‘Other Income’ Article of a DTAA – Although residual, yet important!

Background

A rarely studied provision of the tax treaties, the ‘Other Income’ Article, often lies dormant at the end of the provisions dividing the jurisdiction to tax various kinds of income from various sources between the two Contracting States.

The ‘Other Income’ Article of a double taxation avoidance agreement (“DTAA”) is essentially a residuary provision which provides for allocation of taxing rights between the two Contracting States, ie, the residence state and the source state in relation to income not dealt with in the preceding articles of the DTAA. In simple language, it can be said that income not dealt with in any of the preceding articles is dealt under the said Article.

Coming to the history of the Other Income Article, note that the same had its first appearance in the third report of the Fiscal Committee of the OEEC (forerunner of OECD), published in 1960, and read as follows:

“The items of income not expressly mentioned in the foregoing Articles of the Convention shall be taxable only in the Contracting State of which the recipient is a resident”

However, the aforementioned language has undergone changes over a period of time before appearing the way we find them in the DTAAs today.

Also before an in-depth analysis of the said Article, it may be worthwhile to have a glance at the text of the said Article as appearing in Model Tax Conventions (“MTC”) which deal with other incomes in near identical terms (Article 21 of UN, OECD and US MTC). The same are reproduced hereunder:

Paragraph

OECD MTC 2010
UN MTC 2001
US MTC

reference

Article 21
Article 21
Article 21

Paragraph 1:

Items of income of a resident
Items of income of a
Items of income

Exclusive right

of a Contracting State,
resident of a Contracting
beneficially owned by a

to State of

wherever arising, not dealt
State, wherever arising,
resident of a Contracting

residence

with in the foregoing Articles
not dealt with in the
State, wherever arising,

of this Convention shall be
foregoing Articles of this
not dealt with in the

taxable only in that State.
Convention shall be
foregoing Articles of this

taxable only in that
convention shall be

State.
taxable only in that

State.

Paragraph 2:

The provisions of paragraph 1
The provisions of
The provisions of

Exceptions to

shall not apply to income,
paragraph 1 shall not
paragraph 1 shall not

Paragraph 1

other than income from
apply to income, other
apply to income, other

immovable property as
than income from
than income from real

defined in paragraph 2 of
immovable property as
property as defined in

Article 6, if the recipient of
defined in paragraph 2 of
paragraph 2 of Article 6

such income, being a resident
Article 6, if
(Income from Real

of a Contracting State, carries
the recipient of such
Property), if the

on business in the other
income, being a resident
beneficial owner of the

Contracting State through a
of a Contracting State,
income, being a resident

permanent establishment
carries
of a Contracting State,

situated therein and the right
on business in the other
carries on business in

or property in respect of
Contracting State
the other Contracting

which the income is paid is
through a permanent
State through a

effectively connected with
establishment
permanent

such
situated therein, or
establishment situated

permanent establishment. In
performs in that other
therein and the income

such case the provisions of
State independent
is attributable to such

Article 7 shall apply.
personal services from a
permanent

fixed base situated
establishment. In such

therein, and the right or
case the provisions of

property in respect of
Article 7 (Business

which the income is paid
Profits) shall apply.

is effectively connected

with such permanent

establishment or fixed

base. In such case the

provisions of Article 7 or

Article 14, as the case

may be, shall apply.

Paragraph 3:

–
Notwithstanding the
–

‘May also be’

provisions of paragraphs

taxed in the

1 and 2, items of income

source state

of a resident of a

Contracting State not

dealt with in the

foregoing Articles of this

Convention and arising

in the other Contracting

State may also be taxed

in that other State.

