Double Taxation Relief

Foreign Tax Credit (FTC) in India is computed under Rule 128 of the Income Tax Rules, 1962. The core principle is that the credit allowed is the lower of the tax payable under the Income Tax Act on such income, or the foreign tax paid on such income. This means that if the foreign tax paid exceeds the Indian tax liability on that specific income, the excess foreign tax is ignored and no refund is provided. The credit is allowed against the amount of tax, surcharge, and cess payable in India, but not against interest, fees, or penalties. Rule 128 also specifies that the credit is computed separately for each source of income arising from a particular country or specified territory outside India. If income on which foreign tax has been paid is offered to tax in India over multiple years, the FTC is allowed proportionately across those years. The foreign tax considered for credit is the tax covered under the DTAA (for Section 90/90A cases) or the income-tax payable under the law in force in the foreign country (for Section 91 cases).

Double taxation occurs when the same income is taxed in two or more countries. This can happen due to conflicting tax laws, such as one country taxing based on the source of income and another based on the residence of the taxpayer. Double taxation relief is crucial to prevent taxpayers from being unduly burdened, which could otherwise discourage international trade, investment, and the free flow of capital and technology. It ensures fairness and promotes economic cooperation between countries. In India, provisions for double taxation relief are primarily enshrined in Sections 90 and 91 of the Income Tax Act, 1961.

Both Mutual Agreement Procedures (MAP) and Advance Pricing Agreements (APA) are crucial mechanisms for resolving and preventing double taxation in international transactions, though they operate at different stages.

Mutual Agreement Procedure (MAP): MAP is a dispute resolution mechanism available under DTAAs, typically invoked when a taxpayer believes that the actions of one or both treaty countries have resulted in taxation not in accordance with the DTAA, including double taxation. Competent Authorities (CAs) of the two countries negotiate to eliminate the double taxation or resolve the dispute. MAP is a reactive process, dealing with disputes that have already arisen. India has a well-established MAP program, and it can help in relieving double taxation either fully or partially.

Advance Pricing Agreement (APA): An APA is a proactive agreement between a taxpayer and the tax authority (and often a foreign tax authority in bilateral/multilateral APAs) that determines the transfer pricing methodology for future international transactions. By agreeing on the pricing method beforehand, APAs provide certainty and significantly reduce the risk of future transfer pricing disputes and consequent double taxation. APAs can be unilateral (with Indian tax authority), bilateral (with India and one treaty partner), or multilateral (with India and multiple treaty partners). While MAP addresses existing disputes, APA prevents them from arising in the first place. The Indian government has also relaxed norms for MAP and bilateral APAs, making them available even if Article 9(2) (correlative adjustment clause) is absent in the DTAA.

Section 90 and Section 91 of the Income Tax Act, 1961, both provide relief from double taxation, but they apply under different circumstances.

Section 90 (Bilateral Relief): This section applies when India has entered into a Double Taxation Avoidance Agreement (DTAA) with another country. The provisions of the DTAA prevail over the Income Tax Act to the extent they are more beneficial to the assessee. It aims to provide relief in respect of income on which tax has been paid in both countries or to avoid double taxation. The relief can be in the form of exemption or tax credit, as specified in the DTAA.

Section 91 (Unilateral Relief): This section provides relief when an Indian resident has paid tax on income in a foreign country with which India does not have a DTAA. Key conditions include: the taxpayer must be a resident of India, the income must have accrued or arisen outside India (and not deemed to accrue or arise in India), tax must have been paid in that foreign country, and the same income must also be taxable in India. The relief allowed is the lower of the Indian tax rate or the foreign tax rate on the doubly taxed income.

Section 90 applies when India has a Double Taxation Avoidance Agreement (DTAA) with the other country. Relief is granted as per the treaty terms. Section 91 provides unilateral relief to a resident Indian when income is earned in a country with which India has no DTAA. The relief is calculated at the lower of the Indian tax rate or the foreign tax rate on the doubly taxed income.

The OECD's Base Erosion and Profit Shifting (BEPS) Action Plan and the Multilateral Instrument (MLI) have significantly impacted double taxation relief mechanisms by addressing aggressive tax planning strategies that lead to non-taxation or reduced taxation, rather than double taxation.

BEPS Action Plan: Launched by the OECD and G20, BEPS aims to ensure that profits are taxed where economic activities generating them are performed and where value is created. It addresses issues like treaty shopping, artificial avoidance of Permanent Establishment (PE) status, and hybrid mismatch arrangements. By curbing these practices, BEPS indirectly affects double taxation relief by ensuring that legitimate taxes are paid, thereby reducing instances where relief might be sought due to artificial structures.

