DOUBLE TAXATION RELIEF

1. R a resident Indian, has derived the following income for the previous year relevant to the assessment year 2009-2010. Particulars (1) Income from profession (2) Share income from a partnership in country X (tax paid in country Y for this income in equivalent Indian rupees Rs 25,000) (3) Commission income from a concern in country Y (tax paid in country Y at 20%) converted in Indian rupee. (4) Interest from schedule banks. Rs. 3,00,000 2,00,000 40,000 20,000

R wishes to know whether he is eligible to any double taxation relief, if so, its quantum. India does not have any Double Taxation Avoidance Agreement with countries X and Y. Solution: (a) Computation of total income Particulars (a) Income from business: (i) Income from profession (ii) Share income in partnership firm in country X (b) Income from other sources: (i) Interest from schedule bank (ii) Commission earned in country Y, assumed from other sources Total income (b) Computation of tax liability : Tax on total income of Rs. 5,60,000 Add : Education cess @ 2% Add : SHEC @ Less : Double taxation relief : (2,00,00 + 40,000) 21.52% Tax payable Tax payable to be rounded off to the nearest multiple of Rs 10 (Sec. 288B) Note: (i) Average rate of tax in the foreign country 20%. (ii) Average rate of tax in India: 1,20,510 5,60,000 100 = 21.52% 1,17,000 2,340 1,170 1,20,510 51,648 68,862 68,860 20,000 40,000 60,000 5,60,000 3,00,000 2,00,000 5,00,000 Rs Rs

Whichever is less, is applicable

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2. Mr. Prasad, ordinarily resident in India, furnished the following particulars of his income/savings during the previous year 2008-2009. Rs (i) Income from foreign business (Including Rs 2,00,000 from business connection in India) accruing outside India (ii) Loss from Indian business (iii) Income from house property (iv) Dividends gross from Indian companies (v) Deposit in Public Provident Fund (vi) Tax paid in foreign country There is no double taxation avoidance treaty. Compute the tax liability Solution: (a) Computation of total income Particulars 1. Income from house property 2. Income from business : (a) Income from Indian business (b) (I) Income from foreign business accruing or arising outside India (ii) Income from foreign business deemed to accrue or arise in India 3. Income from other sources Dividends from Indian companies exempt [Sec. 10(34)] Gross total income Less : Deduction for approved savings (Sec. 80C): PPF Deposits Total income Tax liability on total income : Income-tax on slab rates Add: Surcharge on income tax @ 10% Add : Education cess : 2% on the aggregate of income tax and surcharge Add : SHEC @ 1% Tax liability Less : Double taxation relief on foreign business profits, not deemed to accrue or arise in India (Sec. 91) 10,00,000 20.833% Tax payable Tax payable to be rounded off to the nearest multiple of Rs 10 (Sec.,288B) 3,48,000 34,800 3,82,800 7,656 3,828 3,94,284 2,08,330 Nil 14,00,000 70,000 13,30,000 (-) 2,00,000 (+) 10,00,000 (+) 2,00,000 10,00,000 Rs Rs 4,00,000 12,00,000 () 2,00,000 4,00,000 60,000 70,000 2,50,000

1,85,954 1,85,950

Note: 1. Relief is allowed on the doubly taxed income either at average rate of Indian tax or average rate of foreign income tax, whichever is lower; (a) Average rate of Indian income tax : 3,94,284 / 13,30,000 x 100 = 29.65% (b) Average rate of foreign income tax: (2,50,000/12,00,000) x 100 = 20.833%

Tax Supplement

2.

The amount of doubly taxed income has been worked out as under: Income from foreign business, accruing outside India Less: (i) Income from business connection deemed to accrue or arise in India which is not entitled to double taxation relief. Doubly taxed income

Rs 12,00,000 2,00,000 10,00,000

3.

Loss from Indian business has been set-off against profits from foreign business which is deemed to accrue or arise in India. The mode of set-off increases the amount of double taxation relief.

