An Analysis of the Legal Frameworks in Preventing International Tax Evasion in India

I. Introduction

The legal framework for international taxation consists of domestic tax laws and international tax agreements signed between countries, either through unilateral, bilateral, or multilateral treaties. The way these agreements are used depends on where in the contracting countries the person is taxed under their own rules. This area is very important for figuring out if someone needs to pay tax or not. Domestic tax laws allow taxpayers to claim relief through refunds or deductions under international double taxation agreements, helping to prevent the issue of double taxation. These agreements also assist tax authorities in monitoring and curbing tax evasion.

Domestic tax laws include Acts, rules, circulars, and notifications issued by the tax authorities to regulate taxation on income and capital gains, contributing to the nation's revenue generation. In international taxation, these laws are crucial for taxing both the global income of resident taxpayers and the income earned by non-residents from sources within the country. National laws recognise the different foreign tax agreements that a country has signed in order to carry out deals between countries. Domestic tax laws and international agreements work together to make a new legal system. Transactions that happen across borders are governed by the rules set out in the mutual treaties.

The Income Tax Act of 1961 sets the rules for taxes in India. It gives the government the power to tax people's income, whether they live in India or somewhere else in the world. This includes income made by both residents and non-residents. The Act sets out the reasons for tax rates, how income is calculated, and how taxes are collected. It also gives the Central Government the power to make international tax agreements with other countries to stop people from being taxed twice and cut down on tax evasion.

II. Residential status and taxability

In international tax agreements, "personal scope" refers to how the agreement affects people who reside in one or both signatory nations. According to the clause pertaining to "residents" in the tax agreement, a person's residential status is established by the national laws of each nation. Tax advantages are only available to persons who match the criteria of a resident under these agreements. The determination of an individual's tax liabilities under domestic legislation and their eligibility for benefits under international tax treaties are significantly influenced by their residence status. A person may be regarded as a resident of one nation but not of another due to the possibility of legal differences between the two. They could also relocate and settle in another nation. Therefore, both local tax rules and international agreements are taken into consideration when determining tax liabilities. In India, the IT Act classifies residential status into three categories: “Resident, Non-Resident and Not Ordinarily Resident”

(A) Non-Resident

A person who is not a resident is classified as a non-resident under the Act². Nevertheless, the Act does not specifically define what a non-resident is. Instead, Section 2(42)'s definition of a resident is used. Depending on certain circumstances, an individual residing in India may or may not be considered a resident. A person must not meet the requirements of the Act to be classified as a resident or not normally resident in order to be deemed a non-resident. In this context, "person" can refer to people, Hindu Undivided Families (HUF), businesses, partnerships, bodies of individuals (BOI), associations of persons (AOP), and even the government. These entities will be regarded as non-residents if any of them do not fulfil the residence criteria.

Additionally, a person may also be considered a non-resident under special provisions like:

• Section 92 (Transfer pricing regulations for tax avoidance)
• Section 93 (Income transfer to non-residents for tax avoidance)
• Section 168 (Executors of estates)

Every fiscal year, a person's residence status is assessed independently. A person's status as a resident in one year does not guarantee that they will remain such in the next. For instance, depending on their stay and other circumstances in each year, an individual may be a resident in 2022–2023; become a non-resident in 2023–2024; and then be eligible to be a resident once more in 2024–2025.

(B) Resident

According to Section 2(42) of the Act, an individual is considered a resident if they meet the residency conditions specified in Section 6 of the Act. This section provides two separate tests to determine resident status: one for individuals, businesses, associations of persons (AOPs), and Hindu Undivided Families (HUFs), and another for businesses. A person's residency status is based on how many days they spend in India throughout a fiscal year. The two necessary preconditions are:

• “If an individual has spent at least 182 days in India in the preceding year (the fiscal year prior to the assessment year), they are considered residents.”
• “If a person has spent at least 60 days in India in the last year and 365 days overall in the four years before to that year, they are also regarded as residents.”

However, the 60-day condition is extended to 182 days if the person is:

• “An Indian citizen leaving India for employment abroad.”
• “A crew member on an Indian ship.”
• “An Indian citizen or Person of Indian Origin (PIO) returning to India for a visit.”

The arrival and departure dates are used to determine the number of days spent in India if the precise hours of stay are unavailable.

The exact place of management and control determines the status of residence of other entities, such as HUFs, enterprises, or groups of persons. If these entities have complete or partial authority over India, they are regarded as residents. They are regarded as non-residents if all of their management is located outside of India.

• In HUFs, control is usually held by the Karta or coparceners.
• In associations of individuals, the senior officer holds the control.
• In companies, the residential status depends on where the board of directors or principal officers manage the company's affairs.

If a business is registered under the Companies Act of 2013, it is always regarded as a resident of India, even if its management is based outside of the country. Regardless of where their management works, this provision guarantees that Indian enterprises are taxed on their worldwide income.

