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Unit 14: Advance Tax Planning and Tax Relief

[137 ITR 1 &2] clarified that whenever there is any conflict noticed on an issue between the Notes
provisions contained in both statutes, DTAA shall prevail over the statutory provision of the IT
Act. In this regard, Supreme Court held that DTAA constitute special provisions which would
prevail over general provision of the IT Act and effect must be given to the special provision of
the DTAA even if they are in conflict with general provision of the IT Act.
In that case, section 91 of the IT Act provides relief from double taxation. Provision of Section 91
of the IT Act says

“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”.

Did u know? The general rules of computation of relief are as under:
1. Ascertain doubly taxed income.

2. Ascertain tax by applying Indian rate of tax as well as rate of foreign country
separately.
3. Whichever is less, relief is given to that extent.

14.3.5 Taxation of Business Process Outsourcing Units in India

The provisions containing taxation of IT-enabled business process outsourcing units are not
contained in the Income-tax Act, 1961 but are given in Circular No.5/2004 dated 28.9.2004 issued
by CBDT. The provisions are briefed hereunder -

(a) A non-resident entity may outsource certain services to a resident Indian entity. If there is
no business connection between the two, the resident entity may not be a Permanent
Establishment of the non-resident entity, and the resident entity would have to be assessed
to income-tax as a separate entity. In such a case, the non-resident entity will not be liable
under the Income-tax Act, 1961.
(b) However, it is possible that the non-resident entity may have a business connection with
the resident Indian entity. In such a case, the resident Indian entity could be treated as the
Permanent Establishment of the non-resident entity.
(c) The non-resident entity or the foreign company will be liable to tax in India only if the IT
enabled BPO unit in India constitutes its Permanent establishment.
(d) A non-resident or a foreign company is treated as having a Permanent Establishment in
India if the said non-resident or foreign company carries on business in India through a
branch, sales office etc. or through an agent (other than an independent agent) who
habitually exercises an authority to conclude contracts or regularly delivers goods or
merchandise or habitually secures orders on behalf of the non-resident principal. In such
a case, the profits of the non-resident or foreign company attributable to the business
activities carried out in India by the Permanent Establishment becomes taxable in India.

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