Double Taxation Avoidance Agreement Accounting Essay

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The tax rates are not very comfortable, the impact of double tax burden can become onerous and affect growth of the International Business. The present chapter emphazises on the need to review the provisions of double taxation, which is a must for international business to thrive. Double Taxation Avoidance Agreement (DTAA) is a tool established under our Direct tax laws either to eliminate or to reduce the tax burden of a resident assessee, which ultimately helps in enhancing International Business. Focus is also laid on how Double Taxation Avoidance Agreement (DTAA) is being exploited by 'Treaty Shopping', so needs to be tackled by suitable amendments.

The chapter is elaborated on the following lines;

2.1 Double Taxation

2.2 Need And Purpose Of Double Taxation Avoidance Agreements

2.3 Classification Of Double Taxation Avoidance Agreement

2.4 Pattern Of Taxation

2.5 Indian Government Policy With Respect To Double Taxation Avoidance Agreement

2.6 Double Taxation Relief Mechanisms

2.7 Tax Sparing

2.8 'Treaty Shopping '

2.9 Tackling 'Treaty Shopping '

2.10 Double Taxation Relief Provisions In India

2.10.1 Bilateral Relief: Section 90, Section 90A

2.10.2 Recent Amendments In Section 90 And 90A

2.10.3 Unilateral Relief: Section 91

2.11 Conclusion

2.1 Double taxation-

The interaction of two tax systems each belonging to different country, can result in double taxation. Every country wishes to tax the income generated within its territory on the basis of one or more factors, for example, location of the source, residence of taxable entity, maintenance of Permanent Establishment and so on. If the same income is taxed twice in the hands of same entity it would give rise to severe consequences and impair economic development. In simpler terms, International double taxation can be defined as a scenario when two different countries impose a comparable tax on the same potential taxpayer on the same taxable income/source. This results in overlapping claims of two countries in accordance with their respective domestic tax laws. This also kills the will to work and will to save of the taxable entity.


Double Taxation Avoidance Agreement (DTAA) agreements are required due to conflicting rules in two different countries regarding tax chargeability of income. In the absence of clearly drawn provisions under the domestic tax laws, an income may become liable to tax in the resident country of the taxpayer; as well as in the source country of the income.

In order to promote international trade and investments both the countries may enter into a Double Taxation Avoidance Agreement (DTAA) offering possible solutions as under;

An income is taxed only once (in either country) or

an income is exempt in both countries; or

an income is, although, taxed in both countries, but credit for tax paid in one country is given against tax payable in the other countries.

The OECD Committee on Fiscal Affairs has further summarized the purpose of Double Taxation Avoidance Agreement (DTAA) in the following way:

The principal purpose of double tax conventions is" to promote by eliminating international double taxation, exchanges of goods and services and the movement of capital and persons. It is also a purpose of tax conventions to prevent tax avoidance and evasion."

Double taxation carries adverse impact on the international trade and services and on the movement of capital and people. Taxation of the same income in two or more countries would result in an unbearable burden, of restrictive nature, discouraging the tax payer from entering into cross-border transaction and movements.

The Double Taxation Avoidance Agreement (DTAA) are negotiated under public international law and governed by the principles laid down under the Vienna Convention on the Law of Treaties.

The objectives of a Double Taxation Avoidance Agreement (DTAA) can be summarized as under;

Avoiding double taxation, which would otherwise be imposable on the income arising from an international transaction or event if each country imposed its own taxes on the same income or capital;

Providing a framework of rule for allocating the tax imposed between the concerned countries who are parties to the Double Taxation Avoidance Agreement (DTAA).

Preventing the evasion of taxation on international transactions A Double Taxation Avoidance Agreement (DTAA) also outlines the governing rules and framework empowering the taxing authorities to seek and exchange information with each other ensuring that the benefits as provided under the treaties is not misused by the taxpayers of either country; or by the resident of a third country by way of 'Treaty Shopping'.

A Double Taxation Avoidance Agreement (DTAA) further outlines a dispute resolution framework that the contracting states may invoke to relieve double taxation in particular circumstances not dealt with explicitly under the terms of the Double Taxation Avoidance Agreement (DTAA).


Classification of Double Taxation Avoidance Agreement (DTAA) is based upon the following two factors:

On the basis of scope.

