INTERNATIONAL TAXATION
International Taxation emerged as significant subject post 1928. Countries entered into around 3000 treaties thus far which allocate
the taxing rights between the parties to treaty. These treaty do not create the Charge. It merely allocates the taxing right, i.e., which
country can tax what part of income.
CONSTITUTIONAL PROVISIONS
Article 253 of the CoI empowers the Parliament to make any law for implementation of any treaty, agreement or convention with
another country or countries or any decision made in an international conference, association or other body.
Article 52(c) of CoI – state shall endeavour to foster respect for international law and treaty obligations in the dealings of organized
people with one another.
SECTION 90 OF INCOME TAX ACT [THROUGH AZADI BACHAO ANDOLAN CASE]
1. Every country seeks to tax the income generated within its territory on the basis of one or more connecting factors such as
location of the source, residence of the taxable entity, maintenance of a permanent establishment, and so on.
2. Depending on the connecting factor in different countries the same income of the same entity might become liable to
taxation in different countries leading to harsh consequences. In order to avoid such an anomalous and incongruous
situation, the Governments of different countries enter into bilateral treaties, Conventions or agreements for granting relief
against double taxation. These are called double taxation avoidance treaties, conventions or agreements.
3. The power of entering into a treaty is an inherent part of the sovereign power of the State. The power to legislate in respect
of treaties lies with the Parliament under entries 10 and 14 of List I of the Seventh Schedule.
4. But making of law under that authority is necessary when the treaty or agreement operates to restrict the rights of citizens
or others or modifies the law of the State. If the rights of the citizens or others which are justiciable are not affected, no
legislative measure is needed to give effect to the agreement or treaty.
5. The executive can by agreement, convention or treaty incur obligations, which, in international law are binding upon the
state. Ordinarily, a mere agreement by the Union is not, by its own course binding upon the Indian Nationals.
6. Since in India such a treaty would have to be translated into an Act of Parliament, a procedure which would be time
consuming and cumbersome, a special procedure was evolved by enacting section 90 of the Act. The Central Government
could make such provisions as necessary for implementing the agreement by notification in the Official Gazette.
7. The provisions of Sections 4 and 5 of the Act are expressly made "subject to the provisions of this Act", which would
include Section 90 of the Act. As to what would happen in the event of a conflict between the provision of the Income-tax
Act and a Notification issued under Section 90, is no longer res-integra.
8. Section 90 was specifically intended to enable and empower the Central Govt. to issue a notification to implement to
implement the terms of a DTAA. Once the notification is issued the provisions of the agreement apply even if they are
inconsistent with the provisions of income tax act.
9. Section 90 Awesome enables the central government as a delegate of legislation the power to grant exemption. Even if no
specific exemption has been granted by Parliament, the Central Government can grant exemption from tax payable under
the income tax act.
INTERPRETATION OF DTAA TREATIES [THROUGH CIT V. PVAL KULANDAGAN CHETTIAR]
Ioli Shukla
, 1. Tax treaties are mini legislations containing all relevant aspects and features which are at variance with the general taxation
laws of the respective countries.
2. Wherever DTAA provides any particular method of computation, that alone has to be followed irrespective of the
provisions of the domestic laws.
3. The expression “May be Taxed” used in DTAA does not mean that there is no prohibition or embargo from taxing that
category under the domestic law. An enabling form of language cannot be taken advantage of by the Revenue to bring the
assessment of the income that is covered under the agreement.
4. Language used in treaties may differ. Thus, there is no straight jacketed formula for interpretation of treaties.
5. If there is a provision to the contrary in the agreement, there is no scope for applying the law to any one of the respective
contracting states to tax the income. Liability to tax is only permitted under the terms of DTAA.
6. If there is not specific provision to the contrary, the domestic laws are applicable.
7. Where the language in DTAA and model convention is similar the commentaries will have a strong and persuasive value.
CONFLICTS BETWEEN SECTION 90 AND 94A [THROUGH T RAJKUMAR V. UOI]
Background:
1. Section 90 of the Income Tax Act allows India to enter into Double Taxation Avoidance Agreements (DTAAs) with other
countries. These treaties ensure fair taxation and prevent double taxation of the same income.
2. Section 94A was introduced to counter tax evasion by "Notified Jurisdictions" (countries that do not cooperate in sharing
tax-related information). If a country is notified under Section 94A, stricter tax rules apply to transactions involving that
country.
Issue in the T Rajkumar Case:
India had a DTAA with Cyprus (a low-tax jurisdiction). However, the Indian government notified Cyprus under Section 94A,
claiming it was not sharing tax-related information. This led to stricter tax rules, including a flat 30% TDS deduction on payments
made to Cyprus-based entities.
The legal question: Could Section 94A apply even when a DTAA under Section 90 was already in place?
Key Arguments:
1. DTAA Takes Priority Over Domestic Law:
2. Most DTAAs, including the India-Cyprus DTAA, already have an exchange-of-information clause.
3. Since a treaty requires both countries to share tax-related information, the government cannot apply Section 94A unless
the treaty obligation is not being followed.