(C) Not-Ordinary Resident

According to the Act³, only individuals and Hindu Undivided Families (HUFs) are eligible to be designated as Not Ordinarily Resident (NOR). The whole family is regarded as having the same status if the Karta or manager of a HUF meets the requirements to be classified as Not Ordinarily Resident. A person is deemed Not Ordinarily Resident under Section 6(6) of the Act if they satisfy any one of the following requirements:

1. “They have not lived in India for at least 9 out of the 10 years immediately before the relevant previous year.”

2. “They have spent less than 729 days in India during the 7 years immediately before the relevant previous year.”

This suggests that a person does not have to meet both conditions in order to be classified as Not Ordinarily Resident; they can be classified as such by meeting either of the two requirements. The qualifications for residency status specified in Section 6 do not apply to Central Government and State Government officials who work outside of India⁴.

(D) Taxability of total income

All income earned in India, regardless of source, is taxable for non-residents. This includes money received in India or presumed to have been received there, as well as revenue earned or expected to be produced there. Non-resident Indians (NRIs) are free from Indian taxes on income generated and received outside of India. Residents pay taxes on all of their income, including money from sources outside of India, whereas non-residents only pay taxes on income originating in India. This is the main difference between residents and non-residents. However, the person classified as a Not Ordinarily Resident (NOR) must pay taxes on overseas income if the funds come from a company or profession that is controlled or managed from India. In conclusion, citizens are taxed on their whole income worldwide, whereas non-residents are just taxed on their Indian income. As the foregoing explanation clarifies, the basis of charge—which includes accrual, assumed accrual, and accrual receipts—is the main factor that determines the amount of taxable income. A clearer grasp of this is given in the following table:

In any of the three scenarios, there is no tax on the income that is sent to India from prior years. As a result, this section distinguishes between receiving and remitting income.

(E) Income accruing or arising in India

Section 5 of the IT Act explains the terms "accrues", "arises", and "received" in the context of income taxation. The terms "accrues" and "arises" are not the same and have different meanings. The place where income accrues or arises is an important factor in deciding whether the income is taxable in India. However, the location of income accrual depends on the nature of the transaction and may differ in each case.

There is no fixed rule to determine where a business's income originates. The location of income is based on the circumstances of the transaction. For example:

• “If a person earns money through speculative contracts with a company in another country, the income is considered to have arisen outside India if the contracts are executed there.”
• “In high seas trade (international shipping trade), profits are considered to arise at the point where the ownership of goods is transferred.”

Determining whether income accrues or arises in India should be based on common sense and practical judgment.

Section 9 of the Act, provides a list of different types of income that are deemed to have accrued or arisen in India, even if the income is earned outside India.

(F) The Exempted Incomes

Unless otherwise exempted under the Act's provisions, every income that is mentioned in the definition of total income is liable to taxes under the Act⁵. The Act's Section 10 lists a number of exempt income categories that are not subject to taxation and that apply to all taxpayers, including non-residents and those who are categorised as Not Ordinarily Residents (NOR). These exemptions are intended to help certain people and organisations while encouraging international collaboration, foreign investment, and diplomatic links. Interest income on bonds or securities, including the premium paid upon bond redemption, as announced by the Indian government in the gazette, is one of the major exclusions under Section 10. Furthermore, non-residents who maintain Non-Resident (External) Accounts benefit from the fact that interest generated on deposits made in these accounts is tax-exempt. Additionally excluded is interest earned on some savings certificates bought in foreign currencies prior to June 1, 2002.

Additionally, income received from bonds, securities, savings certificates, annuity certificates, and other Central Government-issued instruments is not subject to taxes. As long as the government notifies them, this covers interest, redemption premiums, and other payments related to such instruments. Interest income on deposits made under the SBI's NRI Bonds and Non-resident (non-repatriable) Rupee Deposit Scheme is likewise exempt. Non-residents who use Reserve Bank of India (RBI)-approved programs to generate interest income from foreign currency deposits are free from paying taxes. The Act also exempts revenue received by the government, banks, and businesses that have taken out loans from sources outside of India. Foreign nationals who work as diplomats or with foreign governments in certain circumstances are also free from paying taxes. In a similar vein, non-residents' pay income from work performed aboard foreign boats is exempt from taxes as long as they remain in India for no more than 90 days during the relevant year. Royalties or fees paid to a registered foreign corporation for technical assistance related to security projects in India under agreements with the government are likewise excluded under the Act.

Income earned by foreign consultants, their staff, and family members as defined by Sections 10(8A), 10(8B), and 10(9) is also exempt, as is income obtained by people participating in cooperative technical assistance programs between the Central Government and foreign governments. Furthermore, interest, dividends, and capital gains on investments made using funds from the European Economic Community are not subject to taxes. Finally, any money collected for regional initiatives by the “SAARC Fund” which was created by the “Colombo Declaration on December 21, 1991 is tax-exempt”. These Section 10 exemptions are essential for fostering international ties, economic growth, and the attraction of foreign investment in India.