On the basis of parties to treaties

on the basis of scope, the following agreements are possible:

a) Comprehensive Double Taxation Agreements- They provide for taxes on income, capital gains, etc. Comprehensive agreements ensure that the taxpayers in both the countries would be treated equally and on equitable basis, in respect of the problems relating to double taxation.

b) Limited Double Taxation Agreements - They refer only to income from shipping and air transport, or estates, inheritance and gifts.

On the basis of parties to treaties, the following agreements are possible:

a) Bilateral Treaties- Double Taxation Avoidance Agreement (DTAA) entered between two countries

b) Multilateral Treaties- Double Taxation Avoidance Agreement (DTAA) entered between a group of countries e.g. convention between Nordiac countries including Denmark, Finland, Iceland Norway and Sweden.

The underlying objective of tax treaties is to reduce taxes of one treaty country for residents of the other treaty country and thus reduce double taxation of the same income. Most of the treaties:

define which taxes are covered and who is a resident and eligible for benefits,

reduce the amounts of tax withheld from interest, dividends, and royalties paid by a resident of one country to residents of the other country,

limit tax of one country on business income of a resident of the other country to that income from a permanent establishment in the first country,

define circumstances in which income of individuals resident in one country will be taxed in the other country, including salary, self employment, pension, and other income,

provide for exemption of certain types of organizations or individuals, and

Provide procedural frameworks for enforcement and dispute resolution.

The stated goals for entering into a treaty include reduction of double taxation, eliminating tax evasion, and encouraging cross-border trade efficiency. Tax treaties improve certainty for taxpayers and tax authorities in their international dealings.

2.4 Pattern of taxation

Double taxation agreements allocate jurisdiction with respect to the right to tax a particular kind of income. The objective underlying tax treaties is to share the revenues between two countries. If each country gets its due share of tax revenues, the bilateral and multilateral trade prospers and the overall tax collection also increases as a result of which both countries tend to benefit.

The OECD Model emphasizes on the residence basis whereas the UN Model recognizes the right of the source state to tax income. However both the models agree that:

1. Income from the business is taxed

a) only in the resident country, if the business entity has no activity in the source state; 

b) only on the source state, if there is a fixed place of business, i.e. Permanent Establishment and to the extent it is attributable to that place.

2. Income from immovable property arising to a non-resident is taxed primarily in the state of its location, i.e. the source state.

 3. Income from movable property such as dividends, interest and royalties are primarily taxed in the resident state, but the source state may impose a reduced tax

2.5 Indian Government Policy With Respect To Double Taxation Avoidance Agreements

The policy adopted by the Indian government in regard to double taxation treaties is as follows:

Trading with India should be relieved of Indian taxes considerably so as to promote its economic and industrial development.

There should be co-ordination of Indian taxation with foreign tax legislation for Indian and foreign companies trading with India

The agreements are intended to permit the Indian authorities to co-operate with the foreign tax administration.

Tax treaties are a good compromise between taxation at source and taxation in the country of residence.

India primarily follows the UN model convention and therefore the tax-sparing and credit methods for elimination of double taxation are found in most of the Indian treaties and source-based taxation is applicable in respect of the articles on 'royalties' and 'other income'.


There is no international consensus on the appropriate method for granting relief from double taxation. The following three methods are in common use.

Deduction method: the residence country allows its taxpayer a deduction for income taxes, paid to a foreign government in respect of foreign-source income.

Exemption method: the residence country provides its taxpayer with an exemption for foreign-source income.

Credit method; the residence country provides its taxpayer with a credit against taxes otherwise payable for income taxes paid to a foreign country.

Both the credit and exemption methods are authorized by the OECD and UN model treaties.


A tax sparing credit is a credit granted by the residence country for foreign taxes that for some reason were not actually paid to the source country but that would have been paid under the country's normal tax rules. The usual reason for the tax not being paid under is that the source country has provided a tax holiday or other tax incentive to foreign investor as an encouragement to invest or conduct business in the country. In the absence of tax sparing, the actual beneficiary of a tax incentive provided by a source country to attract foreign investment may be the residence country rather than the foreign investor. This result occurs whenever the reduction in source-country tax is replaced by an increase in residency-country tax.

The concept of tax sparing is illustrated by the following example:

Country J, a developing country,(corporate tax rate 30%) offers foreign corporations a 10 year tax holiday if they establish a manufacturing plant in country J. K Company, a resident of country K (corporate tax rate40% and uses foreign tax credit system), establishes a plant in country J. K Company earns a profit of 1000. If country K is willing to give a tax sparing credit to K Company for the taxes forgone by country J then K Company would get the benefit of the tax holiday. Its income in country J would be 1000, and it would pay no tax to country J. It would have an initial tax obligation of 400 in country K but would be allowed to reduce the amount by the 300 of tax forgone by country J, for a total tax liability of 100.