3. The Income-tax Act, 1961 provides for taxation of a certain income earned by X. The Double Taxation Avoidance Agreement, which applies to X, excludes the income earned by X from the purview of tax. Is X lilable to pay tax on the in come earned by him? Discuss. Answer: Where any conflict arises between the provisions of the Double Taxation Avoidance Agreement and the Income- tax Act, 1961, the provisions of the Double Taxation Avoidance Agreement would prevail over those of the Income-tax Act. X is, therefore, not liable to pay tax on the income earned by him. 4. Explain briefly the proposition of law in case of any conflict between the provisions of the Double Taxation Avoidance Agreement (DTAA) and the Income-tax Act, 1961. Answer: Where there is conflict between the provision as contained in the tax treaty and the provisions of Income Tax Act, a payer can take advantage of those provisions which are more beneficial to him. Thus, tax treaties override the provisions of Income Tax Act which can be enforced by the appellate authorities/courts. 5. Arif, a resident both in India and Malaysia in previous year 2008-2009, owns immoveable properties (including residential house) at Malaysia and India. He has earned income of Rs 50 lakh from rubber estates in Malaysia during the financial year 2008-2009. He also sold some property in Malaysia resulting in short-term capital gain of Rs 10 lakh during the year. Arif has no permanent establishment of business in India. However, he has derived rental income of Rs 6 lakh from property let out in India and he has a house in Lucknow where he stays during his visit to India. The Article 4 of the Double Taxation Avoidance agreement between India and Malaysia provides that where an individual is a resident of both the contractting States, he shall be deemed to be resident of the Contracting State in which he has permanent home available to him. If he has permanent home in both the Contracting States, he shall be deemed to be a resident of the Contracting State with which his personal and economic relations are closer (centre of vital interests). You are required to state with reasons whether the business income of Arif arising in Malaysia and the capital gains in respect of sale of the property situated in Malaysia can be taxed in India. Answer: Where the Central Government has entered into an aggreement with the government of any other country for granting relief to tax or for avoidance of double taxation, the provisions of the Income-tax Act, 1961 are applicable in such case to the extent they are more beneficial to the assessee. Arif has a residential house both in Malaysia and India. Thus, he has a permanent home in both the countries. However, he has no permanent establishment of business in India. The Double Taxation Avoidance Agreement (DTAA) with Malaysia provides that where an individual is a resident of both countries, he is deemed to be resident of that country in which he has a permanent home and if he has a permanent home in both the countries, he is deemed to be resident of that country, which is the centre of his vital interests, i.e. the country with which he has closer personal and economic relations. Arif owns rubber estates in Malaysia from which he derives business income. However, Arif has no permanent establishment of his business in India. Therefore, his personal and economic relations with Malaysia are closer, since Malaysia is the place where(a) the property is located and (b) the permanent establishment (PE) has been set-up. Therefore, he is deemed to be resident of Malaysia for AY 2009-2010.

Tax Supplement

So, in this case, Arif is not liable to income tax in India for assessment year 2009-2010 in respect of business income and capital gains arising in Malaysia. 6. Sania, a resident Indian, furnishes the details for the assessment year 2009-2010. Rs (1) Income from profession (2) Share income from a partnership in country X (Tax paid in country X for this income in equivalent Indian rupees Rs 8,000) (3) Commission income from concern in country Y (Tax paid in country Y at 20%) converted in Indian rupee) (4) Interest from scheduled banks 20,000 30,000 1,04,000 40,000

Sania wishes to know whether he is eligible to any double taxation relief, if so, its quantum. India does not have any Double Taxation Avoidance Agreement with countries X and Y. Solution : (a) Computation of total income Particulars (a) Income from business: (i) Income from profession (ii) Share income in partnership firm in country X (b) Income from other sources: (i) Interest from schedule bank (ii) Commission earned in country Y, assumed from other sources Total income (b) Computation of tax liability Particulars Tax on total income of Rs 1,94,000 Add: Surcharge on income tax Education cess @ 2% SHEC @ 1% Rs 9.300 Nil 9,300 186 93 9,579 Less: Dobule taxation relief : 70,000 4.94 Tax payable Rounded off u/s 288B Note: (i) Average rate of tax in the foreign country : 20% (ii) Average rate of tax in India : 9579 100 = 4.94% 194000 3,458 6,121 6,120 20,000 30,000 50,000 1,94,000 1,04,000 40,000 1,44,000 Rs Rs

7. A is a musician deriving income from foreign concerts performed outside India, Rs 50,000. Tax of Rs 10,000 was deducted at source in the country where the concerts were given. India does not have any agreement with that country for avoidance of double taxation. Assuming that Indian income of A is Rs.2,00,000, what is the relief due to him under Sec. 91 for the assessment year 2009-2010.

Tax Supplement

Solution : (a) Computation of total income: (i) (ii) Indian income Foreign income Gross total income or total income (b) Computation of tax liability: Income tax on total income at slab rates: Add: (i) Surcharge on income tax (ii) Education cess @ 2% (iii) SHEC @ 1% Less : Double taxation relief under Sec. 91: Rs 50,000 x 9.9% Tax payable
24,720 100 = 9.9% 2,50,000

Rs 2,00,000 50,000 2,50,000

24,000 480 240 24,720 4,950 19,770

Note: 1. 2.

Average rate of Indian income tax: = Average rate of foreign income tax:

Relief is allowed either at the average rate of Indian income tax or te average rate of foreign income tax,
10,000 100 = 20% 50,000

whichever is lower. Accordingly, the relief has been allowed at the average rate of Indian income tax. 8. A resident assessee, earned foreign exchange of Rs 78,800. The foreign income was also subjected to tax deduction of Rs 8,800 at source in the foreign country with which India had no agreement for avoidance of double taxation. The asses- see claimed relief under Sec. 91 of the Income-tax Act in respect of the whole foreign income. Discuss his contention with reference to decided case laws. Answer: Where any income is taxed outside India as well as in India, a resident assessee is entitled to claim double taxation relief on such doubly taxed income provided such income is not deemed to accrue or arise in India. If any income arising outside India, is not subjected to tax in India, such foreign income does not form part of doubly taxed income for the purposes of Sec. 91. The expression doubly taxed income refers to foreign income which also suffered tax in India. Where any foreign income, taxed outside India, is also eligible to deduction in computing total income in India, double taxation relief would be allowed only on such income as forms part of total income. Double taxation relief will be allowed on such doubly taxed income either at the average rate of foreign income tax or Indian income tax, whichever is lower out of the two.

Tax Supplement