(G) Income From Immovable or House Property

The source state refers to the country where income is earned or generated, and under various international tax agreements, it holds the primary authority to impose taxes on income arising from immovable property. The source state is responsible for assessing and calculating such income based on its domestic tax regulations. Regardless of a person's residency status, all income received from immovable property located in India is subject to Indian taxation under the worldwide tax framework.

Sections 22 to 27 of Chapter IV of the Act⁶, determine how income from residential and immovable assets is calculated in India. Regardless of whether the owner is a resident or not, the income is classified as "income from house property" under these regulations. The assessee must be the holder of the asset, which consists of buildings or land connected with them. The yearly value of the property, which reflects the property's intrinsic capacity to provide income, is used to calculate the income from residential property.

Three prerequisites must be met in order to determine taxable income under this category. First and foremost, the property has to have buildings or land that is connected to them. Second, the property must be owned by the assessee. Last but not least, although the property may be utilised for any reason, it will not be taken into consideration under this heading if the owner uses it for business or professional purposes, where the revenue from such activities is subjected to tax within the category, “profits and gains from business or profession.”

One of the most important factors in calculating the taxable income is the property's yearly value. Depending on the kind of property partially rented, partially self-occupied, entirely self-occupied, or vacant different methods of valuation are used. The owner is granted a significant exemption, which permits one self-occupied home's gross yearly worth to be classified as zero. To calculate the taxable income, a number of deductions are permitted from the computed yearly value. The owner's paid municipal taxes are subtracted from the property's gross yearly worth. In order to pay for maintenance and repairs, the owner is also qualified for a standardised deduction of 30% of the net yearly value. The interest paid on capital borrowed for loans used to buy, build, repair, or renovate real estate is another noteworthy deduction.

These provisions aim to establish a comprehensive method for calculating income from immovable property while providing necessary exemptions and deductions to ensure a fair taxation system.

(H) Income From Profit or Gains of Business

DTAA⁷ includes provisions in the international tax system that regulate the taxation of company revenues based on the presence of a PE⁸. These provisions provide that the country of origin, where the funds are created, has the primary power to tax corporate profits but only if the non-resident business has a permanent presence there. If there is no permanent establishment, the country in which the firm is located (the resident state) has the power to tax the income. For India, this legislation has two significant ramifications. First off, according to Indian tax laws, non-residents who keep a PE in India are liable for taxes on their income. Second, if Indian citizens do not have a permanent presence in that foreign country, they will be liable to pay Indian taxes on business revenue they get from outside sources. In some situations, a country may impose taxes on its people based on income earned from a permanent establishment overseas or impose taxes on foreigners who do not possess a PE in India. This mechanism helps avoid double taxes and ensures a fair allocation of taxing powers across countries.

III. Role of permanent establishments in business operations

While "permanent establishment" is the phrase used in international tax conventions, "business connection" is the phrase used in the ‘Act’ to describe the relationship between a non-resident firm and revenue earned in India. Although their definitions and applications may vary, both concepts seek to provide a foundation for income taxation. Since "permanent establishment" is regulated rigorously by international tax agreements and "business connection" is not specifically defined in the IT Act, the former often has a broader connotation. In addition to a permanent place of operation for business, a business link can also refer to various kinds of ties that generate revenue. Professional and corporate income are treated differently under international tax accords. Nonetheless, the Hon'ble SCI⁹ made it clear in the Barendra Prasad Ray case that the definition of "business connection" is broad enough to encompass professional ties as well.

Sections 9(1)(vi) and 9(1)(vii) of the Tax Law¹⁰ addresses the royalties and renumeration for technical services resulting from commercial relationships in India. However, royalties or fees for technical services that are associated with a PE are considered company revenue under international tax agreements. If the terms of international tax agreements are more advantageous than those found in domestic law, taxpayers may be able to claim relief under those accords. Any revenue obtained, either by direct or indirect, from a commercial relationship in India is deemed to have accrued or arisen in India, according to Section 9 of the Taxation Act.¹¹ The relationship between a non-resident company and profitable ventures in India is referred to as a business connection. For there to be a tax liability, this relationship needs to be genuine and substantial.

To clarify the meaning of business connection, the law provides three explanations:

1. Certain activities, such as purchasing goods, collecting news, or filming cinematography, are excluded from being considered a business connection.

2. The Finance Act, 2003, added further explanations to define business connection, including:

• A person who regularly enters into contracts on behalf of non-residents.
• A person who maintains stock of goods in India and delivers them on behalf of non-residents.
• A person who frequently obtains orders in India for non-residents.

Independent brokers or commission agents acting in their regular course of business are not included under this definition. If any income is attributed to a business connection as per the second explanation, it is presumed to have accrued or arisen in India according to the third explanation. This framework ensures that income earned through business relationships with India is appropriately taxed, whether under domestic law or international tax agreements.