Income from country J 1000

Country J tax before holiday 300

Tax holiday credit 300

Country J tax 0


Income from country K 1000

Country K tax 400

Tax sparing credit 300

Total tax of country K 100

Country J has no genuine complaint about the outcome because it does not bother whether its forgone tax revenue went to K Company or to country K. Its real concern would be about potential investor from country J that would invest in country K only if they get the benefits of the tax holiday.

Tax sparing is a feature of tax treaties between developed and developing countries. Developed countries voluntarily grant tax sparing in their treaties with developing countries to encourage investment in their countries.

Tax sparing is not required if the country of residence of the potential investor is benefitted with the exemption method to avoid double taxation. For these investors, the source country tax is the only tax. Thus any reduction in source taxation automatically accrues to their benefit.

Thus, tax sparing credit is an extension of the normal and regular tax credit to taxes that are spared by the source country i.e. forgiven or reduced due to rebates with the intention of providing incentives for investments.

The regular tax credit is a tool for prevention of double taxation, but the tax sparing credit extends the relief granted by the source country to the investor in the residence country as an incentive to stimulate foreign investment flows and does not seek reciprocal arrangements by the developing countries.

However, generous tax sparing credits in a particular treaty often encourage residents of third countries to incorporate conduit entities in the country granting tax sparing.


'Treaty Shopping' refers to the act of a resident of a third country taking advantage of a fiscal treaty between two states. A person acts through a legal entity incorporated in a state to obtain treaty benefits that would not be available directly to such person.

Tax payer may also engage in 'Treaty Shopping' to obtain any special treaty benefit not otherwise available. Most 'Treaty Shopping' attempts of tax payer aims at obtaining reduced withholding rates on dividends, interest and royalties.

One form of 'Treaty Shopping' involves the use of unrelated financial intermediaries located in a treaty country to make investment for tax payer who are not eligible for any treaty benefits.

For example,if P is a resident of PH, a tax haven country that does not have a tax treaty with country M. Country M does have a tax treaty with country K under which country M reduces its withholding tax rate from 30% to zero on interest paid to residents of country K . P invests 1 million with K Company, an independent financial intermediary who is resident in country K. K Company uses the one million to purchase a bond issued by unrelated country M manufacturer. The manufacturer pays K Company one lakh as interest on bonds. K Company claims one lakh to be exempt under treaty. K Company pays P one lakh minus some commission as a return on P's original investment.

Another form of 'Treaty Shopping' involves use of a controlled corporation organised in a treaty country.

For example, P organises a wholly-owned affiliate C Company in country C. P subscribes two million for shares of C Company and C Company uses this money to purchase listed shares in country J. C Company receives dividends of four lakhs on the shares. Country J has a treaty with country C whereby withholding tax will be reduced from 30% to 15%. As a resident of country C, C Company claims the benefit of treaty to reduce its tax. C Company is also exempt from tax in country C because it does not tax foreign dividends under its domestic tax laws.

'Treaty Shopping' is the establishment of base companies in other states solely for the purpose of enjoying the benefit of a particular treaty rules existing between the state involved and the third state. An example of 'Treaty Shopping' can be the India-Mauritius double Taxation agreement where various companies have been incorporated in Mauritius to take advantage of the Indo-Mauritius Double Taxation Avoidance Agreement (DTAA) in which capital gains are to be assessed as per the law of the state of residence of the entity. However, under the Mauritian law, tax is not levied on capital gains which means that the capital gains made by the Mauritian entity on transfer of shares in an Indian company go unassessed.


As 'Treaty Shopping' is a major threat to the domestic tax base. A lot of countries are adopting a "Limitation of Benefits" clause in the tax treaties so as to restrict third parties from taking advantage of tax treaties between two other states.

An LOB provision is an anti-abuse provision that sets out which residents of the Contracting States are entitled to the treaty's benefits. The purpose of an LOB provision is to limit the ability of third country residents to obtain benefits under the said treaty. In general,a company resident in a contracting state is not denied treaty benefits if the income it obtains in the other Contracting State is derived from the active conduct of a trade or business (other than the business of making investments) in its country of residence.

