India-Canada DTAA

Double Taxation Avoidance Agreement (DTAA) is an agreement between two countries that aims to eliminate the double taxation of income earned by individuals or entities in both countries. The DTAA provides a mechanism for foreign investors to avoid being taxed twice on the same income. It allows foreign investors to claim tax relief in their home country for the tax paid in India. The DTAA also helps to prevent tax evasion and promote transparency in tax matters.

The India-Canada DTAA was first signed in 1989 and came into force on 6 May 1997. It has been revised several times since then. The DTAA ensures that taxpayers who are residents of one country but earn income from the other country are not taxed twice on the same income. The agreement covers taxes on income and wealth and applies to residents of both countries.

Scope of India Canada DTAA

Foreign investors in India can be categorized into different groups based on their investment objectives, the nature of their investment, and the regulatory requirements they need to comply with.

Residence-based Taxation

The DTAA provides clarity on the tax treatment of residents and non-residents in both countries. It ensures that individuals and businesses are not taxed twice on the same income.

Business Profits

The agreement provides guidelines for the taxation of business profits earned by companies in either country. It ensures that companies are taxed fairly based on their activities in each country.

Dividends, Interest, & Royalties

The DTAA provides rules for the taxation of dividends, interest, and royalties received by residents of either country. It ensures that these payments are taxed at a reasonable rate and not subject to double taxation.

Capital Gains

The agreement provides for the taxation of capital gains arising from the sale of assets, such as shares, real estate, and other investments. It ensures that residents are taxed fairly and not subject to double taxation.

Exchange of Information

The agreement provides for the exchange of information between the tax authorities of both countries to prevent tax evasion and ensure compliance with tax laws.

Definitions under India-Canada DTAA

The DTAA defines various terms such as 'person', 'resident', 'permanent establishment', 'dividend', 'interest', 'royalties', 'capital gains', etc. These definitions are important as they help in determining the scope and applicability of the agreement.

Permanent Establishment

As per Article 5 of the India-Canada DTAA, a Permanent Establishment means a fixed place of business through which an enterprise of one country carries on its business activities in the other country. It includes the following:

• A place of management.
• A branch.
• An office.
• A factory.
• A workshop, and a mine, among others.
• An installation or structure used for the exploration or exploitation of natural resources, but only if it is used for a period of more than 120 days in any 12-month period.
• A building site or construction, installation or assembly project or supervisory activities in connection therewith, where such site, project or activities (together with other such sites, projects, or activities, if any) continue for a period of more than 120 days in any 12-month period.
• The furnishing of services other than included services as defined in Article 12, within a Contracting State by an enterprise through employees or other personnel, and only if:
  • Activities of that nature continue within that State for a period or periods aggregating to more than 90 days within any 12-month period.
  • The services are performed within that State for a related enterprise.

Note: The mere presence of a company's goods or merchandise in the other country does not, by itself, constitute a Permanent Establishment (PE).

The DTAA also considers certain activities as not constituting a PE, such as:

• The use of facilities solely for the purpose of storage, display or delivery of goods or merchandise belonging to the enterprise.
• The maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage, display or delivery.
• The maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise or for collecting information for the enterprise.
• The maintenance of a fixed place of business solely for the purpose of carrying on any other activity of a preparatory or auxiliary character.

In case an enterprise has a Permanent Establishment in both India and Canada, the business profits will be taxed in both countries, but the DTAA provides relief from double taxation by allowing the taxpayer to claim a credit for the taxes paid in one country against the taxes payable in the other country.

Overall, the definition of Permanent Establishment under the India-Canada DTAA plays a crucial role in determining the tax liability of foreign enterprises doing business in India or Canada.

A summary of structure of entities covered in Permanent Establishment is as follows:

Particulars	Indian Definition	Canadian Definition	India-Canada DTAA Definition
Brief meaning	- Any fixed place of business serving the activities of an enterprise. - Any entity engaged in any activity, relating to the production, storage, supply or distribution. - Wider definition than Tax treaty.	- Any fixed place of business serving the activities of an enterprise. - Tax payer has the power to dispose of the business facility or plant (unwritten requirement).   - Wider definition than Tax treaty.	- Any fixed place of business through which the business of an enterprise is wholly or partly carried on. - Narrower definition than respective taxation.
Examples
Place of Management	Yes	Yes	Yes
Branch or office	Yes	Yes	Yes
Factory or workshop	Yes	Yes	Yes
Fixed place solely for the purpose of purchasing goods or merchandise	Yes	Yes	Yes
Fixed place solely for the purpose of maintenance of a stock of goods	Yes	Yes	Yes
Building site or construction	Yes (if Duration > 6 Months)	Yes (if Duration > 12 Months)	Yes (if Duration > 120 Days)

Withholding Tax as per Indian Tax laws

A brief summary of the withholding tax rates is as follows:

Nature of Income	Indian Income Tax Act*	India-Canada DTAA
Dividend	20%	15% / 25%
Interest	20%	15%
Royalty	20%	10% / 15%
Fee for Technical Services	20%	10% / 15%

* The rates as per Income Tax Act shall be increased by applicable surcharge (2% / 5% for companies and 10%/15%/25%/37% for individuals) and cess (4%).