(A) Assessment of Business Profits

Appropriate provisions of the Act¹² apply to all business profits earned by non-residents through their business connections in India, even if they do not have a PE in India. These provisions also apply to residents of India who earn income from their businesses. The method of calculating tax liability remains the same for both domestic and international income if the taxpayer's residential status is determined to be Indian resident under the rules of international taxation. This means that Indian residents are taxed on their global income, whether earned within India or from foreign sources, without any difference in the taxation process.

(B) Income from associated enterprises by way of transfer pricing

Transferring profits to nations with lower tax rates is a frequent problem in the international tax system. When two or more linked businesses conduct business abroad, this practice frequently occurs. The tax authorities of the respective nations make monetary adjustments in accordance with international tax accords if such evasion is discovered. The Indian Tax Law contains particular rules aimed at preventing tax evasion. With effect from April 1, 2002, the Finance Act of 2001 introduced the transfer pricing system by replacing Section 92 with Sections 92A through 92F. According to these rules, ‘the arm's length pricing’ must be applied to calculate income from cross-border transactions between connected businesses. According to Section 92A, a "associated enterprise" is a business that shares ownership or control. Section 92B states "international transaction" as involving two or more related businesses. Methods for determining the arm's length price are described in Section 92C, along with recommendations for selecting the best approach. The taxpayer is ultimately responsible for determining and applying the arm's length price, although Section 92C(3) gives the Assessing Officer the power to reevaluate the price and, if need, recalculate the income. Furthermore, taxpayers engaged in foreign transactions are required under Sections 92D and 92E to keep thorough records and provide an accountant's report with their income tax forms.

(C) Methods for analysing arm’s length price

The IT Rules, 1962, notably Rules 10A to 10E, describe the procedures for applying several approaches to ascertain the “arm's length price” in international transactions. These recommendations also list the factors to consider while choosing the best course of action. The Central Board of Direct Taxes (CBDT) has issued these regulations in compliance with the relevant provisions of the Income Tax Act, 1961, to ensure fair and accurate pricing in transactions between affiliated enterprises.

(D) Comparable uncontrolled price method

There are three phases in the CUP Method¹³. The first step is to determine the price that the business charged or paid in a comparable uncontrolled transaction or set of transactions at the global level. Secondly, pricing modifications are performed to reflect any discrepancies between international and unregulated transactions. Last but not least, the modified price is regarded as the arm's length price for the delivered items or rendered services.

a. Resale Price Method

There are five steps in the RPM process¹⁴. In order to determine the arm's length price for the purchase, the company must first find a transaction in which it sells the acquired property, goods, or services to another company; then, it must subtract the gross profit margin from the resale price; third, it must further deduct any expenses incurred by the company in order to acquire the goods or services; fourth, it must adjust for any discrepancies that may arise due to different accounting methods; and fifth, the adjusted price that results is considered the arm's length price for the purchase.

b. Cost Plus Method

CPM contains five stages¹⁵. First, the company calculates its direct and indirect costs for moving goods or providing services. Secondly, the gross profit margin derived from similar transactions with other businesses is computed. Third, the gross profit margin is adjusted to account for any functional differences between the transactions. Fourth, the adjusted profit margin is added to the starting cost that was established in the first step. Last but not least, the total is regarded as the arm's length pricing for the international transaction.

c. Profit Split Method

There are four phases in the PSM¹⁶. The associated firms' aggregate net profit from the overseas transaction is first determined. Second, each company's particular contribution to the overall profit is assessed according to the tasks they do, the resources they utilise, and the risks they incur. Third, the firms split the net profit based on their individual contributions. Lastly, while calculating the “arm's length price for the transaction”, the profit allotted to each enterprise is taken into account.

d. Transactional Net Margin Method

There are five phases in the TNMM¹⁷. First, the business's net profit margin from a contract with a linked company is calculated based on costs, revenues, or assets used. Second, the net profit margin is determined by comparing transactions with independent, unaffiliated enterprises. The third step is modifying each transaction's net profit margin to reflect any functional changes that may have occurred between them. Fourth, the adjusted net profit margin from the third stage is applied to the transaction with the associated firm to ensure that all margins are the same. Finally, the arm's length price is determined using the computed net profit margin. According to Section 92C(1)(f) of Rule 10AB of the IT Rules, 1962, the arm's length price may also be ascertained by any other method that considers all relevant data as well as the amount charged or paid in an uncontrolled transaction.

e. Choosing the most appropriate method

According to Rule 10C of the Act, the optimum method for determining the arm's length price in an international transaction depends on the specific facts and circumstances of each instance. When selecting the strategy, the following factors must be considered:

1. The type and nature of the international transaction involved.

2. The related businesses participating in the transaction, their roles, the resources used, and the risks undertaken by each business.