Multilateral Instrument (MLI): The MLI is a key outcome of the BEPS project (Action 15) designed to swiftly implement BEPS-related measures into existing bilateral tax treaties without the need for renegotiating each one individually. India signed the MLI, and it entered into force for India on October 1, 2019, applying to various DTAAs from April 1, 2020. The MLI modifies DTAAs to include minimum standards related to preventing treaty abuse (BEPS Action 6) and improving dispute resolution (BEPS Action 14), such as mandatory binding arbitration for MAP. This ensures that DTAA benefits, including double taxation relief, are granted only to genuine cases and not for tax avoidance purposes, thus strengthening the integrity of the international tax system.

A Double Taxation Avoidance Agreement (DTAA) is a bilateral tax treaty between two countries aimed at preventing income from being taxed twice in both jurisdictions. Its primary objectives include promoting economic cooperation and trade by providing certainty to taxpayers, eliminating double taxation, and preventing fiscal evasion. In India, Sections 90 and 90A of the Income Tax Act, 1961, govern the applicability of DTAAs. Section 90 deals with agreements between the Government of India and other countries, while Section 90A pertains to agreements between specified associations. A crucial aspect of their interaction is enshrined in Section 90(2), which stipulates that where the Central Government has entered into a DTAA, the provisions of the Income Tax Act, 1961, shall apply to the assessee only to the extent that they are more beneficial than the provisions of the DTAA. This is known as the 'treaty override' rule, ensuring that taxpayers can always opt for the more advantageous provisions, be it the DTAA or the domestic law.

Double taxation relief in India is primarily provided through two mechanisms: bilateral relief and unilateral relief. Bilateral relief is available when India has entered into a Double Taxation Avoidance Agreement (DTAA) with another country, as per Sections 90 and 90A of the Income Tax Act, 1961. These agreements typically provide relief through either the exemption method or the credit method. Under the exemption method, income taxed in one country is entirely exempt from tax in the other country. Under the credit method, the income is taxed in both countries, but the tax paid in the source country is allowed as a credit against the tax payable in the country of residence, up to the amount of tax payable on that income in the residence country. Unilateral relief, on the other hand, is provided under Section 91 of the Income Tax Act, 1961, in cases where India does not have a DTAA with the foreign country where the income has been earned and taxed. An Indian resident who has paid tax on income accrued or arisen outside India (and not deemed to accrue or arise in India) in a country with which there is no DTAA, is entitled to a deduction from the Indian income-tax payable by them. The relief is calculated as the lower of the Indian rate of tax or the rate of tax of the foreign country on such doubly taxed income.

When an Indian resident taxpayer earns income from a country with which India does not have a Double Taxation Avoidance Agreement (DTAA), double taxation relief is granted under Section 91 of the Income Tax Act, 1961. This is known as unilateral relief. The conditions for claiming this relief are:

1. The taxpayer must be a resident of India in the relevant previous year.
2. The income must have accrued or arisen outside India and should not be deemed to accrue or arise in India.
3. Income tax must have been paid in that foreign country, either by deduction or otherwise, under the law in force there.
4. The same income must also be taxable in India.

The relief provided is a deduction from the Indian income tax payable by the resident. The amount of deduction is calculated on the doubly taxed income at the lower of the Indian rate of tax or the rate of tax of the said foreign country.

To claim Foreign Tax Credit (FTC) in India, a resident taxpayer must file Form 67. This form is mandatory and must be submitted online on the e-filing portal of the Income Tax Department. The essential documents and procedural requirements include:

1. Form 67: A statement of income from the foreign country and foreign tax deducted or paid on such income.
2. Proof of Foreign Tax Payment: A certificate or statement from the tax authority of the foreign country, or from the person responsible for deducting the tax, specifying the nature of income and the amount of tax deducted/paid. Alternatively, if signed by the assessee, it must be accompanied by an acknowledgment of online payment, bank counterfoil, or challan for tax payment, or proof of deduction.
3. Timely Filing: Form 67 must be filed on or before the due date for furnishing the return of income under Section 139(1) of the Income Tax Act. Failure to do so may result in the denial of FTC.
4. Tax Residency Certificate (TRC): While not explicitly mentioned in Rule 128 for Form 67, a TRC is generally required to claim DTAA benefits under Section 90.

The primary methods for providing double taxation relief are the exemption method and the credit method. Under the exemption method, income is taxed in only one of the two countries (usually the source country) and is exempt from tax in the other country (residence country). Under the credit method, income is taxable in both countries, but the residence country allows a credit for the tax paid in the source country against its own tax liability on that income. India primarily follows the credit method in most of its DTAAs. The Indian Income Tax Act, 1961, provides for bilateral relief under Section 90 (through DTAAs) and unilateral relief under Section 91 (for countries without DTAAs), both generally employing the credit method.

