Double Taxation Avoidance Agreement (DTAA): formula sheet

Key formulas

Purposes of an agreement (section 159(3))

Relief + avoidance of double taxation + exchange of information + recovery of tax

The avoidance purpose must not create non-taxation or reduced taxation through evasion or avoidance, including treaty-shopping.

Beneficial provision rule (section 159(4))

For an assessee covered by an agreement, the Act applies to the extent it is more beneficial

Section 159(6) says the provisions of Chapter XI (anti-avoidance) apply even if not beneficial.

Non-resident's claim condition (section 159(8))

Residence certificate from the other country + prescribed documents and information

Both are needed before a non-resident can claim treaty relief.

Unilateral relief (section 160(1))

Relief = foreign income × lower of (Indian rate, foreign rate)

Applies where no section 159 agreement exists. If rates are equal, use the Indian rate. Relief is a deduction from Indian tax payable.

Indian rate of tax (section 160(3)(c))

Indian income-tax (after reliefs under the Act, before this Part's relief) ÷ total income

Average rate, not marginal rate.

Rate of tax of the said country (section 160(3)(d))

Tax actually paid in that country (before its double-tax relief) ÷ whole income as assessed there

Also an average rate.

Credit method (concept)

Tax payable in residence country = tax on global income − foreign tax credit

Credit is normally limited to the residence country's tax on that income.

Central Government's power

Section 159(1): agreement with any other country or specified territory + notification to implement. Section 159(2): agreement between specified associations + notification to adopt and implement

Specified territory means an area outside India notified as such by the Central Government. Specified associations must also be notified.

Purposes of an agreement

Section 159(3): (a) relief on (i) income taxed in both places and (ii) tax chargeable under both laws, to promote economic relations, trade and investment; (b) avoidance of double taxation; (c) exchange of information; (d) recovery of tax under this Act and the corresponding foreign law

Clause (b) requires that no opportunities for non-taxation or reduced taxation through evasion or avoidance, including treaty-shopping, are created.

Beneficial provision rule

Section 159(4): the provisions of this Act shall apply to the extent they are more beneficial to that assessee

Applies where an agreement covers the assessee and is for granting relief of tax or avoidance of double taxation.

Override of the beneficial rule

Section 159(6): Chapter XI applies even if not beneficial

Applies irrespective of sub-section (4).

Meaning of terms

Section 159(7): agreement definition first; then this Act and Central Government's explanation; then notification; then other Central Government laws

Notified meanings take effect from the date the agreement came into force.

Condition for non-resident relief

Section 159(8): residence certificate from foreign Government + prescribed documents and information

Both conditions must be met.

Higher tax rate on foreign company

Section 159(5): higher rate on a foreign company than on a domestic company is not a less favourable charge

Also applies to a company incorporated in a specified territory.

Government route

Section 159(1): Central Government agreement with (a) any other country or (b) any specified territory

The Government may also notify provisions to implement the agreement.

Association route

Section 159(2): specified association in India + specified association in specified territory + notification by Central Government

The notification adopts and implements the agreement.

Purposes of agreement

Section 159(3): (a) relief; (b) avoidance of double taxation; (c) exchange of information; (d) recovery of tax

Clause (b) requires that no opportunity for non-taxation, reduced taxation or treaty shopping is created.

Beneficial provisions rule

Section 159(4): the Act applies to the extent it is more beneficial to the assessee

Applies where a government agreement exists, or an association agreement has been notified.

Chapter XI override

Section 159(6): Chapter XI applies even if not beneficial

Applies irrespective of sub-section (4).

Non-resident's conditions

Section 159(8): residence certificate from that Government + prescribed documents and information

Both are needed to claim relief.

Definitions

Section 159(9): specified association and specified territory are those notified by the Central Government

A specified association must also function under a law in force in India or in the specified territory.

Beneficial provision rule

Tax position = lower-tax of (Act, treaty), applied provision by provision

Section 159(4). Applies to the assessee to whom the agreement applies. The Act applies to the extent more beneficial.

Residency certificate condition

Treaty relief for non-resident = Residency certificate from foreign Government + prescribed documents and information

Section 159(8). Both conditions are needed.

Override by Chapter XI

Chapter XI applies even if not beneficial

Section 159(6). Overrides the beneficial-provision rule of sub-section (4).