3. The accessibility of the data required to put the chosen strategy into practice.

4. The degree of similarity between the companies engaged in the comparable uncontrolled transaction and the regulated transaction.

5. How differences between the transactions under comparison may be taken into consideration with accurate and reliable adjustments.

6. The type and number of assumptions needed while applying the selected method.

The approach that offers the most accurate and equitable evaluation of the arm's length pricing is selected after taking these criteria into account.

(E) Fee paid or received for technical services

According to Section 9 of the Act, a "royalty" is any payment made in exchange for the use of commercial, industrial, or scientific equipment or for providing technical services. Included are payments for the use of intangible assets such as copyrights, patents, trademarks, and other types of intellectual property. This provision was amended to include services and equipment utilised for commercial, industrial, or scientific purposes on April 1, 2002. In India, a significant portion of the money paid for technical services is already covered by taxable royalties. Most DTAAs handle royalties and fees for technical services under a single provision. However, some agreements distinguish between the two by referring to payments for services related to equipment or intangible property as technical service fees and payments for its usage as royalties.

Fees for technical services are deemed to have been earned or accrued in India under Section 9 of the Act if they are paid under the following circumstances:

1. To the Government in all situations.

2. To a resident in any situation, unless the services are utilised for professional or business objectives outside of India or to generate revenue from sources outside of India.

3. To a non-resident if the services are utilised to make money from an Indian source or for business or professional reasons in India.

This provision applies to payments made on or after April 1, 1976, following the official notification by the Government of India.

(F) Taxation on Income From Capital Gains

The Income Tax Law establishes special rules for taxing capital gains income earned by non-residents. In the lack of specific restrictions, the Act's primary criteria are met. However, these tax laws only come into force if the income is considered taxable under India's international tax system. This judgement is based on the Income Tax Act and the terms of any DTAAs that India has signed with other countries. Non-residents are free from paying taxes on income that does not originate or accrue in India. Income from the transfer of capital assets located in India is still considered to have been generated there, even if the transaction occurs outside of the country. This is covered under Section 9(1)(i) of the Act. A capital asset transfer must occur within India in order to be taxed. Income from indirect transfers of capital assets outside of India is exempt from this provision.

The Vodafone case, in which the Hon'ble Apex Court and the International Court of Arbitration decided that properties situated in India are exempt from taxation when capital assets are transferred between two non-resident entities outside of India, is a noteworthy instance pertaining to indirect transfers. Chapter XIIA of the Act outlines the capital gains tax regulations for Non-Resident Indians (NRIs). Only non-resident Indian nationals or individuals of Indian descent are covered by this chapter. These people have to put money into certain assets, including:

• Shares in Indian companies
• Debentures
• Deposits in non-private companies
• Central Government securities under the Public Debt Act, 1944
• Any other notified assets

Additionally, the investment must be made using foreign currency. Long-term capital gains are taxed at 10% and investment income is taxed at a reduced rate of 20% if these conditions are met.

(G) Income Received from Independent Personal Services

A particular clause known as "Independent Personal Services" is included in several international tax agreements to specify the location and method of taxation of professional income. Income from independent personal services rendered by professionals, including physicians, attorneys, engineers, architects, dentists, and accountants, is covered by this clause. The sale of any property has nothing to do with these services. However, under the tax agreement, the payment is regarded as either royalty income or a charge for technical services if the services are related to the sale of real estate

Income from independent personal services is classified as "Income from Business or Profession" under the Act. The general guidelines for taxation business and professional income are provided in this area. Section 9 of the Act states that if professional services are rendered in India or if the revenue is related to an Indian business venture, it is deemed to have been earned in India. For taxation purposes, the Act does not distinguish between commercial and professional income. Some Indian tax treaties and the UNMTC¹⁸ retain the distinct provision on independent personal services, despite the OECDMTC¹⁹ eliminating it and combining it with corporate income.

(H) Income Received from Dependent Personal Services

International tax agreements primarily address four types of income: director's fees, pensions, social security payments, and government service income. The OECD model convention categorizes this income under employment income, while the UN model convention refers to it as dependent services income. The Income Tax Act of 1961 groups all these types of income under the broader category of "Income from Salary", which is governed by Chapter IV of the Act. The following rules apply to salary income:

1. Regardless of where the payment is received, salary income generated in India is subject to taxation.

2. For Indian citizens, salary income is taxable whether it is received from within India or from a foreign country. However, any benefits or allowances received outside India are not taxable.

3. For non-citizens, income received for services performed outside India is not taxable under Indian tax laws.

These provisions ensure that salary income is taxed fairly based on the individual's residential status and where the services are performed.

