State
How to apply DTAA
The process of operation of a double taxation convention can be divided into a series of steps, involving the different types of provisions.
1. Determine if the issue is within the scope of the convention:
This involves determining firstly whether the taxpayer is within the personal scope in Article 1- that is, “persons who are residents of one or both Contracting States”. This may involve confirming that the taxpayer is a “person” within in the definition of Article 3(1) (a); it will involve confirming that the taxpayer is resident of a Contracting State
2. Check that the treaty applies to the tax in issue- is it a tax listed in Article 2 (or a tax substantially similar to such a tax).
3. Thirdly, check that the treaty is in operation for the taxable period in issue – that the treaty is in force (Article 29) and has not been terminated (Article 30).
4. Apply the relevant definitions: At this stage the relevant definition provisions (if any) can be applied. Thus, for example, if the taxpayer is a resident of both Contracting States, the tiebreakers in Article 4(2) and (3) have to be applied to determine a single residence for treaty purposes, similarly, if it is necessary to decide whether the taxpayer has a permanent establishment in a state, then Article 5 is relevant.
5. Determine which of the substantive provisions apply: The substantive provisions apply to different categories of income, capital gains or capital; it is necessary to determine which applies. This is a process of characterization. In many cases this may be straightforward; in others the task may not be easy. For example, payments, which are referred to as “royalties”, may in fact fall under Article 7 (Business Profits), 12 (Royalties), 13 (Capital Gains) or 14 (Independent Personal Services). Assistance in characterizing the items can be gained from the Commentaries, case law and reports of the Committee on Fiscal Affairs
6. Apply the substantive article: Substantive articles generally take one of three forms
(i)The state of source may tax without limitation. Examples are: income from house property situated in that state, and business profits derived from a permanent establishment there.
(ii) The state source may tax up to a maximum: here the treaty sets a ceiling to the level of taxation at source. Examples in the OECD Models are: dividends from companies resident in that state and interest derived from there.
(iii) The state of source may not tax: here, the state of residence of the tax payer alone has jurisdiction to tax. Examples in the OECD Model are: business profit where there is no permanent establishment in the state of source.
7. Apply the provisions for the elimination of double taxation : Every one of the substantive articles must be considered along with article 23 which sets out the methods for the elimination of double taxation
No comments:
Post a Comment