Note: Taxability of dividend is on gross basis and the amount of tax is deducted by the source country Interest is also taxable on gross basis and the tax is withheld by the source country.

Benefits and Rates of Tax as per India-Canada DTAA

Fees for Technical services and Royalty

As per Article 12, the term "royalties" means:

• Payment of any kind received as a consideration for the use of, or the right to use, any copyright of a literary, artistic, or scientific work including cinematograph films or work on film tape or other means of reproduction for use in connection with radio or television broadcasting, any patent, trademark, design or model, plan, secret formula or process, or for information concerning industrial, commercial or scientific experience, including gains derived from the alienation of any such right or property which are contingent on the productivity, use, or disposition thereof.
• Such royalties earned in India by a resident of Canada are taxable in India at a rate of 15%.
• Payments of any kind received as consideration for the use of, or the right to use, any industrial, commercial, or scientific equipment other than the payments derived by an enterprise for rental of ships or aircraft or containers.
• Such royalties earned in India by a resident of Canada are taxable in India at a rate of 10%.
• The above rates and taxability are not applicable if such incomes are earned through a Permanent Establishment situated therein. Then the permanent establishment shall be taxed as per rates of the Income Tax Act (i.e., 40%).

Dividend Income

“Dividends” as used in Article 10 means income from shares or other rights, not being debt-claims, participating in profits, as well as income assimilated to income from shares by the taxation law of the country of which the company making the distribution is a resident.

Rates of tax on dividend:

• If the recipient is a resident of Canada and the beneficial owner of the dividends and is a company which controls directly or indirectly at least 10% of the voting power in the company paying the dividends and the tax so charged does not exceed 15% of the gross amount of the dividends and vice versa.
• If the recipient is a resident of Canada and the beneficial owner of the dividends and not covered by the above point, the tax so charged shall not exceed 25% of the gross amount of the dividends and vice versa.

Interest

As per Article 11, the term “Interest” means income from debt-claims of every kind, whether secured by mortgage, and in particular, income from Government securities and income from bonds or debentures, including premiums and prizes attached to such securities, bonds or debentures, as well as income assimilated to income from money lent by the taxation laws of the country in which the income arises. Such interests earned in India by a resident of Canada are taxable in India at a rate of 15%.

Interest arising in India and paid to a resident of Canada shall be exempt from tax in India if:

• The payer of the interest is the Government of India or of a political sub-division or local authority thereof.
• The beneficial owner of the interest is the Central Bank of Canada.
• The interest is paid to an agency or instrumentality (including a financial institution) which may be agreed upon in letters exchanged between the competent authorities of India and Canada.

Note: The above exemption is available vice versa to Interest arising in Canada and paid to a resident of India.

The above rates and taxability are not applicable if such incomes are earned through a Permanent Establishment situated therein. Then the Permanent Establishment shall be taxed as per rates of the Income Tax Act (i.e., 40%).

Independent Personal Services

As per Article 14, the term "professional services" includes independent scientific, literary, artistic, educational, or teaching activities, as well as the independent activities of physicians, surgeons, lawyers, engineers, architects, dentists, and accountants. Income derived by an individual or a firm of individuals (other than a company) who is a resident of Canada and earns income from the performance of professional services or other independent activities shall be taxable in India only if any of the following conditions is satisfied:

• If they have a fixed base regularly available to them in India for the purpose of performing their activities and in that case, only so much of the income as is attributable to that fixed base may be taxed in India.
• If their stay in India is for a period or periods amounting to or exceeding in the aggregate 183 days in the relevant fiscal year; in that case, only so much of the income as is derived from their activities performed in that other State may be taxed in India.
• If a remuneration for services in India exceeding CAD 2,500 or its equivalent in Indian currency is derived from residents of India or is borne by a Permanent Establishment of the Canadian company in India.

Dependent Personal Services

As per Article – 15, salaries, wages and other similar remuneration derived by a resident of Canada in respect of employment shall be taxable in India only if the employment is exercised in India at the rates in force. Such salary can be taxed in Canada only after fulfilment of the following conditions:

• The recipient is present in India for a period or periods not exceeding an aggregate of 183 days in the fiscal year concerned.
• The remuneration is paid by, or on behalf of, an employer who is not a resident of India.
• The remuneration is not borne by a Permanent Establishment or a fixed base which the employer has in India.

Tax on Capital Gains: Article – 13

• Gains from the alienation of ships or aircraft operated in international traffic by an enterprise of India and movable property pertaining to the operation of such ships or aircraft, shall be taxable only in India and vice-versa.
• Gains from the alienation of any property, other than those referred to above, may be taxed in both countries.