Meaning of terms

Agreement definition → Act definition and Government explanation → notification → other Central laws

Section 159(7). Follow this order for undefined terms.

Higher rate on foreign company

Higher rate on foreign company than on domestic company ≠ less favourable charge

Section 159(5). Also covers a company incorporated in a specified territory.

Nature of a Model Convention

Model = template for negotiation, not binding law

It binds only after two countries sign a treaty and India notifies it.

OECD vs UN allocation

OECD Model → residence-country bias; UN Model → source-country bias

Say 'bias' or 'tendency', not that the Models are always opposite on every article.

Structure of a typical treaty

Scope → Definitions → Distributive articles → Elimination of double taxation → Special and administrative articles → Final provisions

Use this order as a skeleton when you describe any treaty in an answer.

General rule of interpretation (Vienna Convention)

Ordinary meaning + context + object and purpose, read in good faith

Preparatory work is only a supplementary means when the text is ambiguous or leads to an absurd result.

Status of Commentaries

OECD/UN Commentaries = persuasive aids, not binding

Most useful where the treaty wording matches the Model; treaty text prevails on conflict.

Associated enterprise threshold (domestic law, section 162)

Voting power ≥ 26%; loan ≥ 51% of book value of total assets; guarantee ≥ 10% of total borrowings

Domestic definition used for transfer pricing. A treaty's associated enterprises article has its own wording, so do not mix them.

Individual resident test (domestic)

Resident if India stay ≥ 182 days in the tax year, OR ≥ 60 days in the year AND ≥ 365 days in the preceding 4 years

Section 6(2). The 60-day limit becomes 120 days for a citizen or person of Indian origin visiting India with Indian-source income above ₹15 lakh (section 6(4) and (5)).

Company resident (domestic)

Resident if Indian company OR place of effective management in India

Section 6(10). POEM means where key management and commercial decisions for the business as a whole are, in substance, made.

Individual tie-breaker order

Permanent home → centre of vital interests → habitual abode → nationality → mutual agreement

Typical OECD-style order. Apply in sequence and stop at the first test that gives a single state. Check the exact treaty wording.

Non-individual tie-breaker

Place of effective management (or mutual agreement in some treaties)

Treaty-specific. Do not assume POEM always applies.

Business profits rule

Business profits taxable in the source state only if there is a PE, and only to the extent attributable to that PE

Applies when the enterprise is resident in the other contracting state.

Types of PE

Fixed place PE; construction or installation PE; service PE; dependent agent PE

Each has its own conditions. Service PE and construction PE depend on duration thresholds fixed in the treaty.

Business profits rule

Source state taxes only if PE exists, and only profits attributable to the PE

No PE means taxable only in the residence state. Check the PE test first.

Capped source tax on passive income

Tax at source = lower of (domestic rate, treaty rate), where treaty conditions are satisfied

Treaty applies only if it is more beneficial. Beneficial ownership and residence status must be shown.

Domestic rates under section 207(1) and (2)

Section 207(1): dividend 20%; dividend from an IFSC unit 10%. Section 207(2): royalty 20%; FTS 20%, only if the agreement is post-31 March 1976 and approved or as per industrial policy, and the income is not within section 59(1)

Section 207 applies to a non-resident (not a company) or a foreign company. Plus applicable surcharge and cess where relevant.

Effectively connected income

Royalty/FTS effectively connected with an Indian PE or fixed place → computed as business income under section 59(1)

All four conditions of section 59(1) must be met: payer, agreement, PE or fixed place, effective connection.

Capital gains allocation

Immovable property: where situated. PE movable property: PE location. Shares and others: as per treaty article

Treaties differ on shares. Read the specific article.

Relief in residence state

Foreign tax credit ≤ residence-state tax on that income

Credit cannot exceed the tax payable on the same income in the residence state.

Purpose of treaty agreements, section 159(3)

Relief + avoidance of double taxation + exchange of information + recovery of tax

Clauses (a) to (d) list these four purposes. Quote them as the base for any answer on treaty aims.

Anti-abuse limit in section 159(3)(b)

Avoid double taxation WITHOUT creating non-taxation or reduced taxation through evasion or avoidance (including treaty shopping)

Use this wording to link domestic law to the PPT and LOB.

