Double Taxation and Foreign Tax Credit

Section 90 of the Income Tax, 1961 deals with the provisions of double taxation relief. In today’s globalized world business is not restricted to​​ single country but is generally spanned across globe. It reads out as follows: -

• • • The Central Government may enter into an agreement with the Government of any country outside India or specified territory outside India,—

• • for the granting of relief in respect of—

• • income on which have been paid both income-tax under this Act and income-tax in that country or specified territory, as the case may be, or

  • income-tax chargeable under this Act and under the corresponding law in force in that country or specified territory, as the case may be, to promote mutual economic relations, trade and investment, or

• • for the avoidance of double taxation of income under this Act and under the corresponding law in force in that country or specified territory, as the case may be, or

  • for exchange of information for the prevention of evasion or avoidance of income-tax chargeable under this Act or under the corresponding law in force in that country or specified territory, as the case may be, or investigation of cases of such evasion or​​ avoidance, or

  • for recovery of income-tax under this Act and under the corresponding law in force in that country or specified territory, as the case may be,

• • • Where the Central Government has entered into an agreement with the Government of any country outside India or specified territory outside India, as the case may be, under sub-section (1) for granting relief of tax, or as the case may be, avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, the provisions of this Act shall apply to the extent they are more beneficial to that assessee.

(2A)​​   Notwithstanding anything contained in sub-section (2), the provisions​​   of Chapter X-A of the Act shall apply to the assessee even if such​​    provisions are not beneficial​​ to him.

• • • Any term used but not defined in this Act or in the agreement referred to in sub-section (1) shall, unless the context otherwise requires, and is not inconsistent with the provisions of this Act or the agreement, have the same meaning as assigned to it in the notification issued by the Central Government in the Official Gazette in this behalf.

    • An assessee, not being a resident, to whom an agreement referred to in sub-section (1) applies, shall not be entitled to claim any relief under such agreement​​ unless a certificate of his being a resident in any country outside India or specified territory outside India, as the case may be, is obtained by him from the Government of that country or specified territory.

    • The assessee referred to in sub-section (4)​​ shall also provide such other documents and information, as may be prescribed.

Explanation 1.—For the removal of doubts, it is hereby declared that the charge of tax in respect of a foreign company at a rate higher than the rate at which a domestic company​​ is chargeable, shall not be regarded as less favourable charge or levy of tax in respect of such foreign company.

Explanation 2.—For the purposes of this section, "specified territory" means any area outside India which may be notified as such by the Central Government.

Explanation 3.—For the removal of doubts, it is hereby declared that where any term is used in any agreement entered into under sub-section (1) and not defined under the said agreement or the Act, but is assigned a meaning to it in the notification issued under sub-section (3) and the notification issued there under being in force, then, the meaning assigned to such term shall be deemed to have effect from the date on which the said agreement came into force.

Explanation 4.—For the removal of doubts, it is hereby declared that where any term used in an agreement entered into under sub-section (1) is defined under the said agreement, the said term shall have the same meaning as assigned to it in the agreement; and where the term is not defined​​ in the said agreement, but defined in the Act, it shall have the same meaning as assigned to it in the Act and explanation, if any, given to it by the Central Government.

Section 90A Adoption by Central Government of agreement between specified associations for double taxation relief

• • • Any specified association in India may enter into an agreement with any specified association in the specified territory outside India and the Central Government may, by notification in the Official Gazette, make such provisions as may be necessary for adopting and implementing such agreement—

• • for the granting of relief in respect of—

• • income on which have been paid both income-tax under this Act and income-tax in any specified territory outside India; or

  • income-tax chargeable​​ under this Act and under the corres-ponding law in force in that specified territory outside India to promote mutual economic relations, trade and investment, or

• • for the avoidance of double taxation of income under this Act and under the corresponding law​​ in force in that specified territory outside India, or

  • for exchange of information for the prevention of evasion or avoidance of income-tax chargeable under this Act or under the corresponding law in force in that specified territory outside India, or investigation of cases of such evasion or avoidance, or

  • for recovery of income-tax under this Act and under the corresponding law in force in that specified territory outside India.

• • • Where a specified association in India has entered into an agreement with a specified association of any specified territory outside India under sub-section (1) and such agreement has been notified under that sub-section, for granting relief of tax, or as the case may be, avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, the provisions of this Act shall apply to the extent they are more beneficial to that assessee.