A company that fails to meet this active-business test must satisfy both of the following conditions to qualify for treaty benefits:

The corporation's gross income may not be used in substantial part to pay interest, royalties or other liabilities to persons not entitled to treaty benefits, and

Over 50 percent of the shares of the company (by votes and value) must be owned, directly or indirectly, by certain qualified persons, individuals who are residents of one of the Contracting States.

The first of these conditions is intended to combat 'Treaty Shopping' of the type illustrated in the first example above. The second condition addresses 'Treaty Shopping' of the type illustrated in the second example.

The introduction of LOB provisions in recent Indian treaties is indicative of a policy to discourage 'Treaty Shopping'.

'Treaty Shopping' must be checked because in a Treaty one country is sacrificing its right to tax the income in favour of another country. The benefit should not go to an intended third country.


India has comprehensive Double Taxation Avoidance Agreements (DTAA) with 83 countries. This means that there are agreed rates of tax and jurisdiction on specified types of income arising in a country to a tax resident of another country. Under the Income Tax Act 1961 of India, there are two provisions, Section 90 and Section 91, which provide specific relief to taxpayers to save them from double taxation. Section 90 is for taxpayers who have paid the tax to a country with which India has signed Double Taxation Avoidance Agreement (DTAA), while Section 91 provides relief to tax payers who have paid tax to a country with which India has not signed a Double Taxation Avoidance Agreement (DTAA). Thus, India gives relief to both kinds of taxpayers.


Section 90 empowers the central government to enter into any agreement with the government of any country outside India, or specified territory outside India to provide for the following:

granting relief in respect of -

(i)income on which income tax has been paid both in India and in that country or specified territory, as the case may be: or

(ii)income-tax chargeable in India and under the corresponding law in force in that country or specified territory, as the case may be, to promote mutual economic relations, trade and investment, or

the type of income which shall be chargeable to tax in either country or specified territory, as the case may be so that there is avoidance of double taxation of income under this act and under the corresponding law in force in that country or specified territory as the case may be,

In addition the central government under section 90A(in case of specified association) may enter into an agreement to provide:

(i)for exchange of information for the prevention of evasion or avoidance of income-tax chargeable under this act or under the corresponding law in force in that country or specified territory as the case may be, or investigation of cases of such evasion or avoidance, or

(ii) For recovery of income-tax under this act and under the corresponding law in force in that country or specified country as the case may be.

This section not only empowers the central government to enter into agreement with foreign country or specified territory, as the case may be, for granting of relief in respect of double taxation, but also empowers it to exempt income from taxation (w.e.f.2004-05)

It is now well settled that in India the provisions of the Double Taxation Avoidance Agreement (DTAA) override the provisions of the domestic statute. The liability to tax arising under provisions of section 4 and 5 of income tax act are subject to provisions of Double Taxation Avoidance Agreement (DTAA) between India and foreign country.

In CIT v P.V.A.L. Kulandagan Chettiar (2004)267 ITR 654(SC) It was held that where tax liability is imposed by the Act, the agreement may be resorted to either for reducing the tax liability or altogether avoiding the tax liability. In case of any conflict between the provisions of the agreement and the Act, the provisions of the agreement would prevail over the provisions of the Act, as is clear from the provisions of Section 90(2) of the Act. Section 90(2) makes it clear that "where the Central Government has entered into an agreement with the Government of any country outside India for granting relief of tax, or for avoidance of double taxation, then in relation to the assessee to whom such agreement applies, the provisions of the Act shall apply to the extent they are more beneficial to that assessee" meaning thereby 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 therein.

For example under Double Taxation Avoidance Agreement (DTAA) between Indian and Germany, tax on interest is specified @ 10% whereas under Income Tax Act it is 20%.  Hence, one can follow Double Taxation Avoidance Agreement (DTAA) and pay tax @ 10%. Further if Income tax Act itself does not levy any tax on some income then Tax Treaty has no power to levy any tax on such income. Section 90(2) of the Income Tax Act recognizes this principle.

Moreover if a taxpayer has legitimately reduced his tax burden by taking advantage of a treaty, the benefit cannot be denied to him on the ground of loss of revenue as was decided by Supreme Court in the case of Azadi Bacho Andolen.


