Understanding Double Taxation Relief Provisions in India with Case Studies

Table of Contents

1. Relief for Double Taxation [Secs. 90, 90A and 91]
2. ADT Agreements [Sec. 90]
3. Unilateral Relief [Sec. 91]
4. Double Taxation Relief in Case of Specified Associations [Sec. 90A]
5. Case Studies

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1. Relief for Double Taxation [Secs. 90, 90A and 91]

Foreign income of a person generally becomes liable to tax in two countries – the country in which income is earned and the country in which the person is resident. Double taxation of such income is avoided by means of double taxation avoidance agreements (ADT) entered into by the Government of India with the Governments of other countries under section 90. Where the income accrues or arises in a country with which no agreement exists, unilateral tax relief is provided on the doubly taxed income under the provisions of section 91.

2. ADT Agreements [Sec. 90]

The Government of India has entered into comprehensive agreements for avoidance of double taxation with 57 countries. Besides, the Government of India has entered into agreements which cover limited areas of activity like aircraft and shipping business.

2.1 Modes of granting relief under ADT agreements

Generally, there are two modes of granting relief under ADT agreements –

(a) exemption method, and

(b) tax credit method. Under exemption method a particular income is taxed in one of the two countries. Under tax credit method, an income is taxable in both the countries in accordance with their respective tax laws read with the ADT agreement. However, the country of residence of the taxpayer allows him credit for the tax charged thereon in the country of source against the tax charged on such income in the country of residence.

In India’s ADT agreements, double taxation relief is provided by a combination of the two modes.

The effect of an ADT agreement is as follows —

a. if no tax liability is imposed under the 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 the Act;

b. if a tax liability is imposed by the Act, the agreement may be resorted to for negativing or reducing it;

c. in case of difference between the provisions of the Act and of the agreement, the provisions of the agreement prevail over the provisions of the Act and can be enforced by the appellate authorities and the court.

• • • Provisions of India’s ADT agreements regarding taxation of dividend, interest, royalty and technical fees are summarised in para 0.10 (Annex 1).
    • Provisions of section 90 are to be invoked for granting relief to the assessee if the income of the non-resident assessee is chargeable to tax under sections 4, 5 and 9; if the income of non-resident is not chargeable to tax under the Act, the question of invoking the provisions of section 90 would not arise at all.
    • Provisions of DTAAs override the provisions of the Act, to the extent these agreements are more favourable to the assessee.

3. Unilateral Relief [Sec. 91]

Section 91 provides for the grant of unilateral relief in the case of resident taxpayers on income which has suffered tax in India as well as in the country with which there is no ADT agreement.

The following requirements have to be satisfied in order that an assessee is entitled to claim deduction on the doubly taxed income :

a. the assessee must have been resident in India in the relevant previous year;

b. income must have accrued or arisen to him during that previous year outside India;

c. in respect of that income which accrued or arose outside India, he must have paid by deduction or otherwise tax under the law in force in the country in question.

The relief is worked out as under :

1. First, ascertain the amount of doubly taxed income. It consists of such income as has accrued or arisen to the taxpayer in a foreign country and has been subjected to income-tax in that country as well as in India. It, however, does not include income which is deemed to have accrued or arisen to the taxpayer in India, even though it has been charged to income-tax in a foreign country.
2. On the amount of the doubly taxed income so ascertained, income-tax is calculated at the Indian rate of tax and the rate of tax of the foreign country. The foreign tax rate has to be calculated separately for each country.
3. Relief is granted by allowing to the taxpayer a deduction from the tax liability of an amount equal to the tax calculated at the average Indian rate of tax or the amount of tax calculated at the rate of tax of the other country on the doubly taxed income, whichever is lower. For example, if out of income of Rs. 4,80,000 deduction of Rs. 36,000 is allowed under section 80E in computing the total income, the assessee will be entitled to the double taxation relief under section 91 only in respect of Rs. 4,44,000 which has been subjected to income-tax in India.

• • What is Indian rate – The Indian rate of tax means the rate determined by dividing the amount of Indian income-tax after deduction of any relief due under the provisions of the Act, but before deduction of any relief due under sections 90 and 91, by the total income.
  • What is foreign rate – The rate of tax of the foreign country means income-tax and super-tax actually paid in that country in accordance with the corresponding laws in force thereafter deduction of all relief due, divided by the whole amount of the income as assessed in that country.

