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| A country may choose to emphasise any of such factors to exercise its fiscal jurisdiction. Depending on which factor is considered the connecting element, the same income of the same entity may become liable to be taxed in many countries.
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| This can lead to severe consequences and impair economic development. It is to do away with such an anomaly that countries enter into double taxation avoidance agreements (referred to as tax treaties ).
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| The validity of a bilateral treaty is an inherent part of the sovereign power of the state. As such a treaty will have to be translated into an Act of Parliament in India, a time consuming and cumbersome procedure , a special plan was evolved by enacting Section 90 of the Income-tax Act (I-T Act).
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| Section 90 empowers the government of India to enter into an agreement with the government of any other country for avoidance of double taxation.
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| In fact, such pacts virtually replace the I-T Act. While dealing with the interpretation of tax treaties in CIT vs Davy Ashmore India Ltd (1991, 190 ITR 626 Cal), it was held that in case of an inconsistency between the terms of the bilateral tax agreement and the domestic taxation statute, the agreement alone would prevail.
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| The legitimate legal position, therefore, is that where a specific provision is made in the tax treaty, that provision prevails over the general provisions contained in the I-T Act 1961.
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| The double taxation avoidance agreements the central government has entered into under Section 90 of the I-T Act, also provide that the laws in force in either country will continue to govern the assessment and taxation of the income, except where contrary provisions have been made in the agreement.
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| Thus, where a tax treaty provides for a particular mode of computation of income, the same should be followed, irrespective of the provisions in the I-T Act.
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| Where there is no specific provision in the agreement, the basic law, ie, the I-T Act, will govern income taxation.
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| An important principle in the interpretation of the provisions of an international treaty, including tax treaties, is that such agreements are negotiated and signed at political levels and have several considerations to form their bases.
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| The main function of a double taxation avoidance treaty should be seen in the context of facilitating trade relations between the partners.
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| The treaty is essentially a bargain to ease division of tax revenues in respect of the income falling under the jurisdictions of both the countries.
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| These observations are based on the recent verdict of the Supreme Court in the Union of India vs. Azadi Bachao Andolan 263 ITR 706. The apprehension that a tax treaty supersedes the domestic I-T law is unfounded.
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| The treaty should, in fact, be interpreted as an independent code, notwithstanding any contrary provision in the I-T Act.
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| agar@nda.vsnl.net.in
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