Taxation of Business Profits under DTA agreement

One of the important terms that occurs in all the Double Taxation Avoidance Agreements is the term 'Permanent Establishment' (PE) which has not been defined in the Income- tax Act. However as per the Double Taxation Avoidance Agreements, PE includes, a vide variety of arrangements i.e. a place of management, a branch, an office, a factory, a workshop or a warehouse, a mine, a quarry, an oilfield etc. Imposition of tax on a foreign enterprise is done only if it has a PE in the contracting state. Tax is computed by treating the PE as a distinct and independent enterprise.

In order to avoid double taxation it is provided that if a resident of India becomes liable to pay tax either directly or by deduction in the other country in respect of income from any source, he shall be allowed credit against the Indian tax payable in respect of such income in an amount

not exceeding the tax borne by him in the other country on that portion of the income which is taxed in the said other country. The same benefit is available to the resident of the other Country, on income taxed in India.

In respect of incomes on which taxes are either exempted or reduced, the country of residence will not take the exempted income into account while determining the tax to be imposed on the rest of the income.

Taxation of income from Air and Shipping Transport under DTA agreement

Income derived from the operation of Air transport in international traffic by an enterprise of one contracting state will not be taxed in the other contracting state. In respect of an enterprise of one contracting state, income earned in the other contracting state from the operation of ships in international traffic, will be taxed in that contracting state wherein the place of effective management of enterprise is situated. However some DTA agreement contain provisions to tax the income in the other contracting state also, although at reduced rate. These provisions do not apply to coastal traffic.

Taxation of income from Associated Enterprises under DTA agreements :

In order to plug loop holes for tax evasion, a separate article in DTA agreement provides for taxing the notional income deemed to arise on account of an enterprise of one contracting state participating directly / indirectly in the management of another enterprise in the other contracting state or where some persons participate directly or indirectly in both the enterprises under conditions different from those existing between the independent enterprises.

Taxation of Dividend income under DTA agreement :

Dividend paid by a Company which is a resident of a Contracting State to a resident of the other Contracting State will be taxed in both the States.

Taxation of Interest Income under DTA agreement :

Interest paid in a Contracting State to a resident of the other Contracting State is chargeable in both the States.

Taxation of income from Royalties under DTA agreement :

Regarding Royalties arising in a Contracting State and paid to a resident of the other Contracting State:-

1. Some DTA agreements provide for taxation in the other Contracting State.
2. Some agreements provide for taxation in the contracting State.
3. Some agreements provide for taxation in both the States.
   

Taxation of Income from Capital Gains under DTA agreement :

Capital Gains will be taxed in the state where the capital asset is situated at the time of sale.

Taxation of income from Professional Services under DTA Agreement :

Income will be taxed in the state where the person is resident. However if he has a fixed base in the other Contracting State, the income attributable to the fixed base will be taxed in the other contracting state.

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