4. Lack of Specific Evidence Against Cyprus:
5. The government claimed Cyprus was not cooperating but did not provide specific evidence proving a failure to share
information.
6. A general affidavit stating that information was "not forthcoming" was not sufficient to justify the notification under Section
94A.
7. Improper Flat Tax Rate of 30%:
8. Section 94A(5) allows different tax rates depending on the nature of income.
Ioli Shukla
, 9. The government imposed a flat 30% TDS on all payments to Cyprus, even if the payment was not taxable under Indian
law.
10. This contradicted Section 94A(5) and general taxation principles.
High Court’s Decision and Its Impact:
1. The Madras High Court upheld the government’s stance, but its reasoning was flawed because it overlooked the incorrect
imposition of a flat 30% TDS and the lack of specific evidence against Cyprus.
2. The case went to the Supreme Court, but before it could decide, the government withdrew the notification against Cyprus
(making the case irrelevant).
3. Since the Supreme Court did not rule on the case, the High Court’s decision does not have strong precedential value (it is
not binding for future cases).
Simplified Takeaway:
1. Section 90 (DTAA) and Section 94A (Notified Jurisdiction) must be read together.
2. If a country has a valid tax treaty, Section 94A should not apply unless the treaty is being violated (i.e., if that country
refuses to share tax information).
3. The government cannot impose a blanket tax rate (like 30%) under Section 94A if the payment is not taxable under Indian
law.
4. The case was not fully resolved by the Supreme Court because the notification was withdrawn, meaning it does not serve
as a strong precedent for future cases.
ELIMINATION OF DOUBLE TAXATION
Taxation is based on two principles:
1. Residence Rule: A country can tax its residents (individuals or corporations) on their global income.
2. Source Rule: A country can tax income generated within its territory, regardless of the recipient’s residence.
The Problem of Double Taxation:When both the residence country and the source country claim the right to tax the same income,
double taxation occurs.
To avoid this, countries enter into Double Taxation Avoidance Agreements (DTAAs), which allocate taxing rights between countries.
Under these treaties, the residence country may:
1. Exempt foreign income that has already been taxed in the source country.
2. Grant a tax credit for taxes paid in the source country.
DTAAs impose three types of limitations on the source country:
3. Unlimited taxing power – The source country can fully tax the income.
4. Limited taxing power – The source country can tax only up to a specified rate.
5. No taxing power – The source country cannot tax that income at all.
These agreements help prevent double taxation, encourage cross-border trade and investment, and ensure fair tax allocation between
nations.
“May be Taxed” v. “Shall be Taxable Only”
Ioli Shukla
International Taxation emerged as significant subject post 1928. Countries entered into around 3000 treaties thus far which allocate
the taxing rights between the parties to treaty. These treaty do not create the Charge. It merely allocates the taxing right, i.e., which
country can tax what part of income.
CONSTITUTIONAL PROVISIONS
Article 253 of the CoI empowers the Parliament to make any law for implementation of any treaty, agreement or convention with
another country or countries or any decision made in an international conference, association or other body.
Article 52(c) of CoI – state shall endeavour to foster respect for international law and treaty obligations in the dealings of organized
people with one another.
SECTION 90 OF INCOME TAX ACT [THROUGH AZADI BACHAO ANDOLAN CASE]
1. Every country seeks to tax the income generated within its territory on the basis of one or more connecting factors such as
location of the source, residence of the taxable entity, maintenance of a permanent establishment, and so on.
2. Depending on the connecting factor in different countries the same income of the same entity might become liable to
taxation in different countries leading to harsh consequences. In order to avoid such an anomalous and incongruous
situation, the Governments of different countries enter into bilateral treaties, Conventions or agreements for granting relief
against double taxation. These are called double taxation avoidance treaties, conventions or agreements.
3. The power of entering into a treaty is an inherent part of the sovereign power of the State. The power to legislate in respect
of treaties lies with the Parliament under entries 10 and 14 of List I of the Seventh Schedule.
4. But making of law under that authority is necessary when the treaty or agreement operates to restrict the rights of citizens
or others or modifies the law of the State. If the rights of the citizens or others which are justiciable are not affected, no
legislative measure is needed to give effect to the agreement or treaty.
5. The executive can by agreement, convention or treaty incur obligations, which, in international law are binding upon the
state. Ordinarily, a mere agreement by the Union is not, by its own course binding upon the Indian Nationals.
6. Since in India such a treaty would have to be translated into an Act of Parliament, a procedure which would be time
consuming and cumbersome, a special procedure was evolved by enacting section 90 of the Act. The Central Government
could make such provisions as necessary for implementing the agreement by notification in the Official Gazette.
7. The provisions of Sections 4 and 5 of the Act are expressly made "subject to the provisions of this Act", which would
include Section 90 of the Act. As to what would happen in the event of a conflict between the provision of the Income-tax
Act and a Notification issued under Section 90, is no longer res-integra.
8. Section 90 was specifically intended to enable and empower the Central Govt. to issue a notification to implement to
implement the terms of a DTAA. Once the notification is issued the provisions of the agreement apply even if they are
inconsistent with the provisions of income tax act.
