Double Taxation Relief, Tax Treaties and Transfer Pricing

When income crosses borders, two countries may tax it. India relieves this double taxation through treaties with other countries and, where there is no treaty, by unilateral relief. Treaties also allocate taxing rights and prevent evasion, and their interpretation has produced some of the most important tax cases. Transfer pricing rules ensure that dealings between related entities across borders are taxed at arm's length. This note covers these areas.

1. Treaties and Relief

Figure 1: Sections 159 and 160 (old ss.90, 91)

• Section 159 (old s.90). The Central Government may enter into agreements with other countries to grant relief from double taxation, exchange information and prevent evasion, and gives effect to them by notification.
• More beneficial. Where a treaty applies, the provisions of the Act apply only to the extent they are more beneficial to the assessee than the treaty.
• Tax residency certificate. A certificate from the other country is necessary to claim treaty benefits but is not by itself sufficient.
• GAAR and treaty override. Treaty benefits may be denied under the General Anti-Avoidance Rule, and anti-abuse provisions such as a principal purpose test may also apply (Topic 8)
• Section 160 (old s.91). A resident who pays tax in a country with which India has no treaty may claim unilateral relief, generally at the lower of the Indian and foreign rates on the doubly taxed income.

2. Interpreting Treaties

Figure 2: Leading cases

• Azadi Bachao Andolan (2003). Upheld the acceptance of Mauritian residence certificates and held that treaty shopping is not illegal in itself.
• Engineering Analysis Centre of Excellence v CIT (2021). Payments by Indian end users and distributors to non-resident software suppliers for licences that do not transfer copyright are not royalty under the treaties, and so are not taxable in India.
• Assessing Officer v Nestle SA (19 October 2023). Treaties and protocols are not self-executing; benefits under a most favoured nation clause apply only after notification under s.90(1), and the third State must have been an OECD member when it signed its treaty with India.
• Tiger Global (January 2026). A residence certificate is not conclusive, and treaty benefits can be denied on a substance over form analysis (Topic 8)

3. Transfer Pricing

Figure 3: The arm's length principle

Transfer pricing provisions, in ss.92 to 92F of the 1961 Act and carried into the 2025 Act, require income from international transactions, and specified domestic transactions, between associated enterprises to be computed at the arm's length price, the price that unrelated parties would charge. Prescribed methods are used to determine that price. Taxpayers may obtain certainty through advance pricing agreements or safe harbour rules, and must maintain documentation and furnish an accountant's report.

4. Frequently Asked Questions

Can a taxpayer choose between the Income-tax Act and a tax treaty?

Yes, in effect. Where a treaty applies, the provisions of the Act apply only to the extent they are more beneficial to the assessee, so the assessee is taxed under whichever is more favourable, subject to GAAR and anti-abuse rules.

Does a most favoured nation clause in a treaty apply automatically?

No. In Nestle SA (2023), the Supreme Court held that benefits under an MFN clause apply only after a notification under s.90(1) giving effect to them.

5. Related Topics

• Topic 8: Tax Avoidance, Evasion and GAAR. Vodafone and Tiger Global.
• Topic 11: Residential Status and Scope of Total Income. Residence and deemed accrual.
• Topic 37: Taxation of Firms, LLPs and Companies. Foreign company rates.