(2A)​​  Notwithstanding anything contained in sub-section (2), the provisions of Chapter X-A​​  of the Act shall apply to the assessee even if such provisions are not beneficial to him.

• • • Any term used but not defined in this Act or in the agreement referred to in sub-section (1) shall, unless the context otherwise requires, and is not inconsistent with the provisions of this Act or the agreement, have the same meaning as assigned to it in the notification issued by the Central Government in the Official Gazette in this behalf.

    • An assessee, not being a resident, to whom the agreement referred to in sub-section (1) applies, shall not be​​ entitled to claim any relief under such agreement unless a certificate of his being a resident in any specified territory outside India, is obtained by him from the Government of that specified territory.

    • The assessee referred to in sub-section (4) shall​​ also provide such other documents and information, as may be prescribed.

Explanation 1.—For the removal of doubts, it is hereby declared that the charge of tax in respect of a company incorporated in the specified territory outside India at a rate higher​​ than the rate at which a domestic company is chargeable, shall not be regarded as less favourable charge or levy of tax in respect of such company.

Explanation 2.—For the purposes of this section, the expressions—

 (a) "specified association" means any institution, association or body, whether incorporated or not, functioning under any law for the time being in force in India or the laws of the specified territory outside India and which may be notified as such by the Central Government for the purposes of​​ this section;

 (b) "specified territory" means any area outside India which may be notified as such by the Central Government for the purposes of this section.

Explanation 3.—For the removal of doubts, it is hereby declared that where any term is used in any agreement entered into under sub-section (1) and not defined under the said agreement or the Act, but is assigned a meaning to it in the notification issued under sub-section (3) and the notification issued thereunder being in force, then, the meaning assigned to such term shall be deemed to have effect from the date on which the said agreement came into force.

Explanation 4.—For the removal of doubts, it is hereby declared that where any term used in an agreement entered into under sub-section (1) is defined under the said agreement, the said term shall have the same meaning as assigned to it in the agreement; and where the term is not defined in the said agreement, but defined in the Act, it shall have the same meaning as assigned to it in the Act and explanation, if any, given to it by the Central Government.

Section 91 Countries with which no agreement exists: -

• If any person who is resident in India in any previous year proves that, in respect of his income which accrued or arose during that previous​​ year outside India (and which is not deemed to accrue or arise in India), he has paid in any country with which there is no agreement under​​ section 90​​ for the relief or​​ avoidance of double taxation, income-tax, by deduction or otherwise, under the law in force in that country, he shall be entitled to the deduction from the Indian income-tax payable by him of a sum calculated on such doubly taxed income at the Indian rate​​ of tax or the rate of tax of the said country, whichever is the lower, or at the Indian rate of tax if both the rates are equal.

• If any person who is resident in India in any previous year proves that in respect of his income which accrued or arose to him​​ during that previous year in Pakistan he has paid in that country, by deduction or otherwise, tax payable to the Government under any law for the time being in force in that country relating to taxation of agricultural income, he shall be entitled to a deduction from the Indian income-tax payable by him—

• • of the amount of the tax paid in Pakistan under any law aforesaid on such income which is liable to tax under this Act also; or

  • of a sum calculated on that income at the Indian rate of tax;

whichever is less.

• If any non-resident person is assessed on his share in the income of a registered firm assessed as resident in India in any previous year and such share includes any income accruing or arising outside India during that previous year (and which is not deemed to accrue or arise in India) in a country with which there is no agreement under​​ section 90​​ for the relief or avoidance of double taxation and he proves that he has​​ paid income-tax by deduction or otherwise under the law in force in that country in respect of the income so included he shall be entitled to a deduction from the Indian income-tax payable by him of a sum calculated on such doubly taxed income so included​​ at the Indian rate of tax or the rate of tax of the said country, whichever is the lower, or at the Indian rate of tax if both the rates are equal.

Explanation.—In this section,—

• the expression "Indian income-tax" means income-tax charged in accordance with the provisions of this Act;

• the expression "Indian rate of tax" means the rate determined by dividing the amount of Indian income-tax after deduction of any relief due under the provisions of this Act but before deduction of any relief due under this Chapter, by the total income;

• the expression "rate of tax of the said country" means income-tax and super-tax actually paid in the said country in accordance with the corresponding laws in force in the said country after deduction of all relief due, but before deduction of any relief due in the said country in respect of double taxation, divided by the whole amount of the income as assessed in the said country;

• the expression "income-tax" in relation to any country includes any excess profits tax or business​​ profits tax charged on the profits by the Government of any part of that country or a local authority in that country.