By a Circular No. 682, dated March 30, 1994 (see [1994] 207 ITR (St.) 7), issued by the Central Board of Direct Taxes in exercise of its powers under section 90 of the Act, the Government of India clarified that capital gains of any resident of Mauritius by alienation of shares of an Indian company shall be taxable only in Mauritius according to Mauritius taxation laws and will not be liable to tax in India. Relying on this, a large number of Foreign Institutional Investors (hereinafter referred to as "the FIIs"), which were resident in Mauritius, invested large amounts of capital in shares of Indian companies with expectations of making profits by sale of such shares without being subjected to tax in India. Some time in the year 2000, some of the income-tax authorities issued show cause notices to some FIIs functioning in India calling upon them to show cause as to why they should not be taxed for profits and for dividends accrued to them in India. The basis on which the show cause notice was issued was that the recipients of the show cause notice were mostly "shell companies" incorporated in Mauritius, operating through Mauritius, whose main purpose was investment of funds in India. It was alleged that these companies were controlled and managed from countries other than India or Mauritius and as such they were not "residents" of Mauritius so as to derive the benefits of the DTAC. These show cause notices resulted in panic and consequent hasty withdrawal of funds by the Flls. Thereafter, to further clarify the situation, the Central Board of Direct Taxes issued Circular No. 789 dated April 13, 2000 clarifying that the views taken by some of the Income-tax Officers pertained to specific cases of assessment and did not represent or reflect the policy of the Government of India with regard to denial of tax benefits to such Flls. The High Court quashed and set aside the circular on the ground that it is ultra vires the provisions of section 90 and section 119 and is also otherwise bad and illegal. However, the Supreme Court held that the judicial consensus in India has been that section 90 is specifically intended to enable and empower the Central Government to issue a notification for implementation of the terms of a Double Taxation Avoidance Agreement (DTAA). Therefore, it is erroneous to say that the impunged Circular No. 789,dated 13.4.2000 is ultra vires the provision of section 119. The power conferred upon CBDT by subsection (1) and (2) of section 119 are wide enough to accommodate such a circular.

Double Taxation Avoidance Agreement (DTAA) cannot impose any tax liability where the liability is not imposed by the Act. If no liability is imposed under the act, the question of resorting to agreement doesnot arise.

As per the judgment in CITvR.M.Muthaiah(1993)202 ITR 508(Karn)"The effect of an 'agreement' entered into by virtue of section 90 of the Act would be: (I) if no tax liability is imposed under this Act, the question of resorting to the agreement would not arise. No provision of the agreement can possibly fasten a tax liability where the liability is not imposed by this Act; (ii) if a tax liability is imposed by this Act, the agreement may be resorted to for negativing or reducing it; (iii) in case of difference between the provisions of the Act and of the agreement, the provisions of the agreement prevail over the provisions of this Act and can be enforced by the appellate authorities and the court.

The person has to be resident in at least one of the two countries entering into Double Taxation Avoidance Agreement (DTAA). If he is resident of both the countries then "Tie Breaker Rule" will apply to decide of which country he will be considered to be resident for the purpose of such Double Taxation Avoidance Agreement (DTAA).

Where there is no specific provision in the agreement, it is the basic law i.e. Income Tax Act which will govern to taxation of income.

So far there is no specific requirement to obtain a Tax Residency Certificate(TRC) to claim benefits under Double Taxation Avoidance Agreement (DTAA) except in case of Mauritius. In the case of Mauritius, circular no. 789,dated April 13, 2000 clarifies that wherever a Tax Residency Certificate(TRC) is issued by Mauritius Authority, such Tax Residency Certificate(TRC) will constitute sufficient evidence for accepting the status of residence for applying Double Taxation Avoidance Agreement (DTAA) accordingly. In other words,where the Government of State certified that a person is a resident of that state or has a permanent establishment in the State, the certificate is binding on the other Government. [Union of India v Azadi Bachao Andolen (2003)263 ITR 706(SC) and Arabian Express Line Ltd.v Union of India (1995)212 ITR 31(Guj)]

In Arabian Express Line Ltd. of United Kingdom v. Union of India [1995] 212 ITR 31, the Gujarat High Court, interpreting section 90, in the light of Circular No. 333, dated April 2, 1982 ( [1982] 137 ITR (St.) 1), issued by the Central Board of Direct Taxes, held that the procedure of assessing the income of a NRI because of his occasional activities in shipping business in India would not be applicable in a case where there is a convention between the Government of India and the foreign country as provided under section 90 of the Income-tax Act, 1961. In case of such an agreement, section 90 would have an overriding effect. Interestingly, in this case a certificate issued by J.M. Inspector of Taxes certifying that the company was a resident of the United Kingdom for purposes of tax and that it had paid advance corporate tax in the office of the English Revenue Accounts Office, was held to be sufficient to take away the jurisdiction of the Income-tax Officer.


