DTAA stands for Double Taxation Avoidance Agreement, which 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
29 December 1989. 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 Japan 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:
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.
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.
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.
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 the India-Japan 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
- A mine, an oil or gas well, a quarry or any other place of extraction of natural resources
- A warehouse in relation to a person providing storage facilities for others
- A farm, plantation or other place where agriculture, forestry, plantation or related activities are carried on.
- A store or other sales outlet.
- An installation or structure used for the exploration of natural resources, but only if so used for a period of more than six months.
- A building site or construction, installation or assembly project constitutes a permanent establishment only if it lasts for more than six months.
- An enterprise shall be deemed to have a permanent establishment in India and to carry on business through that permanent establishment if it carries on supervisory activities in India for more than six months in connection with a building site or construction, installation or assembly project which is being undertaken in India.
- [Service PE] Enterprise shall be deemed to have a permanent establishment in India and to carry on business through that permanent establishment if it provides services or facilities in India for more than six months in connection with the exploration, exploitation or extraction of mineral oils in India.
- Person acting in India on behalf of an enterprise of Japan 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 the below mentioned activities that don’t constitute PE in India, or
(b) They have no such authority, but habitually maintains in the India a stock of goods or merchandise from which they regularly deliver goods or merchandise on behalf of the enterprise, or
(c) They habitually secure orders in India, wholly or almost wholly for the enterprise itself or for the enterprise and other enterprises controlling, controlled by, or subject to the same common control as that enterprise.
| Note: The mere presence of a company's goods or merchandise in the other country does not, by itself, constitute a PE. |
The DTAA also considers certain activities as not constituting a PE, such as:
A. The use of facilities solely for the purpose of storage or display of goods or merchandise belonging to the enterprise.
B. The maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of storage or display.
C. The maintenance of a stock of goods or merchandise belonging to the enterprise solely for the purpose of processing by another enterprise.
D. The maintenance of a fixed place of business solely for the purpose of purchasing goods or merchandise or of collecting information, for the enterprise.
E. The maintenance of a fixed place of business solely for the purpose of carrying on, for the enterprise, any other activity of a preparatory or auxiliary character.
In case an enterprise has a Permanent Establishment in both India and Japan, 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-Japan DTAA plays a crucial role in determining the tax liability of foreign enterprises doing business in India or Japan.
A summary of structure of entities covered in Permanent establishment is as follows:
| Particulars |
Indian Definition |
Japan Definition |
India-Japan 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 Japan
- 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 |
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-Japan DTAA * |
| Dividend |
20% |
10% |
| Interest |
20% |
10% |
| Royalty |
20% |
10% |
| Fee for Technical Services |
20% |
10% |
* 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 a 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 10 refers to income from 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. Such dividends earned in India by a resident of Japan are taxable in India at a rate of
10% of the gross amount of the dividends.
Interest
As per
Article 11, the term “Interest” in this Article means income from debt-claims of every kind, whether or not secured by mortgage and whether or not carrying a right to participate in the debtor's profits, and in particular, income from Government securities and income from bonds or debentures, including premiums and prizes attaching to such securities, bonds or debentures. Such interests earned in India by a resident of JAPAN are taxable in India at a rate of
10% of the gross amount of the interest.
The interest income arising in India shall
not be taxable in India (& vice versa) if:(a) The interest is derived and beneficially owned by the Government of Japan, a political subdivision or local authority thereof, or the central bank of Japan or any financial institution wholly owned by the Government of Japan, or
(b) The interest is derived and beneficially owned by a resident of Japan with respect to debt-claims guaranteed, insured or indirectly financed by the Government of Japan, a political subdivision or local authority thereof, or the central bank of Japan or any financial institution wholly owned by the Japan Government.
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 income tax act
(i.e, 40%)
Royalty
As per
Article 12 term "royalties" refers to:
- 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 films and films or tapes 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 Japan are taxable at a rate of
10% of the gross amount of the royalties.
However, if such services are provided through a permanent establishment (PE), the PE shall be taxed as per rates of income tax act
(i.e., 40%)
Fees for Technical services
The term "fees for technical services" refers to payments of any amount to any person other than payments to an employee of a person making payments and to any individual for independent personal services referred to in Article 14, 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 Japan are taxable at a rate of
10% of the gross amount of fees for technical services.
If such services are provided through a permanent establishment (PE), then the PE shall be taxed as per rates of income tax act
(i.e., 40%).
Tax on Capital Gains: Article 13
- Immovable Property: Gains derived by a resident of Japan from the alienation of immovable property situated in India may be taxed in India.
- Movable Property: Gains from the alienation of movable property forming part of the business property of a permanent establishment which an enterprise of a Japan has in India or of movable property pertaining to a fixed base available to a resident of Japan 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.
- Sale of securities: Gains derived by a resident of Japan from the alienation of shares of a company which is a resident of India may be taxed in India.
Independent Personal Services
As per
Article 14, the term "professional services” include especially 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 a resident of Japan 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:
- If they have a fixed base regularly available to them in India for the purpose of performing their activities, or
- If they stay in India 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 15, salaries, wages and other similar remuneration derived by a resident of a Japan 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 Japan only after fulfilment of the following conditions:
- The recipient is present in India for a period or periods not exceeding in the aggregate 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, and
- The remuneration is not borne by a permanent establishment 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 Japan may be taxed in Japan (and vice-versa).
Comparison with 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 |
| 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/USA Income tax Act |
Conclusion
Some issues specific to the India-Japan DTAA are:
DCIT vs. Marubeni Corporation: In this case, a co-ordinate bench in the case of DIC Asia Pacific Pte Ltd. Vs. ADIT held that a plain reading of the provisions show that while interest and royalties can indeed be taxed in the source state, the tax charged on the same, under Article 11 and 12, cannot exceed 15% and 10% respectively. The expression ‘tax’ is defined in Article 2(1) to include ‘income tax’ and is stated to include ‘surcharge’ thereon.
FCC Co. Ltd. vs. ACIT: The assessee is a non-resident corporate entity incorporated in Japan and a tax resident of Japan. In the year under consideration, the assessee had entered into various international transactions with its Associated Enterprise in India. It was held that levy of surcharge and cess cannot exceed the tax rate of 10% as per India – Japan DTAA. Article 12 of India – Japan tax treaty provides that the tax to be charged on royalty and FTS shall not exceed 10% of the gross amount of royalty or FTS. Article 2 of the tax treaty defines tax in India as income tax including any surcharge thereon.
Therefore, Article 12 read with Article 2 of the tax treaty makes it clear that the rate of tax at 10% would encompass surcharge and education cess as it is also in the nature of surcharge. Therefore, they held that levy of surcharge and cess over and above the taxable rate of 10% on royalty and FTS is not permissible as per the treaty provisions.
Thank you for getting in touch! 
