DTAA vis-à-vis Domestic Tax Law: A Critical Analysis

In India, tax treaties are not mere guidelines—they form part of domestic law and can override statutory provisions when more beneficial to the taxpayer.

In an era of globalised trade, digital services and multinational business models, conflicts between domestic tax laws and international tax treaties have become increasingly frequent. Double Taxation Avoidance Agreements (DTAAs) are intended to eliminate double taxation, allocate taxing rights between countries and provide certainty to cross-border transactions. For India, with its extensive treaty network and growing international economic footprint, the interaction between DTAAs and the Income-tax Act, 1961, is of significant practical importance.

The Income-tax Act, 1961, expressly recognises tax treaties under Sections 90 and 91. Section 90(2) provides that where a DTAA exists, the provisions of the Act shall apply only to the extent they are more beneficial to the assessee. This provision establishes that treaty benefits prevail over domestic law when favourable, while domestic provisions continue to apply where they offer greater relief. Accordingly, DTAAs operate not as an override but as a beneficial exception to domestic tax legislation.

Treaty Supremacy

Indian courts have consistently upheld the binding nature of DTAAs. In Union of India v. Azadi Bachao Andolan, the Supreme Court affirmed that tax treaties entered into under Section 90 form part of Indian law and must be interpreted in good faith in line with international principles. The Court also recognised that legitimate tax planning within the framework of a treaty cannot be disregarded merely on suspicion of revenue loss.

This principle was reaffirmed in the Engineering Analysis Centre of Excellence (P.) Ltd. v. CIT (2021), where the Supreme Court held that payments for off-the-shelf software made to foreign suppliers did not constitute “royalty” under the applicable DTAAs. Despite a broader definition under domestic law, the more beneficial treaty provisions were held to prevail, thereby exempting such payments from withholding tax.

Income, Treaty Protection

Disputes frequently arise in relation to the characterisation of income, particularly in respect of royalties, fees for technical services and capital gains. In DIT v. New Skies Satellite BV, the Delhi High Court ruled that retrospective amendments to the Income-tax Act expanding the scope of “royalty” could not be imported into tax treaties. The judgement reinforced that treaty provisions cannot be unilaterally modified through domestic legislation.

Similarly, in Vodafone International Holdings BV v. Union of India, the Supreme Court emphasised that, in the absence of a specific charging provision under the treaty, India could not tax indirect transfers solely by applying domestic law principles.

PE, Business Profits

The taxation of business profits of foreign enterprises hinges on the existence of a Permanent Establishment (PE). In E-Funds IT Solution Inc. v. ADIT, the Supreme Court held that the mere presence of a subsidiary or outsourcing arrangement in India does not automatically constitute a PE under the DTAA. The ruling clarified that treaty thresholds must be strictly satisfied before taxing foreign business profits in India.

GAAR, Procedural Compliance

While DTAAs provide relief, they are subject to anti-abuse provisions. The introduction of General Anti-Avoidance Rules (GAAR) and India’s adoption of the OECD BEPS framework through the Multilateral Instrument (MLI) empower tax authorities to deny treaty benefits where arrangements lack commercial substance. At the same time, procedural requirements—such as furnishing a valid Tax Residency Certificate under Section 90(4)—remain mandatory under domestic law.

DTAAs and domestic tax law operate in a harmonious and complementary manner. While domestic law provides the charging and procedural framework, DTAAs offer relief from double taxation and certainty in cross-border taxation. In case of conflict, the provision more beneficial to the assessee prevails, subject to anti-avoidance safeguards. For tax professionals, a sound understanding of treaty jurisprudence and recent judicial developments is essential in navigating today’s complex international tax landscape.

(The writer is a Chartered Accountant based in Thane. Views personal.)