India – Italy DTAA

A 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 DTAA came into force on 23 November 1995. 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-Italy 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. Here are some of the categories of foreign investors in India:

• 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 and 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.

Permanent Establishment

As per Article 5 of India-Italy DTAA, a Permanent Establishment (PE) 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:
 
(i)    A place of management,

(ii)    A branch,

(iii)    An office,

(iv)    a factory,

(v)    A workshop,

(vi)    A mine, an oil or gas well, a quarry or any other place of extraction of natural resources,

(vii)    A warehouse in relation to a person providing storage facilities for others,

(viii)    A premises 'used' as a sales outlet or for receiving or soliciting orders,

(ix)    An installation or structure used for the exploration or exploitation of natural resources,

(x)    [Construction PE] 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, project or activities, if any) continue for a period of more than six months, or where such project or supervisory activity, being incidental to the sale of machinery or equipment, continues for a period not exceeding six months and the charges payable for the project or supervisory activity exceed 10% of the sale price of the machinery and equipment:

Provided that for the purpose of this paragraph, an enterprise shall be deemed to have a PE in India and to carry on business through that permanent establishment if it provides services or facilities in connection with or supplies plant and machinery on hire used or to be used in, the prospecting for, or extraction or production of mineral oils in the State.

(xi)    An enterprise of Italy shall not be deemed to have a PE in India merely because it carries on business in India through a broker, general commission agent or any other agent of an independent status, provided that such persons are acting in the ordinary course of their business. However, when the activities of such an agent are devoted wholly or almost wholly on behalf of that enterprise itself or on behalf of that enterprise and other enterprise controlling controlled by, or subject to the same common control, as that enterprise, they will not be considered an agent of an independent status within the meaning of this paragraph.

(xii)    Person other than an agent of an independent status to whom paragraph (xi) above applies, acting in India on behalf of an enterprise of Italy as shall be deemed to be a permanent establishment of that enterprise in India if (& vice versa):

(a)    They have and habitually exercise in India an authority to conclude contracts on behalf of the enterprise unless their activities are limited to the purchase of goods or merchandise for the enterprise.
(b)    They have no such authority, but habitually maintain in India a stock of goods or merchandise from which they regularly deliver goods or merchandise on behalf of the enterprise.
(c)    They habitually secure orders in India, wholly or almost wholly for the enterprise itself or for the enterprise and other enterprise controlling, controlled by, or subject to the same common control, as that enterprise, or
(d)    In so acting, they manufacture or process in India for the enterprise, goods or merchandise belonging to the enterprise.

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

What is not considered a Permanent Establishment?

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

• The use of facilities solely for the purpose of storage or display 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 or display.
• The maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise.
• The maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise, or of collecting information, for the enterprise.
• The maintenance of a fixed place of business solely for the purpose of advertising, for the supply of information, for scientific research, or for similar activities which have a preparatory or auxiliary character, for the enterprise.

In case an enterprise has a Permanent Establishment in both India and Italy, 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-Italy DTAA plays a crucial role in determining the tax liability of foreign enterprises doing business in India or Italy.

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

Particulars	Indian Definition	Italy Definition	India-Italy 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. - Entity perform clearly differentiated activities and the management of these is carried out in Italy. - 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.
Example
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	No
Fixed place solely for the purpose of maintenance of a stock of goods	Yes	Yes	No
Building site or construction	Yes (if Duration > 6 Months)	Yes (if Duration > 12 Months)	Yes (if Duration > 6 Months)

Withholding Tax as per Indian Tax Laws

A brief Summary of withholding tax rates is as follows:

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

* 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%)

• 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 DTAA

• Dividend Income

'Dividends’ as used in Article 11 means — income from shares, ‘jouissance’ shares or ‘jouissance’ rights, mining shares, founders shares or other rights, not being debt-claims, participating in profits, as well as income from other corporate rights which is subjected to the same taxation treatment as income from shares by the taxation laws of the country of which the company making the distribution is a resident. Rates of tax on dividend:

(a)    If the recipient is a resident of Italy being 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 shall not exceed 15% of the gross amount of the dividends and also vice versa.

(b)    If the recipient is a resident of Italy being the beneficial owner of the dividends and not covered by (a) above, the tax so charged shall not exceed 25% of the gross amount of the dividends and also vice versa.

• Interest

As per Article 12, the term ‘Interest’ in this Article means – income from Government securities, bonds or debentures, whether or not secured by mortgage and whether or not carrying a right to participate in profits, and debt-claims of every kind as well as all other income assimilated to income from money lent by the taxation law of the country in which the income arises Such interests earned in India by a resident of Italy are taxable in India at a rate of 15% of the gross amount of the interest

The interest income arising in India shall not be taxable in India (& vice versa) if:

(a)    The payer of the interest is the Government of India or Italy or a local authority thereof, or

(b)    The interest is paid to any agency or instrumentality (including a financial institution) which may be agreed upon in this behalf by the two countries.