(I) Income Received from Other Sources

All forms of income that are not expressly covered by any local tax legislation or international tax agreements fall under the "Other Incomes" category. International tax accords may provide that the nation in which an individual resides will have the authority to impose taxes on specific types of income. These agreements, however, don't specify how these earnings need to be determined. Income generated from other sources is covered under Chapter IV, Part F of the Tax Act. A wide definition of this kind of revenue is given in Section 56. All incomes that do not fit into any of the other particular income categories specified in Section 14 of the Act are included. Certain deductions are permitted for determining income within this category, as detailed in Section 57. This guarantees that only net income after deducting allowable expenses is taxed by the taxpayer.

IV. Comparison of the taxable income under it act and international tax agreements

(A) Taxing Non-Residents Under the IT Act

By establishing which countries has the authority to tax particular incomes, international tax agreements aid in the resolution of the double taxation and multiple taxation problems. These agreements, however, don't specify how to determine or evaluate the tax liability. The domestic tax laws of each nation, which has the exclusive authority to tax income, include the guidelines for these computations. Every individual whose taxable income over the designated threshold is required to file an IT return u/S. 139(1) of the Act. This return and self-assessment tax must be filed by the individual alone. The taxpayer must pay interest on the late amount if the return is not submitted on time. There may be fines or even criminal repercussions for not filing the form.

The AO²⁰ may send a notice requesting the non-resident taxpayer to file their income tax return and any supporting documentation if they choose not to do so. We refer to this procedure as scrutiny assessment. In the event that the taxpayer is uncooperative, the officer may use best judgement to estimate the income using the information at hand. Furthermore, throughout a six-year period, the officer has the authority to examine any income that was not previously assessed. If a non-resident receives money from a business relationship in India, they may also be subject to taxation there. For tax reasons, the following people in India may be considered a non-resident's agent:

1. Employees of the non-resident or their trustee.

2. Business associates of the non-resident.

3. Persons receiving income on behalf of the non-resident.

4. Persons purchasing a capital asset in India from the non-resident.

In certain situations, a specific proportion of tax must be withheld by the person paying the non-resident before the payment is made. This is referred to as Tax Deducted at Source (TDS) or withholding tax. Within the allotted period, the sum that was withheld must be deposited with the government. The legislation states that no one may be considered as an agent without first being given an opportunity to be heard in order to safeguard taxpayers. The basic tax recovery and collection methods described in Chapter XVII-B of the Tax Act also apply to non-residents. The government may recoup the unpaid tax on any assets that are in India or that may come into the country in the future if the non-resident does not pay the tax.

V. Law related to evasion and avoidance of tax

The practice of minimising tax obligation by utilising legal provisions in a way that, while legally acceptable, deviates from the law's fundamental purpose is known as tax avoidance. This technique is seen as ethically dubious even if it is legal. Transactions that are legal on paper but illegal in practice are examples of tax evasion. Ensuring that taxpayers adequately declare their financial activities and accounts in order to stop such practices is the main task facing the tax authorities. The Income Tax Act has to have certain clauses that prohibit taxpayers from completing transactions that are only intended to evade taxes in order to counteract this. The GAAR²¹ and the SAAR²² are two examples of such laws that provide tax authorities the authority to investigate transactions and determine their real character. The department wouldn't have the power to stop tax evasion schemes without these regulations.

On the other hand, tax evasion is the unlawful activity of purposefully hiding income, exaggerating costs, or committing fraud in order to lower one's tax obligation. It is against the text as well as the spirit of the law. To stop tax evasion and avoidance, the Tax legislation includes a number of provisions. Addressing tax loopholes may be done in two main ways: first, by having courts interpret current rules broadly, and second, by changing legislation to fill up any gaps that are found. The Doctrine of Judicial Restraint, however, restricts the judiciary's ability to close these gaps. This notion states that judges cannot add new provisions to legislation since they are not legislators. They have to stay inside the law and not go over the Lakshman Rekha (boundary line). Therefore, it is the government's duty to change current legislation or add new clauses in order to successfully stop tax evasion and avoidance.

(A) Taxing The Income by Source Rule

In order to specify the taxation of interest income, royalties, and fees for technical services, the Income Tax Law included Section 9(1) with subclauses (v), (vi), and (vii). Since this section established the source rule of taxes for the first time, non-residents must pay tax on income earned from any source within India or for services linked to a business or profession carried out in India. But the Honourable Supreme Court decided that in order for such income to be subject to taxes, two requirements must be fulfilled at the same time:

1. The services must be utilized in India.

2. The services must be provided within India.

A subsequent amendment to the Act included an explanation to Section 9 with retroactive effect from April 1, 1976, to avoid tax evasion pertaining to certain categories of income. This explanation explained that regardless of the taxpayer's residency or the location where the services were rendered, revenue from interest, royalties, or technical services would be subject to taxation in India. It underlined that for calculating tax responsibility, the location of the service's usage matters more than the location of its provision.

