Some Facts Related To Applicability of DTAA

Sub: Provisions of Section 91(1) DTAA

QUESTION: Income Tax Act, 1961 provides for taxation of a certain income earned in India by Mr. X a non-resident. The DTAA, which applies to Mr. X provides for taxation of such income in the country of residence. Is Mr. X liable to pay tax on such income earned by him in India?

LET’S FIRST EXAMINE APPLICABLE PROVISIONS OF INCOME TAX ACT, 1961

SECTION -5 OF INCOME TAX ACT, 1961

(1) Subject to the provisions of this Act, the total income of any previous year of a person who is a resident includes all incomes from whatever source derived which-

(a) is received or is deemed to be received in India in such year by or on behalf of such person; or

(b) accrues or arises or is deemed to accrue or arise to him in India during such year; or

(c) accrues or arises to him outside India during such year:

Provided that, in the case of a person not ordinarily resident in India within the meaning of sub- section (6) of section 6, the income which accrues or arises to him outside India shall not be so included unless it is derived from a business controlled in or a profession set up in India.

Please Note That:

1. Income of a Resident Ordinary Resident India (RORI)- accruing or arising or deemed to be accruing or arising to him globally is chargeable to tax in India.

2. Income of a Resident but not Ordinary Resident India (RNOR)- accruing or arising or deemed to be accruing or arising in India is chargeable and not income accrue or arise outside or such incomes or which has no connection with India are not chargeable to tax in India.

3. Income of a Non Resident India (NRI)- accruing or arising or deemed to be accruing or arising in India is chargeable and not income accrue or arise outside or such incomes which has no connection with India or Income accrues or arises outside India from business/profession controlled/set up in India are not chargeable to tax in India.

Section 6 (1) of the Income Tax Act, 1961,

1. Residential Status of an Individual

Section 6(1) of IT Act, 1961 offers two sets of parameters to determine whether a particular person is an Indian citizen or not. If the said individual falls under any one of the following criterias, he/she will be a resident of the country. These are:

• If the individual has resided in India during the relevant financial year that amounts to a total of 182 days or more.
• If the individual has resided in India for four consecutive years before the relevant financial year that amounts to a total of 365 days or more.

Meeting with the above mentioned parameters qualifies an individual as a resident of the country, however, in order to become an ordinary citizen of the country, one has to meet with the following standards:

• If the individual has been an Indian citizen for two consecutive financial years out of ten financial years, that falls immediately before the relevant financial year.
• If the individual has resided in India for seven consecutive financial years immediately before the financial year in question.

Two exceptions to the general rule can be applied here:

1. If a person (a resident of India) leaves the country in order to take up another job outside India, during a financial year, the second provision mentioned above will be nullified, and only the first one will be valid.

2. If a person of Indian origin who has been residing outside India, visits the country (India) during a particular financial year, then the second condition specified above will be nullified, and only the first one will be valid.

2. Residential status of a HUF

“6(2) A Hindu Undivided Family is said to be a resident in India in any previous year in every case except where during that year the control and management of its affairs is situated wholly outside India.

6(6) A person is said to be “not ordinarily resident” in India in any previous year if such person is a HUF whose manager has been a non-resident in India in 9 out of 10 previous years preceding that year, or has during the 7 previous years preceding that year been in India for a period of, or periods amounting in all to, 729 days or less”

Thus,

• If the Karta is Resident and ordinarily resident (ROR): then HUF is also ROR
• If the Karta is Resident but not ordinarily resident (RNOR): then HUF is also RNOR

3. Residential Status of a Company is determined as follows;

Section 90 of the Income Tax Act

Section 90 (1) of the Income Tax Act is associated with relief measures for assesses involved in paying taxes twice i.e. paying taxes in India as well as in Foreign Countries or territory outside India.

Section 90(2) also contains provisions which will certainly enable the Central Government to enter into an agreement with the Government of any country outside India or a definite territory outside India.