9. Section 90 Awesome enables the central government as a delegate of legislation the power to grant exemption. Even if no
specific exemption has been granted by Parliament, the Central Government can grant exemption from tax payable under
the income tax act.
INTERPRETATION OF DTAA TREATIES [THROUGH CIT V. PVAL KULANDAGAN CHETTIAR]
Ioli Shukla
, 1. Tax treaties are mini legislations containing all relevant aspects and features which are at variance with the general taxation
laws of the respective countries.
2. Wherever DTAA provides any particular method of computation, that alone has to be followed irrespective of the
provisions of the domestic laws.
3. The expression “May be Taxed” used in DTAA does not mean that there is no prohibition or embargo from taxing that
category under the domestic law. An enabling form of language cannot be taken advantage of by the Revenue to bring the
assessment of the income that is covered under the agreement.
4. Language used in treaties may differ. Thus, there is no straight jacketed formula for interpretation of treaties.
5. If there is a provision to the contrary in the agreement, there is no scope for applying the law to any one of the respective
contracting states to tax the income. Liability to tax is only permitted under the terms of DTAA.
6. If there is not specific provision to the contrary, the domestic laws are applicable.
7. Where the language in DTAA and model convention is similar the commentaries will have a strong and persuasive value.
CONFLICTS BETWEEN SECTION 90 AND 94A [THROUGH T RAJKUMAR V. UOI]
Background:
1. Section 90 of the Income Tax Act allows India to enter into Double Taxation Avoidance Agreements (DTAAs) with other
countries. These treaties ensure fair taxation and prevent double taxation of the same income.
2. Section 94A was introduced to counter tax evasion by "Notified Jurisdictions" (countries that do not cooperate in sharing
tax-related information). If a country is notified under Section 94A, stricter tax rules apply to transactions involving that
country.
Issue in the T Rajkumar Case:
India had a DTAA with Cyprus (a low-tax jurisdiction). However, the Indian government notified Cyprus under Section 94A,
claiming it was not sharing tax-related information. This led to stricter tax rules, including a flat 30% TDS deduction on payments
made to Cyprus-based entities.
The legal question: Could Section 94A apply even when a DTAA under Section 90 was already in place?
Key Arguments:
1. DTAA Takes Priority Over Domestic Law:
2. Most DTAAs, including the India-Cyprus DTAA, already have an exchange-of-information clause.
3. Since a treaty requires both countries to share tax-related information, the government cannot apply Section 94A unless
the treaty obligation is not being followed.
4. Lack of Specific Evidence Against Cyprus:
5. The government claimed Cyprus was not cooperating but did not provide specific evidence proving a failure to share
information.
6. A general affidavit stating that information was "not forthcoming" was not sufficient to justify the notification under Section
94A.
7. Improper Flat Tax Rate of 30%:
8. Section 94A(5) allows different tax rates depending on the nature of income.
Ioli Shukla
, 9. The government imposed a flat 30% TDS on all payments to Cyprus, even if the payment was not taxable under Indian
law.
10. This contradicted Section 94A(5) and general taxation principles.
High Court’s Decision and Its Impact:
1. The Madras High Court upheld the government’s stance, but its reasoning was flawed because it overlooked the incorrect
imposition of a flat 30% TDS and the lack of specific evidence against Cyprus.
2. The case went to the Supreme Court, but before it could decide, the government withdrew the notification against Cyprus
(making the case irrelevant).
3. Since the Supreme Court did not rule on the case, the High Court’s decision does not have strong precedential value (it is
not binding for future cases).
Simplified Takeaway:
1. Section 90 (DTAA) and Section 94A (Notified Jurisdiction) must be read together.
2. If a country has a valid tax treaty, Section 94A should not apply unless the treaty is being violated (i.e., if that country
refuses to share tax information).
3. The government cannot impose a blanket tax rate (like 30%) under Section 94A if the payment is not taxable under Indian
law.
4. The case was not fully resolved by the Supreme Court because the notification was withdrawn, meaning it does not serve
as a strong precedent for future cases.
ELIMINATION OF DOUBLE TAXATION
Taxation is based on two principles:
1. Residence Rule: A country can tax its residents (individuals or corporations) on their global income.
2. Source Rule: A country can tax income generated within its territory, regardless of the recipient’s residence.
The Problem of Double Taxation:When both the residence country and the source country claim the right to tax the same income,
double taxation occurs.
To avoid this, countries enter into Double Taxation Avoidance Agreements (DTAAs), which allocate taxing rights between countries.
Under these treaties, the residence country may:
1. Exempt foreign income that has already been taxed in the source country.
2. Grant a tax credit for taxes paid in the source country.
DTAAs impose three types of limitations on the source country:
3. Unlimited taxing power – The source country can fully tax the income.
4. Limited taxing power – The source country can tax only up to a specified rate.
5. No taxing power – The source country cannot tax that income at all.
These agreements help prevent double taxation, encourage cross-border trade and investment, and ensure fair tax allocation between
nations.
“May be Taxed” v. “Shall be Taxable Only”
Ioli Shukla