4. Double Taxation Relief in Case of Specified Associations [Sec. 90A]

Section 90A provides as under—

• There is a specified association in India.
• It enters into an agreement with any specified association in a specified territory outside India.
• The Central Government may, by notification in the Official Gazette, make the necessary provisions for adopting and implementing such agreement—

a. for grant of double taxation relief, for avoidance of double taxation ;

b. for exchange of information for the prevention of evasion or avoidance of income-tax ;

c. for recovery of income-tax.

• In relation to any assessee to whom the said agreement applies, the provisions of the Income-tax Act shall apply to the extent they are more beneficial to that assessee.

5. Case Studies

The following case studies are given :

5.1 Find out the tax liability for the assessment year 2022-23 in the following cases (assume that X, Y and Z do not want to pay tax under the alternative tax regime given by section 115BAC and applicable tax rate in the case of X Ltd. is 30 per cent) —

1. X (28 years) is resident and ordinarily resident in India. His income is Rs. 8,96,000 from a business in India and Rs. 1,92,000 from a business in a foreign country with whom India has an ADT agreement. According to the ADT agreement, income is taxable in the country in which it is earned and not in the other country. However, in the other country such income can be included for computation of tax rate. According to the tax laws of the foreign country, business income of Rs. 1,92,000 is taxable @ 23 per cent. During the previous year, X has deposited Rs. 42,000 in his public provident fund account (out of which Rs. 10,000 is deposited out of foreign income). He has also received an interest of Rs. 32,000 on Government securities.

2. X Ltd. is an Indian company. For the previous year 2022-23, the following incomes are noted from the books of account of the taxpayer —

According to the ADT agreement, Rs. 2,16,000 is taxable in India. However, it can also be taxed in the foreign country @ 17.5 per cent which can be set off against Indian tax liability.

3. Y (24 years) and Z (26 years) are resident in India. The following points are noted for the previous year 2022-23 from the books of account —

1. Computation of income and tax of X

2. Computation of income and tax of X Ltd.

3. Computation of income and tax of Y and Z

5.2 X (62 years) is a musician deriving income from concerts performed outside India of Rs. 7,50,000. Tax of Rs. 1,50,000 was deducted at source in the country where the concerts were given and remaining Rs. 6,00,000 is remitted to India. India does not have any agreement with that country for avoidance of double taxation. Assuming that the Indian income of X is Rs. 4,00,000, what is the relief due to him under section 91 for assessment year 2023-24. X is resident in India and has deposited Rs. 22,000 in the public provident fund account. Ignore section 115BAC pertaining to the alternative tax regime.

5.3 X (46 years), an individual, is resident and ordinarily in India. During the previous year 2022-23, he has followed incomes—

Find out the tax liability of X for the assessment year 2023-24. Ignore section 115BAC pertaining to the alternative tax regime.

• Computation of income of X—

Note – Double taxation relief under section 91 shall be calculated in respect of foreign income which is taxable in India as well as outside India. In this case, income of Business B (i.e., Rs. 7,15,000) has been taxed in the foreign country. It is also taxable in India. Rs. 7,15,000 is, therefore, doubly taxed income. To find out doubly taxed income, loss incurred in Business C in another foreign country cannot be reduced — CIT v. Bombay Burmah Trading Corpn. Ltd. [2003] 126 Taxman 403 (Bom.). On Rs. 7,15,000 relief is available at the average rate of tax (i.e., Indian tax rate or foreign tax rate, whichever is lower). To calculate Indian tax rate, one has to first find out taxable income in India from all sources (including loss from foreign Business C) and tax liability thereon. In other words, to find out average rate of tax in India, loss from Business C shall be taken into consideration. The ruling of Bombay High Court in the case of Bombay Burmah Trading Corpn. Ltd. (supra) supports this view.

5.4 X (41 years) is resident and ordinarily resident in India. The following information is given by him pertaining to the assessment year 2023-24 —

Find out the net income and taxable thereon (ignore section 115BAC) for the assessment year 2023-24. X is of the opinion that to find out double taxation relief, Indian average rate of tax shall be calculated separately for income generated in country B (without including income from country C) and likewise, for calculating average rate of tax in India in respect of income generated in country C (without including income from country B). This view he has taken from the ruling of Bombay High Court in the case of CIT v. Bombay Burmah Trading Corpn. Ltd. [2003] 126 Taxman 403. Is he legally tenable?

• The opinion of X is not legally tenable. Indian average rate of tax shall be calculated by taking into consideration income from all sources including income from countries B and C. However, foreign tax rate shall be calculated separately for country B and country C. To the same effect ruling is given by the Bombay High Court in the case of Bombay Burmah Trading Corpn. Ltd. (supra). Net income and tax liability shall be calculated as follows —