Non-Discrimination Clauses: Harmonising the ITA and Double Tax Avoidance Agreements

[Rudra Shankar is an associate at Shardul Amarchand Mangaldas & Co. and Dyuthi Sutram is a fourth-year B.B.A. LL.B. (Hons.) student at Symbiosis Law School, Pune]

Double tax avoidance agreements (‘DTAA’) most often include a ‘non-discrimination clause’, which states that no national from one contracting state, or permanent establishment which an entity of a contracting state has in the other contracting state, may be subject to taxation that is more burdensome than the taxation to which nationals of that other contracting state are subjected in similar circumstances. India is signatory to several such DTAAs. These include, inter alia, Agreement for Avoidance of Double Taxation and Prevention of Fiscal Evasion with Korea, 2015, which contains a non-discrimination clause in article 24, and India’s DTAA with the United States of America signed in 1990, which includes a non-discrimination clause in article 26.

Section 90(2) of the Income Tax Act 1961 (‘the ITA’) states, “where the Central Government has entered into an agreement with the Government of any country outside India or specified territory outside India for… avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, the provisions of this Act shall apply to the extent that they are more beneficial to that assessee.” The provisions of Chapter X-A of the ITA, which contain the general anti-avoidance rules, apply to such assessee even if such provisions are not more beneficial to him as per section 90(2A). Explanation 1 to section 90, which was added by Finance Act 2001 clarifies that “the charge of tax in respect of a foreign company at a rate higher than the rate at which a domestic company is chargeable, shall not be regarded as less favourable charge or levy of tax in respect of such foreign company.” It was passed with retrospective effect from April 1, 1962. 

In this post, the authors argue that the provisions of the ITA ultimately violate the non-discrimination clauses of the DTAAs that India is signatory to, by ostensibly differentiating between companies on the basis of where they declare dividends, when in fact the ITA ultimately discriminates on the basis of its nationality.

What is a Domestic Company?

Section 90 discriminates between a foreign firm and a domestic one. Section 2(22A) of the ITA defines a domestic company as, “an Indian company [i.e., a company formed and registered under the Companies Act of 1956, or the Companies Act 2013], or any other company which, in respect of its income liable to tax under this Act, has made the prescribed arrangements for the declaration and payment, within India, of the dividends [including dividends on preference shares] payable out of such income.”

The term ‘foreign company’ has simply been defined to mean “a company which is not a domestic company.” However, there is ambiguity as to whether a non-resident company (defined as per section 6 of the ITA as a company that first, is not an Indian company as per the ITA, and second, does not have its place of effective management in India) can even make the prescribed arrangements to declare and pay dividends within India. This classification, as reflected in section 90, is ostensibly made based on where a company declares dividends. However, as is demonstrated below, companies incorporated outside India cannot do so under the current legal framework.

Can a Company Incorporated Outside India Declare and Pay Dividends in India?

Rule 27 of the Income Tax Rules 1962 (‘the IT Rules’) clarifies the meaning of “prescribed arrangements for the declaration and payment of dividends within India.” It requires that three conditions be met: first, the share register of the company is to be kept in the principal place of business within India; second, the general meeting to pass accounts of the previous year relevant to the assessment year and for declaring any dividends in respect thereof must be held only at a place within India; and finally, the dividends must be payable only within India.

The term ‘share register’ has often been used interchangeably with the term “register of members”. Rule 5 of the Companies (Management and Administration) Rules 2014, read with section 88 of the Companies Act 2013, provides that the register of members must be kept at the registered office of the company, unless a special resolution is passed in a general meeting to move it to an office in a city in which at least one-tenth of the shareholders reside.

While companies incorporated outside India have their principal places of business in India, certain jurisdictions around the world require that the share register be kept only within their territories. These include the United Kingdom, Singapore and even certain states in the United States of America such as Jersey, which have signed DTAAs with India. This prevents companies incorporated outside India from being classified as a “domestic company” on the basis of their nationality.

Section 90 of the ITA and DTAA: Addressing the Difficulty

The tension between the ITA and the non-discrimination provisions of the DTAAs has been the cause for litigation on multiple occasions. Judges have repeatedly had occasion to address the issue, and have in each instance, not addressed the underlying issue directly.

In the case of In Re: Application No. P-16 of 1998, the Authority for Advance Rulings held that a higher rate of corporate taxation levied on a non-resident French company was not violative of the DTAA between India and France. The ITA’s provision regarding the definition of ‘domestic companies’ was inserted by the Direct Tax Laws (Amendment) Act 1987, with effect from April 1, 1989. Whereas, the DTAA between France and India was only entered into on September 29, 1992. Hence, the Authority stated that a series of provisions had made it clear that domestic and foreign companies would be taxed differently prior to the DTAA in Indian tax law. It also cited the erstwhile section 85A (the deduction of tax on intercorporate dividends) as an example of a provision that made this distinction, which existed as early as April 1, 1966.

The Authority consequently held that the non-discrimination clause in the DTAA was drafted “with full knowledge of this well-known and long-standing distinction between an Indian company, domestic company and foreign company”, stating this knowledge was evidence that “no attempt has been made in article 26 [of the DTAA] to do away with this long-standing classification of companies in the Income-tax Act.”  However, the Authority made no attempt to justify whether such distinction is legitimate when seen through the lens of the non-discrimination clauses of the DTAA in the first place.

This difficulty was specifically brought before the Income Tax Appellate Tribunal in Kolkata in the case of ABN Amro Bank NV v. Joint Commissioner of Income Tax, where the assessee was a foreign company seeking relief under the DTAA between the Netherlands and India. The counsel for the assessee argued that explanation 1 to section 90 “is inapplicable in view of the fact that the foreign company cannot fulfil the condition of making prescribed arrangement for declaration and payment within India, of the dividends payable out of its income in India.” With reference to rule 27 of the IT Rules, the learned counsel contended that “the explanation does not make any sense insofar as the prescribed arrangement for declaration and payment within India of the dividends payable out of its income in India cannot be fulfilled.” However, the Appellate Tribunal refused to go into the question, citing the definition of a ‘domestic company’ in the ITA with emphasis on the terms ‘any other company’ as reason for not needing to “ascertain as to whether in any case the second category of the companies [domestic companies which are not Indian companies] would at all exist.

The Appellate Tribunal seemed to be implying that the distinction between foreign and domestic companies is on the basis of whether a company has made the prescribed arrangements to declare and pay dividends in India, and not on the basis of the company’s nationality. Hence, the DTAAs Non-Discrimination clause was supposedly thus not violated. This decision has since been cited and affirmed by other appellate tribunals.


It is unclear as to whether a foreign company incorporated in a jurisdiction which restricts it from moving its share register outside that jurisdiction’s territory can declare dividends in India. Consequently, the provisions of the ITA cause companies to be discriminated on the basis of their nationality, thus violating the non-discrimination clauses of the DTAAs to which India is a party, in both letter and spirit.

Rudra Shankar and Dyuthi Sutram

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