Global business has changed the way taxes work.
- Companies are doing their businesses through overseas branches
- Professionals are working across countries
- Investors are earning income from foreign jurisdictions and
- NRIs are constantly dealing with tax deductions both in India and abroad.
In the midst of all of this, one common concern keeps cropping up:
“Will the same income get taxed twice?”
This is where Sections 90, 90A and 91 of the Income Tax Act, 1961 come into play. These provisions pertain to Double Taxation Avoidance Agreements (DTAA), foreign tax relief and Foreign Tax Credit (FTC).
They enable taxpayers to avoid double taxation of the same income, subject to conditions, documentation and treaty provisions.
This article explains the practical side of these provisions, along with Rule 128, Tax Residency Certificate (TRC) requirements, FTC restrictions, and important judicial precedents.
Understanding Double Taxation
Double taxation is when the same income is taxed in two countries.
For example:
- An Indian resident gets salary, consulting income or rental income from the USA.
- An Indian incorporated company has a branch office in Singapore.
- A professional gets royalty income from the UK
- An NRI pays tax in the country where he resides, but the same income is taxable in India.
In such cases, both countries may claim the right to tax the same income.
Imagine if there are no relief provisions in place – then the taxpayer will be taxed twice on the same income stream. This increases the tax burden and brings compliance into picture.
India tries to solve this problem by:
- Section 90
- Section 90A
- Section 91
- Rule 128 relating to Foreign Tax Credit
Section 90 – DTAA Between India and Foreign Governments
Section 90 empowers the Central Government to enter into Double Taxation Avoidance Agreements with foreign countries.
India currently has DTAAs with more than 90 countries including:
- USA
- UK
- Singapore
- UAE
- Mauritius
- Canada
- Australia
- France
- Germany
These treaties are designed to:
- Avoid double taxation
- Grant tax relief
- Prevent tax evasion
- Enable exchange of information
- Assist in tax recovery
In practical terms, a DTAA decides:
- Which country gets the right to tax a particular income
- Whether exemption or tax credit is available
- The maximum rate at which tax may be deducted
- How disputes between countries will be resolved
One important thing about section 90:
The taxpayer may choose the more beneficial option – between DTAA and IT Act.
In case the Income Tax Act provides a better result than the DTAA, the taxpayer can opt for the Act. If the relief under the DTAA is better, the taxpayer can fall back on the treaty provisions.
This flexibility is of very high importance in international taxation.
Section 90A – Agreements With Specified Associations
Section 90A is slightly different.
Instead of agreements between governments, this section deals with agreements between specified associations in India and specified associations abroad.
This provision is generally seen in arrangements involving jurisdictions such as:
- Taiwan
- Hong Kong
Unlike Section 90, relief under Section 90A is generally available through tax credit and not through exemption.
Another point worth noting is that Section 90A mainly applies to residents. The Central Government notifies the associations and the scope of such agreements.
Section 91 – Unilateral Relief Where No DTAA Exists
Some of the countries do not have DTAA with India.
Section 91 provides unilateral relief when there is no treaty. India allows unilateral relief to the taxpayer who has paid foreign tax on income which is also taxable in India.
The relief is limited to the lower of:
- Indian rate of tax or
- Foreign rate of tax
This provision is applicable only if:
- Other income was generated outside India
- Tax has been paid overseas
- The taxpayer is a resident of India
- India taxes the same income again.
Unlike Sections 90 and 90A, Section 91 is not dependent on a DTAA.
Difference Between Sections 90, 90A and 91
| Particulars | Section 90 | Section 90A | Section 91 |
|---|---|---|---|
| Nature of Relief | Bilateral | Bilateral | Unilateral |
| Agreement Between | India & Foreign Government | Specified Associations | No Agreement |
| DTAA Required | Yes | Yes | No |
| Eligible Persons | Residents & Non-Residents | Residents | Residents |
| Relief Method | Exemption or Tax Credit | Tax Credit | Tax Credit |
| TRC Requirement | Mandatory | Mandatory | Not Applicable |
| GAAR Override | Applicable | Applicable | Not Directly Applicable |
Tax Residency Certificate (TRC) and Form 10F
Certain documentation requirements have to be complied with by the taxpayer who wants to claim DTAA benefits under the Section 90 or 90A.
The most important document is the Tax Residency Certificate (TRC). The TRC is issued by the foreign tax authority and certifies the taxpayer is a tax resident in that country.
Treaty benefits can be denied without a valid TRC. Usually TRC is required along with Form 10F.
This requirement has become a matter of importance in assessment and scrutiny proceedings. In many cases, claims are challenged on the grounds that the documentation is incomplete.
Rule 128 – Foreign Tax Credit (FTC)
This rule (Rule 128) actually deals with how one should claim Foreign Tax Credit in India.
The basic principle is very simple:
FTC is restricted to the lower of: Tax payable in India on such income, or Foreign tax actually paid.
This means that, India does not provide a refund of the excess foreign taxes. If the foreign tax paid is more than the Indian tax liability, the excess is ignored.
Important Rules for FTC Provisions
Rule 128 speaks about several conditions that govern as to how and when Foreign Tax Credit can be claimed. Below are six important rules that one should understand before claiming FTC.