Section 90(3)is intended for granting relief with reference to any of the following relevant situations that may occur:

• Income on which tax has been paid both under Income Tax Act, 1961 and Income Tax prevailing in that country or definite territory.
• Income tax chargeable under Income Tax Act, 1961 and according to the corresponding law in force in that country or specified territory to boost mutual economic relations, trade and investment.
• For the prevention of double taxation of income under Income Tax Act, 1961 and under the equivalent law in force in that country or specified territory.
• For exchange of information regarding the avoidance of evasion or avoidance of income-tax chargeable as per Income Tax Act, 1962 or under the equivalent law in force in that country or specified territory, or investigation of cases of evasion or avoidance.
• For recovery of income tax under the Income Tax legislation which is in force in India and under the equivalent law in force in that country of the specified territory.

The double tax relief as per Section 90 can be claimed only by the residents of the countries who have entered into the agreement.

If a resident of other countries wants to claim relief related to the phenomenon of double taxation, then they have to obtain a Tax Residence Certificate (TRC) from the government of a particular country Section 90(4).

SECTION 90(4)-provides that the non-resident to whom the agreement referred in section 90(1) i.e. DTAA applies, shall be allowed to claim the relief under such agreement if a TAX RESIDENCE CERTIFICATE (TRC) obtained by him from the Government of that country or specified territory, is furnished declaring his residence of the country outside India or the Specified territory outside India as the case may be.

Notification No. 91/2008 dated 28/08/2008 issued by CBDT states that any income of a resident of Indian, which “ may be taxed” in the other country ( Source Country) as per the DTAA shall be included in his total income chargeable to tax in India in accordance with the provisions of Income Tax Act, 1961 . Thereafter relief shall be granted in accordance with the method for elimination or avoidance of double taxation provided in such agreement.

[CBDT Circular No. 333 dated 02/04/1982] It is well settled that in case of any conflict between the provisions of DTAA and the Income tax Act, 1961, then provisions of DTAA would prevail over provisions under Income tax Act, 1961.

ANSWER : Section 90(2) makes it clear that the Central Government has entered into a DTAA, with country outside India, then in respect of an assessement to whom such agreement applies, the provisions of the Act, 1961 shall apply to the extent they are more beneficial to the assessee. This means that where DTAA has been entered, the assessee can opt to be governed by the provisions of DTAA, if the provisions of DTAA are beneficial in comparison to the provisions of the Income Tax Act, 1961.

However as per provisions of Section 90(4), the assessee, in order to claim relief under the DTAA, has to obtain Certificate ( Tax Residence certificate ) TRC from the government of that country, declaring the resident of country outside India. Further, he also has to provide below mentioned documents and information in Form 10F;

i) Status ( Whether Individual, Company, Firm etc.) of the assessee;

ii) PAN of the assessee, if allotted;

iii) Nationality ( in case of an individual) or country or specified territory of incorporation or registration (other than individuals);

iv) Assessee’s tax identification number in the in the country of residence, in case there is no such number, then, a unique number on the basis of which the person is identified by the Government of the country or the specified territory of which the assessee calims to be resident;

v) Period for which the residential status, as mentioned in the TRC;

vi) Address of the assessee in the country or specified territory outside India, during the period for which TRC as mentioned above is applicable.

However the assessee is not required to provide information, which are already with the departmental officers or which are already mentioned in the TRC.

It is well settled that in case of any conflict between the provisions of DTAA and the Income tax Act, 1961, then provisions of DTAA would prevail over provisions under Income tax Act, 1961. [CBDT Circular No. 333 dated 02/04/1982]

In this case Mr. X is therefore not liable to pay tax on the income earned by him in India provided he submits the TRC (Tax Residence certificate) obtained from the government of the other country, where he resides and provides such information and documents as required by the income tax authorities in India.

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DISCLAIMER: above write up is an attempt to share information and knowledge with our readers. The view expressed here are the personal views of the author and same should not be considered as a professional advice. It is advisable to consult with your tax consultant before acting on any part of this article.