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

• Royalty

As per Article 13 ‘royalties’ mean – payments of any kind received as a consideration for the use of, or the right to use, any copyright of literary, artistic or scientific work, including cinematograph film or films or tapes used for radio or television broadcasting, any patent, trade mark, design or model, plan, secret formula or process, or for the use of, or the right to use, industrial, commercial or scientific equipment, or for information concerning industrial, commercial or scientific experience.

• Such royalties earned in India by a resident of Italy are taxable at a rate of 20% of the gross amount of the royalties and however, if such services are provided through a PE, then the PE shall be taxed as per rates of the Income Tax Act (i.e., 40%).

• Fees for Technical Services

The term ‘fees for technical services’ means payments of any amount to any person other than payments to an employee of the person making payments, in consideration for the services of a managerial, technical or consultancy nature, including the provisions of services of technical or other personnel.

• The fees for technical service earned in India by a resident of Italy are taxable at a rate of 20% of the gross amount of Fees for Technical services.
• If such services are provided through a PE, then the PE shall be taxed as per rates of income tax act (i.e., 40%).

• Tax on Capital gains: Article 14

(a)    Immovable Property: Gains derived by a resident of Italy from the alienation of immovable property situated in the India may be taxed in India.

(b)    Movable Property: Gains from the alienation of movable property forming part of the business property of a permanent establishment which an enterprise of Italy has in India or of movable property pertaining to a fixed base available to a resident of Italy in India or the purpose of performing independent personal services, including such gains from the alienation of such a permanent establishment, such gains shall be taxable in India.

(c)    Sale of Securities:

• Gains from the alienation of shares of a company the property of which consists, directly or indirectly, principally of immovable property situated in India will be taxed in India and vice versa.
• Gains for the alienation of shares of a company forming part of a company which is a resident of India other than above will be taxed in India and vice versa.

• Independent Personal Services

As per Article 15, the term ‘professional services’ includes independent scientific, literary, artistic, educational or teaching as well as the independent activities of physicians, surgeons, lawyers, engineers, architects, dentists and accountants.

Income derived by a resident of Italy and who earns income from the performance of professional services or other independent activities of a similar character shall be taxable activities shall be taxable in India only if any of the following conditions is satisfied:

(a)    If they have a fixed base regularly available to them in India for the purpose of performing their activities; or

(b)    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.

If they have such a fixed base or remain in India for the aforesaid period or periods, the income may be taxed in India but only so much of it as is attributable to that fixed base or is derived in India during the aforesaid period or periods.

• Dependent Personal Services

As per Article – 16, Salaries, wages and other similar remuneration derived by a resident of Italy in respect of an employment shall be taxable in India only if the employment is exercised in India and such income shall be taxable at the rates in force. Such salary can be taxed in Italy only after fulfilment of the following conditions:

(a)    The recipient is present in India for a period or periods not exceeding in the aggregate 183 days in the fiscal year concerned; and

(b)    The remuneration is paid by, or on behalf of, an employer who is not a resident of India; and

(c)    The remuneration is not borne by a PE or a fixed base which the employer has in India.

However, remuneration in respect of an employment exercised aboard a ship or aircraft operated in international traffic by a resident of Italy may be taxed in Italy (and vice-versa).

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 and Canada.
France	10%	10%	10%	10%	Capital gain arises in India if more than 10% Shares are held.
Spain	15%	15%	10%/20%	20%	Capital gain arises in India if more than 10% Shares are held.
Australia	15%	15%	10%/15%	Not Covered under DTAA	Capital gain arises in India.
USA	15% / 25%	10%/15%	10%/15%	Not Covered under DTAA	Capital gain arises as per Indian/USA Income Tax Act.
Germany	10%	10%	10%	10%	Capital gain arises in India.
Netherlands	10%	10%	10%	10%	Capital gain arises in India if more than 25% Shares are held.
Italy	15% / 25%	15%	20%	20%	Capital gain arises in India.
Japan	10%	10%	10%	10%	Capital gain arises in India.
United Kingdom	10% / 15%	10% / 15%	10% / 15%	10% / 15%	Capital gain arises as per Indian/UK Income Tax Act.

Conclusion

Some issues specific to India-Italy DTAA are:

• CMA CGM SA Italy 24: The Income Tax Appellate Tribunal (ITAT) decided that the income earned by the assessee on account of transportation by ships operated by other enterprises under slot chartering arrangement is covered by Article 9 and is taxable only in the State of residence and accordingly, such income will be exempt from income tax under the Income Tax Act.
• Maruti Udyog LTD. vs. Assistant Director: It was decided that the expression ‘fees for technical services’ as it appears in the provision of article 13(4) of DTAA between India and Italy as well as in Explanation 2 to s.9(1)(vii) means payment made to any person in consideration of managerial, technical or consultancy services. Since test reports had been used by assessee in India in manufacturing of cars, payment made to ‘U’ company of Italy were chargeable to tax in India.