1. FTC is available in the year when income is offered to tax in India
Timing Matters: The FTC is available only in the assessment year in which the relevant foreign income is taxed in India.
2. FTC must be proportionately split where income is taxed over multiple years
In India, if income is spread over years, then credit must also be proportionately allocated.
3. FTC is available only against income tax
Credit cannot be adjusted against:
- Interest
- Penalty
- Fees
This limitation is specifically acknowledged in Rule 128.
4. No FTC for foreign taxes in dispute
If the foreign tax itself is in dispute, then then FTC is not immediately available.
The taxpayer should:
- Solve the dispute
- Pay your taxes
- Provide proof within the mentioned time limit
Only then can the claim be taken up.
5. Currency conversion is governed by the rules prescribed
The rate of conversion usually adopted is the telegraphic transfer buying rate prevailing on the last day of the month immediately preceding the month in which tax was paid or deducted.
6. FTC claim must be filed within the time limits set forth
Generally, FTC claims are permitted for returns filed under:
- Section 139(1)
- Section 139(4)
- Section 139(8A)
Litigation can be often avoided by timely compliance.
Carry Forward of FTC is Not Allowed
This is one of the strictest aspects of Rule 128. If the foreign tax exceeds Indian tax liability in a particular year, the excess credit lapses.
There is no typical mechanism to carry it forward to future years.
This is especially the case for:
- Multinational companies
- Branch operations
- Foreign assignments
- Cross-border professionals
Careful tax planning therefore becomes important while structuring overseas transactions.
Landmark Case: Bank of India v. ACIT
One of the most talked-about rulings in this area is:
Bank of India v. ACIT | ITAT Mumbai | March 4, 2021
The case involved foreign branches located in:
- UK
- USA
- France
- Belgium
- Kenya
- Japan
- Singapore
- China
The taxpayer had paid quite a bit of foreign taxes under Sections 90 and 91.
However, in India, the company reported losses. Since there was no Indian tax liability, the FTC claim was denied.
The Tribunal held that: DTAA relief is intended to reduce Indian tax liability, not generate a refund.
This is an important rule in FTC jurisprudence.
But the ruling did not stop there.
The Tribunal also noted that even if FTC is not available due to nil Indian tax liability, the foreign taxes may still qualify as business expenditure.
Such deduction was held not to be barred by s 40(a)(ii).
The principle found support from a number of precedents including Reliance Infrastructure.
Judicial Precedents on FTC as Deduction
Different courts and tribunals have looked at whether foreign taxes can be claimed as business expenditure where FTC itself is unavailable.
Cases allowing deduction
- Bank of India v. ACIT
- Reliance Infrastructure Ltd. v. CIT
- Mastek Ltd. v. DCIT
- Virmati Software & Telecom Ltd.
Cases denying deduction
- Zoho Corporation Pvt. Ltd. v. DCIT
- DCIT v. Elitecore Technologies Pvt. Ltd.
- Kirloskar Electric Co. Ltd. v. CIT
Because judicial views have evolved differently in certain situations, the factual background and treaty provisions become extremely important before claiming relief.
Mutual Agreement Procedure (MAP)
Many DTAAs also contain a Mutual Agreement Procedure, commonly referred to as MAP.
MAP acts as a dispute resolution mechanism between tax authorities of two countries.
It is generally used where:
- Income is taxed inconsistently
- Transfer pricing adjustments arise
- Treaty interpretation disputes occur
- Double taxation continues despite FTC claims
For multinational companies and large international transactions, MAP plays a very important role in reducing prolonged litigation.
Practical Takeaways
There are some practical points that we can highlight from Sections 90, 90A, 91 and Rule 128.
1.DTAA relief is good but documentation is equally important: TRC, Form 10F, proof of foreign taxes and proper disclosures are a must. Even a strong treaty claim may tend to fail if the documentation is poor.
2. FTC is not unlimited: The credit is always restricted to Indian tax liability. And know that, India does not refund excess foreign taxes.
3. Timing of the claim is important: FTC should be claimed in the correct assessment year. Any delays and mismatches may lead to notices and litigation.
4. Section 91 still matters: Even if DTAA is not in place, unilateral relief can be availed. Many taxpayers are unaware of this provision.
5. International tax positions need to be carefully evaluated: Cross-border taxation almost never works in isolation. Domestic law, treaty provisions, Rule 128, judicial precedent and compliance documentation are all interconnected.
Sometimes what seems to be a small error in reporting, timing or documentation can lead to a large tax exposure.
Final Thoughts
The framework for relief from double taxation in India is based on Sections 90, 90A and 91.
These are to ensure that taxpayers engaged in international transactions are not unfairly taxed in more than one jurisdiction. At the same time, the law also imposes clear limitations through documentation requirements, FTC restrictions and anti-avoidance provisions.
Rule 128 also adds procedural rules for Foreign Tax Credit claims, particularly with regard to timelines, disputed taxes and computation methodology.
With cross-border transactions increasing, it is not just multinational corporations that need to be aware of these provisions. These issues are often faced by NRIs, professionals, consultants, exporters, startup founders and growing businesses in today’s world.
Good structuring, timely compliance and careful evaluation of treaty provisions can make a material difference to the avoidance of unnecessary disputes and tax costs.
