ROLE OF TAX TREATIES Written by Advocate Ashish Panday

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ROLE OF TAX TREATIES Written by Advocate Ashish Panday


The emergence and the growth of transitional economic activity in the 20th and 21st centuries have created an issue for taxation law.  An increase in FDI and the emergence of a digital economy or e-commerce have made international legal and fiscal arrangements among the nations more complex and nations started to coordinate among themselves. Apart of the Unilateral agreement, nations start various Bilateral and multilateral agreements/ treaties as a tool to tackle the complexity. Both developed and developing nations adopt tax treaties to serve their respective needs. These treaties also create a conflict of interest.

Treaties played a very important role in the removal of obstacles to the cross-border movements of goods, services, labour, technology and capital has always been the ultimate goal of both, International trade law and International taxation. The 20th century saw a major diplomatic achievement in terms of the progressive reduction of economic barriers to international commerce cumulating into the establishment of the World Trade Organization.

Double Taxation Avoidance Agreement or DTAA

India has signed tax treaties under the head of DTAAs with more than 90 countries and limited agreements with a few countries. Under the treaties provide for the income that would be taxable in either of the contracting states, depending on the understanding of the nations, and the conditions for taxing and the exemption from tax.

In India, the Central Government has been vested with powers to enter into an agreement with the government of a foreign country, under section 90 of the Income-tax Act. Bilateral Investment Treaties are treaties entered into between two States with the aim of protecting and encouraging investment flows between their economies. India has made bilateral BITs with the UK, UAE, Australia etc. in such a situation different tax clauses are there in BITs.

Also Read: ROLE OF TAX TREATIES Written by Advocate Ashish Panday


Where liability to tax arises under the Income-tax Act, 1961, provisions of sections 4 and 5 of the Income Tax Act which provide for taxation of international income of an assessee thereunder are subject to the provisions of an agreement entered into between the Central Government and the Government of a foreign country for the avoidance of double taxation as envisaged under section 90 (i.e., DTAA) to the contrary, if any, and such an agreement will act as an exception to or modification of sections 4 and 5. The provisions of such an agreement cannot fasten a tax liability where the liability is not imposed by the Act.

Also Read: Application for condonation of delay under Section 128(1) of the Customs Act, 1962

In case of any conflict between the provisions of the Act and the agreement, the provisions of the agreement would prevail over the Act, as this is clear from the prevision of section 90(2) of the Act[1].

In  CIT v. P.V.A.L. Kulandagau Chettiar [2004][2] -The Supreme Court Court held that :

         “The immovable property in question was situated in Malaysia and income was derived from that property. Further, it had also been held as a matter of fact that there was no permanent establishment in India in regard to carrying on the business of rubber plantations in Malaysia out of which income was derived. Proceeding on that basis it is held that business income out of rubber plantations could not be taxed in India because of closer economic relations between the assessee and Malaysia in which the property was located and where the permanent establishment had been set up will determine the fiscal domicile.”

The income assessable to Income Tax Act is of two kinds viz (i) Residence and (ii) Source. The residence of a person and source of income are the two fundamental principles, which confer territorial jurisdiction upon a taxing authority to impose income tax in the international context. 

Therefore, tax treaties can be unilateral, bilateral and multilateral but none of them can be made any regulation, or understanding among the nation for a smooth mechanism for tax collection under treaties and domestic laws.  

[1] Section 90

[2] CIT v. P.V.A.L. Kulandagau Chettiar [2004]

ROLE OF TAX TREATIES Written by Advocate Ashish Panday [Delhi High Court]