Beneficial provisions rule, section 159(4)

Where an agreement applies, the Act applies only to the extent it is more beneficial to the assessee

The assessee gets the better of the treaty and the Act.

GAAR override, section 159(6)

Chapter XI applies even if not beneficial to the assessee

Treaty benefit does not override the general anti-avoidance rules.

Residency certificate condition, section 159(8)

Non-resident relief = certificate of residence from the foreign Government + prescribed documents and information

Both conditions must be met.

Principal purpose test

Benefit denied if obtaining it was one of the principal purposes of the arrangement, unless granting it is in line with the object and purpose of the treaty

This is the OECD/MLI standard wording in substance. Apply it to the facts.

Meaning of terms, section 159(7)

Treaty definition first, then the Act and Central Government explanation, then notification, then other Central laws

Use this order when a treaty term is undefined.

Quick revision

• Section 159 allows agreements with a country or a specified territory, notified by the Central Government.
• Under section 159(2), a specified association in India may agree with one in a specified territory, and the Central Government may notify it.
• Section 159(3) purposes: relief, avoidance of double taxation, exchange of information, and recovery of tax.
• Section 159(4): the Act applies to the extent more beneficial to the assessee covered by the agreement.
• Section 159(6): Chapter XI applies even if not beneficial.
• Section 159(5): a higher tax rate on a foreign company than on a domestic company is not a less favourable charge.
• Section 159(8): a non-resident needs a residence certificate from the other country or territory and prescribed documents.
• Section 159(7): treaty definition first, then the Act, then notifications or other Central laws for undefined terms.
• Section 160 gives relief where no agreement exists, to a resident on foreign income that is not deemed to accrue in India.
• Section 160 relief is at the lower of the Indian rate and the foreign rate, or at the Indian rate if equal.
• Indian rate of tax = Indian income-tax after reliefs under the Act but before this Part's relief ÷ total income.
• Treaty anti-abuse aim: no non-taxation or reduced taxation through evasion, avoidance or treaty-shopping.

Common mistakes

• Treating juridical and economic double taxation as the same thing. Fix: Ask one question: is the taxpayer the same? Same person means juridical. Different persons means economic.
• Giving full foreign tax as relief under section 160. Fix: Relief is the lower of the Indian rate and the foreign rate, applied on the doubly taxed income.
• Saying the treaty always overrides the Act. Fix: Write the rule as the section words it: the provisions of the Act apply to the extent they are more beneficial to that assessee. Do not say the treaty always prevails. Add the Chapter XI exception.
• Forgetting the residence certificate for a non-resident. Fix: Always mention section 159(8): a certificate from the foreign Government plus the prescribed documents and information.
• Treating an association agreement as valid on signing alone. Fix: State that the Central Government must notify provisions to adopt and implement it.
• Saying any association in India can sign. Fix: The body must be notified as a specified association and function under a law in force in India or the territory.
• Saying the treaty always overrides the Act. Fix: Write that under section 159(4) the Act applies to the extent more beneficial. Choose the better of the two.
• Ignoring the residency certificate. Fix: For a non-resident, always state the certificate and prescribed documents under section 159(8) before granting relief.
• Saying the OECD or UN Model is binding on India. Fix: Write that a Model is only a template. A treaty binds after signing and notification by the Central Government.
• Saying India's treaties copy the UN Model exactly. Fix: Say India's treaties are influenced mostly by the UN Model but each has negotiated variations. Always read the actual article.

Exam tips

• Define double taxation, then give both causes (residence and source) before the relief methods. Examiners reward that order.
• In numerical questions, first state whether section 159 or section 160 applies. This earns marks even if arithmetic slips.
• Show the Indian rate and foreign rate as separate lines. Marks are often given per step.
• For case-based questions, write provision, analysis of facts, conclusion. Quote the section 159(8) residence certificate condition when the claimant is a non-resident.
• Do not claim exemption or credit method details as Indian law unless the question states the treaty wording.
• Quote the sub-section numbers: (1) power, (3) purposes, (4) beneficial rule, (6) Chapter XI, (7) terms, (8) residence certificate.
• Open case answers by stating whether an agreement exists, and move to section 160 if not.
• Write a short line on the anti-treaty-shopping wording of sub-section (3)(b) when the facts hint at abuse.