[Opinion] Elimination or Amplification of Double Taxation?

Pradhumn Daftri & Kanika Mahajan – [2024] 168 taxmann.com 27 (Article)

Background

• The Double Taxation Avoidance Agreement plays a pivotal role in determining the taxation of income of a non-resident in the other state, drawing clear lines for taxation of source and resident state and providing taxing rights to each. However, some transactions are still not explicitly covered in the tax treaties, thereby leaving a gray area for taxpayers to speculate and for tax authorities to find new and innovative ways to tax income.
• One such issue is posed by the Article on ‘Elimination of double taxation’ which appears as Article 23, 24 or 25 in different tax treaties (hereinafter referred to as ‘Relevant Article’). The need for interpretation of this article arises in cases where a particular income FTS for instance is not covered by any specific clause of the tax treaty.
• The question in such case is as to whether the income in the nature of technical services shall be governed by the article on Business Profits or the article on Other Income, or taking a different interpretation altogether, the income shall be taxed in accordance with the Domestic Law sans any explicit provision present in the particular treaty.
• The application of Domestic Law arises where the Relevant Article is interpreted in a manner to be applicable on the whole treaty. Therefore, the issue is to analyze whether it confers Revenue with the power to tax the income not covered by the foregoing articles in accordance with the provisions of the Domestic Law or it is only restricted to granting the assessee the benefit of Foreign Tax Credit (‘FTC’).

Analysis

• The various aspects to be analyzed in this regard are – the comparison of language in various tax treaties, OECD and UN Commentary, Preamble of tax treaties, interpretation of Section 90 of the Act and important judicial interpretations available on the subject matter.

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