With effect from April 1,2013,section 90 and 90A have been amended to make submission of Tax Residency Certificate(TRC) as necessary but not sufficient condition for availing of benefits of the agreement. The format of Tax Residency Certificate(TRC) and the extent of information required by the government in Tax Residency Certificate(TRC) will be notified by the Board. It appears that after the notification of the format, it will become difficult for an intermediate country like Mauritius to issue Tax Residency Certificate(TRC) to certify that a global company has significant operations in Mauritius.


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 income tax in that country with which there is no agreement under section 90 for the relief or avoidance of double taxation, 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.

Unilateral relief under this section is provided only in respect of the doubly taxed income i.e. that part of income which is included in the assessee's total income. The amount deducted under chapter VIA is not doubly taxed and therefore no relief is allowable in respect of such amount.

The court in CIT v. Dr. R.N. Jhanji [1990] 185 ITR 586 has held that the assessee is not entitled to relief under section 91(1) of the full amount of tax on the total foreign income. The assessee is entitled to the relief under section 91(1) only of the amount of tax paid on 50 percent of the total foreign income The said decision given by this court is a reasoned decision taking into consideration all the provisions of the Act and the various authorities which have been cited and, therefore, in respect of an assessee who is resident and has received income from foreign countries (where there is no agreement to avoid double taxation) then in accordance with the provisions of section 91(1) of the Income-tax Act read with section 80RRA, 50 per cent. Of the remuneration is liable as deduction and, therefore, the full amount of tax paid on such amount is not to be allowed as deduction and it is only that 50 per cent. Of the income which is deemed to arise in India on which the tax has been paid could be deducted in accordance with the section 91(1) of the Act.

Further, the section contemplates granting the relief calculated on the income countrywise and not on the basis of aggregation or amalgamation of income from all foreign countries.

CIT V.Bombay Burmah Trading Corporation Ltd,(2003) 259 ITR 423 (Bom)

Assessee had its business in India, Tanzania and Thailand. During the relevant year the assessee suffered loss from Thailand branch and earned income from Tanzania. For computing relief u/s.91 (1) of the Income-tax Act, 1961 the assessee claimed that the relief should be allowed in respect of the income from Tanzania without adjusting the loss from Thailand branch. How-ever, the Assessing Officer allowed the relief only on the net income after adjusting the loss. The Tribunal allowed the assessee's claim.

On reference, the Bombay High Court upheld the decision of the Tribunal and held as under 

"If one analyses S. 91(1) with the Explanation, it is clear that the scheme of the said Section deals with granting of relief calculated on the income countrywise and not on the basis of aggregation or amalgamation of income from all foreign countries. Basically u/s.91(1), the expression 'such doubly taxed income' indicates that the phrase has reference to the tax which the foreign income bears when it is again subjected to tax by its inclusion in the computation of income under the Income-tax Act. Further S. 91(1) shows that in the case of double income-tax relief to the resident, the relief is allowed at the Indian rate of tax or at the rate of tax of the other country whichever is less. Therefore, the relief u/s.91(1) is by way of reduction of tax by deducting the tax paid abroad on such doubly taxed income from tax payable in India. Under the circumstances, the scheme is clear. The relief can be worked out only if it is implemented countrywise. If incomes from foreign countries were to be aggregated, it would be impossible to compare the rate of tax of the foreign country with the rate under the Indian Income-tax Act."

In order that this section (section 91) 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 an agreement.


The Income Tax Act takes care to ensure through section 90 that where Double Taxation Avoidance Agreement (DTAA) is in existence, the taxpayer is not made to suffer double taxation due to the provision in the Double Taxation Avoidance Agreement (DTAA) and where Double Taxation Avoidance Agreement (DTAA) is not in existence the taxpayer is not made to suffer double taxation by giving a relief under section 91 of the Act in respect of the doubly taxed income.

The act also emphasizes that Double Taxation Avoidance Agreement (DTAA) are not relief agreement, therefore, it is not necessary that the tax has been paid. On the other hand, section 91 require that the tax should have been actually paid, as it is a relief provision and no relief is available if no tax has been paid.

The next chapter deals with the significance and applicability of Permanent Establishment rules that serve not only as a pre-requisite to taxation but also as the means for identifying the income which is subject to tax and thus helps in the development of International Business.