Comparison with the other Tax Treaties

Treaty Partner	Dividends	Interest	Royalties	Fee for Technical Services	Capital Gain on Shares held in India
Canada	15%/25%	15%	10%/15%	10%/15%	Capital Gain arises in both India & Canada
France	10%	10%	10%	10%	Capital Gain arises in India if more than 10% Shares are held
Netherlands	10%	10%	10%	10%	Capital Gain arises in India if more than 25% Shares are held
United Kingdom	10%/15%	10%/15%	10%/15%	10%/15%	Capital Gain arises as per Indian/UK Income Tax Act

Documents required to take benefit of DTAA

Any foreign company or non-resident is taxable in India under the Income Tax Act 1961 but not under the DTAA or taxable at a higher tax rate under the Income Tax Act 1961 but lower tax rate under the DTAA, in such a scenario, such foreign company or non-resident can take a benefit of the Double Taxation Avoidance Agreement with the producing the following documents:

1.    Tax Residency Certificate – It is necessary to submit a Tax Residency Certificate at the time of filing Form 10F electronically to the Income Tax Department.

2.    Form 10F – It is necessary to submit Form 10F electronically to the Income Tax Department after 30/09/2023.

3.    Declaration of No Permanent Establishment in India – Declaration to be furnished by the company that they do not hold any permanent establishment in India such as a place of management, a branch, an office, a factory, or a workshop.

RECENT CHANGES TO FORM 10F

Form 10F is a self-declaration tax form used by non-resident (NR) taxpayers for claiming the benefits under DTAA (Double Taxation Avoidance Agreement)

For a foreign company rendering technical services in India without a permanent establishment, recent changes in the Form 10F procedures have implications that demand attention. Historically, non-residents were required to submit a Tax Residency Certificate (TRC) and a self-certified Form 10F in a written format.

However, the CBDT, in July 2022, mandated the electronic filing of Form 10F. This change posed challenges for non-residents, including the necessity for income tax portal registration, a mandatory Permanent Account Number (PAN), and a Digital Signature Certificate (DSC).

Key developments and considerations by CBDT

• PAN relaxations: To accommodate non-residents without a PAN, the CBDT introduced relaxations in March 2023, allowing manual submission of self-certified Form 10F until September 30, 2023.
• New registration category: Post the relaxation period, a new registration category was introduced for ‘non-residents not having a PAN and not required to have a PAN.’ This allows non-residents to register without a PAN and file Form 10F electronically.
• Considerations during registration:
  • The income tax portal accepts foreign mobile numbers but doesn’t deliver OTP passwords to them. Non-residents may need to provide an Indian mobile number for this security verification via OTPs.
  • Required documents during registration include the Certificate of Registration for date of incorporation, Tax Identification Number, Tax Residency Certificate, Address Proof, and details of key persons.
• Digital Signature Certificate: Non-residents must digitally sign Form 10F using a DSC obtained in India.
• Verification process: Non-residents must ensure they are not required to obtain a PAN under the Income-tax Act, 1961. Post-registration, key persons must provide contact numbers and email IDs for OTP verification.

Conclusion

Some key issues specific to the India-Canada DTAA in different cases:

CIT vs. PVP Ventures Ltd.

In this case, the Hyderabad High Court held that the payment made by an Indian company to a Canadian company for the use of trademarks and logos was a payment of royalty and was, therefore, taxable under the India-Canada DTAA. The Court held that the payment could not be treated as business income of the Canadian company.

• The Bank of Nova Scotia vs. Commissioner of Income Tax

In this case, the High Court of Delhi held that the interest income earned by a Canadian bank from its Indian branch was taxable in India under the India-Canada DTAA. The Court held that the place of effective management of the bank was in India, and, therefore, the income was taxable in India.

• Asia Satellite Telecommunications Co. Ltd. vs. Deputy Director of Income Tax (2010)

In this case, the Authority for Advance Rulings held that the income earned by a non-resident company from providing satellite bandwidth to Indian customers was not taxable in India under the India-Canada DTAA. The authority held that the non-resident company did not have a Permanent Establishment in India and, hence, the income was not taxable.

• Jindal Steel and Power Ltd. vs. Deputy Commissioner of Income Tax (2016)

In this case, the High Court of Delhi held that the payment made by an Indian company to a Canadian company for the acquisition of a coal mine in Indonesia was not taxable in India under the India-Canada DTAA. The court held that the Canadian company did not have a Permanent Establishment in India and, hence, the income was not taxable.

• Mahindra and Mahindra Ltd. vs. Deputy Commissioner of Income Tax (2013)

In this case, the High Court of Bombay held that the benefit of the India-Canada DTAA was available to a Canadian company, even though it had a Permanent Establishment in India. The court held that the profits of the Canadian company were taxable only to the extent that they were attributable to the Permanent Establishment in India.


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