FOREIGN TAX CREDIT

Rule 128 of the Income Tax Rules, 1962 provides for the procedure to claim the credit for the amount of any foreign tax paid by him in country or specified territory outside India and the same is being reproduced below: -

• An assessee, being a resident shall be​​ allowed a credit for the amount of any foreign tax paid by him in a country or specified territory outside India,​​ by way of deduction or otherwise, in the year in which the income corresponding to such tax has been offered to tax or assessed to tax in India, in the manner and to the extent as specified in this rule :​​ 

 Provided​​ that in a case where income on which​​ foreign tax has been paid or deducted, is offered to tax in more than one year, credit of foreign tax shall be allowed across those years in the same proportion in which the income is offered to tax or assessed to tax in India.

• The foreign tax referred to​​ in sub-rule (1) shall mean,—

​​ 

• The credit under sub-rule (1) shall be available against the amount of tax, surcharge and cess payable under the Act but not in respect of any sum payable by way of interest, fee or penalty.

• No credit​​ under sub-rule (1) shall be​​ available in respect of any amount of foreign tax or part thereof​​ which is disputed in any manner by the assessee:​​ 

Provided​​ that the credit of such disputed tax shall be allowed for the year in which such income is offered to tax or assessed to tax in India if the assessee within six months from the end of the month in which the dispute is finally settled, furnishes evidence of settlement of dispute and an evidence to the effect that the liability for payment of such foreign tax has been discharged by him​​ and furnishes an undertaking that no refund in respect of such amount has directly or indirectly been claimed or shall be claimed.​​ 

• The credit of foreign tax shall be the aggregate of the amounts of credit computed separately for each source of income arising from a particular country or specified territory outside India and shall be given effect to in the following manner:—​​ 

• In a case where any tax is payable under the provisions of section 115JB or section 115JC,​​ the credit of foreign tax shall be allowed against such tax in the same manner as is allowable against any tax payable under the provisions of the Act other than the provisions of the said sections​​ (hereafter referred to as the "normal provisions").

• Where the amount of foreign tax credit available against the tax payable under the provisions of section 115JB or section 115JC exceeds the amount of tax credit available against the normal provisions, then while computing the amount of credit under section 115JAA or section 115JD in respect of the taxes paid under section 115JB or section 115JC, as the case may be, such excess shall be ignored.

• Credit of any foreign tax shall be allowed on furnishing the​​ following documents by the assessee, namely:—​​ 

• The statement in Form No.67 referred to in clause (i) of sub-rule (8) and​​ the certificate or the statement referred to in clause (ii) of sub-rule (8)​​ shall be furnished on or before the due date specified for furnishing the return of income under sub-section (1) of section 139, in the manner specified for furnishing such return​​ of income.​​ 

• Form No.67 shall also be furnished in a case where the carry backward of loss of the current year results in refund of foreign tax for which credit has been claimed in any earlier previous year or years.​​ 

Explanation.—For the purposes of this​​ rule 'telegraphic transfer buying rate' shall have the same meaning as assigned to it in Explanation to rule 26.]

Section 155(14A)provides for the provisions relating to amendments after settlement of dispute related to tax paid u/s 90/90A/91 of the​​ Income Tax Act, 1961 and procedure thereof: -

​​ Where in the assessment for any previous year or in any intimation or deemed intimation under sub-section (1) of​​ section 143​​ for any previous year, credit for income-tax paid in any country outside India or a specified territory outside India referred to in​​ section 90,​​ section 90A​​ or​​ section 91​​ has not been given on the ground that the payment of such tax was under dispute, and if subsequently such dispute is settled; and the assessee, within six months from the end of the month in which the dispute is settled, furnishes to the Assessing Officer evidence of settlement of dispute and evidence of payment of such tax along with an undertaking that no credit in respect of such amount has directly or indirectly been claimed or shall be claimed for any other assessment year, the Assessing Officer shall amend the order of assessment or any intimation or deemed intimation under sub-section (1) of​​ section 143, as the case may be, and the provisions of​​ section 154​​ shall, so far as may be, apply thereto:

Provided​​ that the credit of tax which was under dispute shall be allowed for the year in which such income is offered to tax or assessed to tax in India.]