A person earning any income has to pay tax in the country in which the income is earned (as source country) as well as in the country in which the person is resident. So, the said income is liable to tax in both the countries. To avoid this hardship of double taxation, Government of India has entered into Double Taxation Avoidance Agreements (DTAAs) with various countries.
The term “person” is defined in Article 3 of the DTAA of India with any other Country. It is an inclusive definition. It reads as “the term person includes an individual, a company, a body of person or any other entity which is taxable under the laws in force in either Contracting State.“ On reading this definition, it seems clear that if an individual or an entity is not a taxable entity in the concerned state, it will not be a person.
Article 4 of DTAA reads as “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 incorporation, place of management or any other criterion of a similar nature. So, if an individual or an entity does not fall into the definition of “Person” as per Article 3, it cannot be a resident of Contracting State and hence the DTAA benefit cannot be claimed.
List of Examples with referred case law:-
Suppose a partnership firm is formed in Switzerland. Under Swiss law, it is not a taxable entity but its partners are liable to pay tax. There is no a definition of person in Swiss law corresponding to Section 2(31) of the Income-tax Act, which confers the status of a ‘person’ on a partnership. So, it cannot claim the India – Switzerland DTAA benefit. In this regard, reference can be made to AAR Ruling in Schellenberg Wittmer, In re (A.A.R. NO. 1029 OF 2010).
In United Arab Emirates, no personal tax is levied. So, an individual who is a resident of UAE is not covered in the definition of “Person” in Article 3 of DTAA. Hence, he cannot claim in the India – UAE DTAA. In this regard, reference can be made to AAR Ruling in Abdul Razak A. Meman, In re (AAR NOS. 637, 638 AND 640 OF 2004).
The OECD commentary on Article 3 states that partnerships will also be considered to be persons either because they fall within the definition of ‘company’ or where this is not the case, because they constitute other body of persons and in cases where the Partnership is considered as a fiscally transparent entity, the benefit of a tax treaty should be granted to partners. India has not accepted this part of the OECD view and not being a member of the OECD has expressed its reservation.