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Double taxation refers to the imposition of taxes on the same income or assets by two or more jurisdictions. It occurs when two different taxing authorities, such as the government of two countries or two states within a country, claim the right to tax the same income, profits, or assets of an individual or a company.

There are two primary types of double taxation:

1. Double Taxation of Individuals: This type of double taxation occurs when an individual is taxed on the same income in two different jurisdictions. For example, if a person is a resident of one country but earns income from another country, both countries may claim the right to tax that individual's income. To mitigate this, many countries have entered into double taxation avoidance agreements (DTAAs) with other countries. DTAAs generally provide mechanisms such as tax credits or exemptions to avoid or minimize double taxation for individuals.

2. Double Taxation of Companies: This type of double taxation happens when a company is subject to taxation on its profits in both the country where it earns the income (source country) and the country where it is registered or based (residence country). For instance, a multinational company may face taxation on its global profits by the country where it operates and also by its home country. To address this, various countries have introduced measures like tax treaties, foreign tax credits, or the exemption of certain types of income to alleviate the impact of double taxation for companies.

PROVISIONS TO MITIGATE THE IMPACT OF DOUBLE TAXATION

India has provisions to mitigate the impact of double taxation on individuals and companies. These provisions are primarily governed by the Indian Income Tax Act, 1961, and the Double Taxation Avoidance Agreements (DTAAs) that India has entered into with several countries. Here are some key provisions related to double taxation in India:

1. Double Taxation Avoidance Agreements (DTAAs): India has signed DTAAs with over 90 countries to prevent double taxation and provide relief to taxpayers. These agreements allocate taxing rights between India and the respective country, specify the types of income covered, and provide mechanisms for tax relief. They typically include provisions for tax credits, exemptions, or reduced tax rates to avoid or mitigate double taxation.

2. Tax Credit: Under the Indian Income Tax Act, a taxpayer who is a resident of India and earns income from a foreign country with which India has a tax treaty can claim a tax credit for the taxes paid in the foreign country. The tax credit is generally available for the lower of the tax paid in the foreign country or the tax liability calculated under Indian tax laws for that foreign income. This prevents the same income from being taxed twice.

3. Exemption for Foreign Income: The Indian Income Tax Act provides exemptions for certain types of foreign income. For example, income earned by an Indian resident from specified sources outside India, such as foreign dividends, long-term capital gains from the sale of specified assets, or income from specified businesses outside India, may be exempt from tax in India.

4. Advance Pricing Agreements (APAs): APAs are arrangements between the taxpayer and the tax authority to determine transfer pricing methodologies for international transactions involving associated enterprises. Transfer pricing refers to the pricing of cross-border transactions within multinational groups. APAs provide certainty to taxpayers regarding transfer pricing and help avoid disputes and double taxation.

5. Mutual Agreement Procedure (MAP): The MAP is a mechanism provided in tax treaties that allows taxpayers to resolve disputes arising from the application of tax treaties. Under the MAP, taxpayers can approach the Competent Authorities of the countries involved to resolve issues of double taxation or to allocate taxing rights in cases where there is a disagreement between the tax authorities of the countries.

UNION OF INDIA V. AZADI BACHAO ANDOLAN (2003)

The Supreme Court of India examined the issue of double taxation in the context of the applicability of the Minimum Alternate Tax (MAT) to foreign companies. The case involved the interpretation of Section 115J of the Indian Income Tax Act, 1961.

The dispute arose when the government-imposed MAT on certain foreign companies operating in India, even though they were not liable to pay tax on their book profits under the regular provisions of the Income Tax Act. The foreign companies argued that taxing their book profits under MAT would result in double taxation, as they were already paying taxes in their home jurisdictions.

The Supreme Court, in its judgment, held that MAT provisions could be applicable to foreign companies as long as they had a "place of business" in India. It clarified that the provisions of MAT were not meant to override the provisions of the Double Taxation Avoidance Agreement (DTAA) between India and other countries.

The court emphasized the importance of giving effect to the provisions of DTAA to prevent double taxation. It stated that if a tax treaty provides relief from taxation, it should prevail over the provisions of the Income Tax Act. The court also highlighted that the principle of non-discrimination must be observed while interpreting the provisions of the Income Tax Act and the tax treaties. This case established the principle.