(B) Minimum Alternative Tax

Some businesses generated large profits and paid dividends to shareholders prior to the Minimum Alternative Tax (MAT), but they ran their operations in a way that prevented them from having to pay taxes. The IT Act was amended to include Section 115J in order to stop this unjust practice. Based on the generally acknowledged "ability to pay" premise, which guarantees that businesses making significant profits must pay their fair share of taxes, this section presented the idea of a minimal alternative tax. This clause requires businesses to determine their earnings using two methods:

1. As per the Taxation Act of 1961, after considering all deductions, exemptions, and concessions.

2. As per the Companies Act of 1956, which involves computing book profits after making adjustments specified under Section 115J.

The business must pay taxes on the designated percentage of its “book profits” if the income tax due under standard rules is less than that amount. This clause makes sure that profitable businesses can't completely avoid paying taxes by taking use of tax exemptions.

(C) IT Provisions of Associated Enterprises /Transfer Pricing

Sections 92A to 92F of the Act related with special anti-avoidance rules that deal with the idea of transfer pricing. These provisions' primary goal is to stop businesses from moving their earnings to nations with lower tax rates or no taxes at all. This is frequently accomplished by changing the costs of goods, services, or transactions between businesses that are tightly connected. In order to prevent lowering taxable income in India, these regulations regulate transfer pricing, ensuring that deals between related businesses are completed at fair market value. See the previous part of this chapter for further information on transfer pricing and how it affects the revenue of related businesses.

(D) Avoiding tax by transfer of foreign assets to non-residents

Non-residents are excused from paying taxes on their foreign income, or revenue received outside of their nation of residence, whereas citizens are subject to taxes on their worldwide income, which includes income from overseas assets, according to a well-established taxation norm. As a result, residents and non-residents have different tax treatment when it comes to income from overseas assets. Some residents may attempt to transfer their international assets to a non-resident while covertly keeping control of the income from such assets in order to evade paying taxes in India. They can avoid paying taxes on the money they make from these assets by using this tactic. Section 93 of the 1961 Act requires the resident to pay taxes on income received from transferred overseas assets in order to stop this abuse. The Hon'ble Supreme Court explained that this section's goal is to prevent Indian nationals from transferring their assets fraudulently in order to avoid paying taxes while yet enjoying the revenue from such assets.

(E) Bond Washing & Dividend Stripping

Bond washing is the practice of selling assets that earn interest revenue just before the interest begins to accrue in order to evade taxes. When the asset's original owner sells it to someone else, the buyer becomes the new legal owner and is entitled to the interest. The original owner repurchases the securities from the buyer at a reduced ex-interest price (without including the interest amount) following the payment of interest. The original owner benefits since the difference between the sale and buyback prices is not considered as interest income but rather as a STCG.²³ This is so that the owner can lessen their tax obligation because STC gains are taxed at a lower rate than interest income. Dividend stripping is a similar activity in which before the record date, the original owner sells shares on which a dividend has been declared and then repurchases them at a reduced price. This enables the owner to turn taxable dividend income into short-term capital gains, which are taxed at reduced rate. Special restrictions are included in Section 94 of the 1961 Income Tax Law to stop such tax dodging tactics. It considers the short-term buyer's interest income to be the original owner's income. Furthermore, Section 94(7) prohibits taxpayers from abusing this technique to claim fictitious losses by stating that any loss sustained by the short-term buyer from selling shares would not be taken into account for tax reasons.

(F) Presumptive Taxes

First proposed in 1976, the presumptive basis of taxes went into force on April 1st of that year. By estimating revenue using a predetermined proportion of gross receipts or turnover rather than actual profits realised, this technique streamlines the process of determining taxable income. Under this approach, no deductions are permitted from the predicted income, nor are the real expenditures of the firm taken into account. Presumptive taxation is primarily intended to assist professionals, small firms, and people whose books of accounts are either inadequate or untrustworthy, or who do not maintain appropriate books of accounts. According to the CBDT²⁴, the goal of this method is to make it simpler for these taxpayers to calculate their income and collect taxes. In order to make tax compliance in cross-border transactions easier, presumptive tax requirements are also applied to specific non-resident companies that operate in sectors including shipping, aviation, and oil exploration.

(G) Preventing Tax Evasion

It is important to emphasize that the tax administration should be given specific legal powers and access to clear provisions or legal amendments to prevent individuals or businesses from unfairly using legal loopholes to avoid paying taxes. Without such provisions in the law, tax evasion cannot be penalized, as it would be considered a violation of the ex post facto law which prohibits punishing actions that were not illegal at the time they were committed. Additionally, in the absence of proper legal clauses, the judiciary cannot take action against such practices. On the other hand, tax evasion is completely illegal and widely viewed as a criminal offense by society, the judiciary, and tax authorities. This form of tax avoidance is condemned because it involves deliberate efforts to conceal income or provide false information to evade taxes.