In the context of Indian tax law, Section 90(2) of the Income Tax Act, 1961, deals with the interaction between DTAA provisions and domestic law. It states that where the Central Government has entered into a DTAA with another country, the provisions of the Income Tax Act shall apply to the assessee to the extent they are more beneficial to that assessee. This means that India follows a 'treaty-beneficial' rule, where the taxpayer can choose to be governed by either the DTAA or the domestic law, whichever offers a more favorable outcome. This is often referred to as a 'treaty override' in the sense that the DTAA can override less beneficial domestic law provisions. However, it's crucial to distinguish this from a 'domestic law override' where domestic law unilaterally overrides treaty commitments. India's position, as per Section 90(2), is to give precedence to the more beneficial of the two. There are specific exceptions, such as the General Anti-Avoidance Rule (GAAR), which can override DTAA benefits even if they are not beneficial to the taxpayer.

The Minimum Alternate Tax (MAT) for companies and Alternate Minimum Tax (AMT) for non-corporate assessees ensure that certain entities pay a minimum amount of tax, even if their taxable income under normal provisions is low due to various deductions or exemptions. The Foreign Tax Credit (FTC) mechanism under Rule 128 of the Income Tax Rules, 1962, generally allows credit for foreign taxes paid against the tax liability under MAT/AMT. However, a critical nuance arises concerning the carry-forward of MAT/AMT credit. Rule 128(7) (and similar provisions in the proposed Income Tax Bill, 2025) specifies that if the amount of FTC available against the tax payable under MAT/AMT provisions exceeds the amount of FTC that would have been available against tax payable under normal provisions, such excess shall be ignored while computing the MAT/AMT credit that can be carried forward. This provision aims to prevent assessees from claiming a 'dual advantage' by restricting the MAT/AMT credit carry-forward to the extent of the 'excess' FTC claimed against MAT/AMT, thereby aligning the MAT/AMT credit with the actual incremental tax paid domestically. This can lead to a situation where a portion of the foreign tax credit effectively reduces the MAT/AMT liability, but the corresponding MAT/AMT credit that can be carried forward for future set-off is reduced, potentially increasing the overall tax outgo for Indian entities with overseas operations.

A 'Permanent Establishment' (PE) is a fundamental concept in international taxation, particularly within Double Taxation Avoidance Agreements (DTAAs), that determines whether a foreign enterprise has a taxable presence in another country. As per Article 5 of most DTAAs (often following the OECD or UN Model Tax Conventions), a PE generally means a fixed place of business through which the business of an enterprise is wholly or partly carried on. Common examples of a fixed place PE include a place of management, a branch, an office, a factory, a workshop, or a mine/oil/gas well. Beyond fixed place PEs, DTAAs also define other types, such as:

• Agency PE: Where a dependent agent habitually exercises an authority to conclude contracts in the host country.
• Service PE: Where services are rendered in the host country for a specified period.
• Construction PE: A building site or construction/installation project that lasts for more than a specified period (e.g., six or twelve months).

The significance of a PE lies in its role as a threshold for taxing business profits. Generally, the business profits of an enterprise of one country are taxable in the other country only if the enterprise carries on business through a PE situated therein. Once a PE is established, only the profits attributable to that PE can be taxed in the host country (e.g., India). The DTAA definition of PE typically prevails over the broader domestic law definition of 'business connection' under Section 9(1)(i) of the Income Tax Act, 1961, when a treaty is in force, due to the 'more beneficial' rule.

Rule 128 of the Income Tax Rules, 1962, lays down the detailed conditions and limitations for claiming Foreign Tax Credit (FTC) in India. Key aspects include:

1. Eligibility: An assessee, being a resident in India, is allowed credit for foreign tax paid in a country or specified territory outside India.
2. Year of Credit: The credit is allowed in the year in which the income corresponding to such tax has been offered to tax or assessed to tax in India.
3. Documentation: To claim FTC, the assessee must furnish a statement of income from the foreign country and foreign tax paid/deducted in Form No. 67, verified as specified. Additionally, a certificate or statement from the foreign tax authority, or the person responsible for deducting tax, or signed by the assessee (with proof of payment/deduction) is required. These documents must be furnished on or before the due date for filing the return of income.
4. Limitation of Credit: The credit allowed is the lower of the tax payable under the Income Tax Act on such income and the foreign tax paid on such income. If the foreign tax paid exceeds the amount of tax payable as per the DTAA, such excess is ignored.
5. Separate Computation: FTC is computed separately for each source of income arising from a particular country.
6. No Credit for Interest/Penalty: FTC is available against tax, surcharge, and cess payable, but not in respect of any sum payable by way of interest, fee, or penalty.
7. Disputed Tax: No credit is available for any disputed foreign tax. However, if the dispute is settled and the liability discharged, credit can be claimed in the year the income was offered to tax, provided evidence and an undertaking are furnished within six months of settlement.