(H) Compulsory Audit

Taxpayers occasionally attempt to evade paying taxes by failing to keep accurate and current books of accounts. A lower assessment than the actual taxable income under the IT Law may arise from the tax authorities' need to estimate the taxpayer's income based on the information that is now available. The taxpayer may appeal to have the assessed income reduced if the estimated income exceeds the actual taxable income. The taxpayer could receive a more positive evaluation as a result of this procedure. Section 44AB of the Direct Tax Code requires some taxpayers to have their books of accounts audited in order to stop such unfair acts. The audit helps to uncover any fraudulent activity and guarantees that the accounts are accurately kept and represent the income. This clause enhances tax law compliance and encourages openness.

(I) Taxing the Unexplained Transactions

Unaccounted money (also known as unreported income) can be shown in the taxpayer's books of accounts by falsely claiming it as loans from third parties or capital contributions made by themselves. This practice is commonly used to evade taxes and convert black money into legitimate income.

To prevent such tax evasion, the Taxation Act of 1961 includes provisions for taxing various forms of unexplained income, such as:

• Unexplained cash credits
• Unexplained investments
• Unexplained money or valuable items like gold or jewellery
• Unexplained expenses

These provisions allow the AO to investigate the source of the money. If the taxpayer fails to provide satisfactory evidence to explain the origin of the income, the amount will be treated as taxable income and added to the taxpayer's total income during the assessment process. This helps curb money laundering and strengthens the fight against black money.

(J) Penal Provisions in The Event of Tax Evasion

In his Arthashastra, Kautilya proposed the idea of "dhanda" (punishment or fine) as a way to prevent tax evasion. The term dhanda refers to enforcing the law by imposing penalties to discourage taxpayers from avoiding taxes. The IT Act has several provisions to penalize tax evasion and ensure compliance, including fines and criminal prosecution:

1. Concealment of Income (Section 271(1)(c)): A taxpayer faces fines of up to three times the amount of tax avoided if they conceal income or provide incorrect information. The definition of actual tax evasion is expanded in this section's Explanation 4. If concealed income is found during search and seizure activities, there may be further fines.

2. Transfer Pricing (Section 271AA): When two connected businesses manipulate prices in international transactions to avoid taxes, they can be fined up to three times the tax avoided. If income tax authorities adjust the prices under transfer pricing rules, the hidden income becomes taxable.

3. Failure to Maintain Books of Account (Section 271A): Taxpayers may be fined up to ₹25,000 for failing to keep accurate books of accounts as mandated by Section 44AA. The penalty for not maintaining records of foreign transactions is two percent of the total transaction amount.

4. Failure to Get Accounts Audited: If the taxpayer does not audit their accounts in cases where it is required, a fine of up to ₹1,50,000 may be imposed. An additional fine applies if the taxpayer fails to submit the audit report for international transactions.

5. Failure to Quote PAN (Permanent Account Number): If a taxpayer does not obtain or quote their PAN number, they can be fined ₹10,000.

6. Non-Compliance with Notices: If a taxpayer fails to respond to tax notices, sign documents, provide information, or allow inspection, they can be fined up to ₹10,000.

In addition to these fines, income tax authorities can also file criminal complaints under Section 190 of the Criminal Procedure Code, which may lead to prosecution in criminal courts for serious cases of tax evasion.

VI. Conclusion

As a researcher this study may highlight the role of UN and OECD’s contribution towards the balanced and harmonised free trade policy between the country and the Model DTAA acts as a basic guiding principle for entering into conventions by eliminating the dual tax in two jurisdictions. India’s tax laws are blended with the agreements signed by it with other countries to facilitate the proper implementation and enforceability of the tax laws of the nation for effective tax collection and preventing tax evasion. The role of the administrative actions in this regard in curbing the tax evaders and identifying them and recovering the arrears and prosecuting them are a tedious task. These are all the main areas covered under this paper for the better understanding and gaining insightful knowledge about the international double taxation laws and its avoidance.

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Footnotes

1. Author is an Assistant Professor at Dr. Ambedkar Global Law Institute, Tirupati, Andhra Pradesh, India.

2. Section 2(30) of the Income Tax Act, 1961. ↩

3. Supra. ↩

4. The Income Tax Act, 1961. ↩

5. ibid. ↩

6. ibid. ↩

7. The Double Taxation Avoidance Agreement. ↩

8. Permanent Establishment. ↩

9. Supreme Court of India. ↩

10. The Income Tax Act of 1961. ↩

11. Ibid. ↩

12. Sections 28 to 44-D and 68 to 69-D of the Income Tax Act, 1961. ↩

13. Comparable Uncontrolled Price CUP Method. ↩

14. The Resale Price Method. ↩

15. The Cost-Plus Method. ↩

16. Profit Split Method. ↩

17. Transactional Net Margin Method. ↩

18. UN Model Tax Convention. ↩

19. OECD Model Tax Convention. ↩

20. Assessing Officer. ↩

21. General Anti-Avoidance Rule. ↩

22. Specific Anti-Avoidance Rule. ↩

23. Short-Term Capital Gain. ↩

24. Central Board of Direct Taxes. ↩