In relation to above, it is pertinent to note the following:

Residence State has ‘exclusive’ right to tax –The first paragraph of the Article envisages that other income ‘shall be taxable only’ in the state of residence; hence providing for an exclusive right to the

residence state to tax such income (except for in the case wherein the UN model is followed which also provides the right to the source state to tax such income, as envisaged by paragraph 3 of Article 21 of the UN model). Further, once the right is vested in the state of residence, the same cannot be taken away on account of non-exercise. Therefore, exercise cannot be presumed to be a precondition of its existence. As mentioned above, however such exclusive right is subject to paragraph 2 and 3 wherein the income ‘may also be’1 taxed in the source state (of the UN model).

Whilst paragraph 1 of Article 21 brings in the residence rule in emphatic terms by requiring only the state of residence to tax as the only state being entitled to the same, paragraph 2 makes an inroad by carving out an exception in relation to income earned from permanent establishment or independent personal services, which is effectively connected with a permanent establishment.

Income not dealt with in the preceding articles – The Other Income Article of a DTAA deals with income that is not already dealt with in the foregoing provisions of the DTAA (ie Article 6 to 20 of OECD/ UN/ US model). Almost every type of income has a corresponding distributive rule providing for sharing of taxing rights. However, there may still remain an item of income which per se may not get covered by the specific provisions embodied in the DTAA; therefore undergo no taxation or may be doubly taxed. Article 21 is a distributive rule for such residual type of income.

Deemed incomes are not to be included – Note that Other Income Article does not include deemed income since the Article uses the term ‘arising’ and not ‘arise and deemed to arise’ [as used in the provisions of the Income-tax Act, 1961 (“Act”)]. Therefore, deemed income are to be kept outside the purview of the said Article.

Only income ‘arising’ is to be covered? –There may be a school of thought stressing on literal interpretation of the Other Income Article of the DTAA (using the connotation ‘wherever arising’), that the scope of the said Article is limited only to such income as ‘arising in’ a state and not the one which are ‘paid’ (as used in the case of Article 10, 18, 19, 20) or ‘derived from’ (as used in the case of Article 6, 13, 15, 16, 17) from a third state or state of residence. Note only Article 11 (interest) and 12 (royalty) deals with income ‘arising’ in a state. Hence, income only in the form of interest or royalty (similar nature) shall be subject to tax under the said residuary Article.

Income under the residuary heads includes income from third state – As mentioned above, the said Article uses the connotation ‘wherever arising’ – meaning thereby that it refers to income from source, giving rise to income in the state of residence as well as the third state.

1 However, there are DTAAs wherein terms ‘may be taxed’ are also used. Note that there have been jurisprudence with respect to the intentions of the countries when they use different terminologies like; ‘shall be taxed’, ‘shall be taxed only’, ‘may be taxed’, ‘may also be taxed’, ‘may be taxed in’, ‘shall be taxed only in’, ‘shall only be taxable’, etc.
The same has not been dealt in here while analyzing the provisions of the DTAA.

Some examples of type of income that may be covered in the Other Income Article

Examples2 (illustrative only) of items of income that may get covered by Article 21 of the DTAA include:

income from gambling;

punitive (but not compensatory) damages and covenants not to compete;

income from a variety of financial transactions, where such income does not arise in the course of the conduct of a trade or business. For example, income from notional principal contracts and other derivatives would fall within Article 21 if derived by persons not engaged in the trade or business of dealing in such instruments, unless such instruments were being used to hedge risks arising in a trade or business;

securities lending fees derived by an institutional investor;.

guarantee fees paid within an intercompany group would be covered by Article 21, unless the guarantor were engaged in the business of providing such guarantees to unrelated parties etc

Various forms of the Other Income Article

The Contracting States may opt to either follow the MTC (either OECD, UN or US) or enter into a mutual agreement (which may differ from MTC). Some may use the connotation ‘dealt with’, other may use ‘expressly mentioned’, while some may use even ‘expressly dealt with’ etc (in Indian context; generally used by India). For various forms of Other Income Article, refer Annexure 1.

Issues

Income ‘dealt with’ vs ‘expressly mentioned’ – Meaning

As mentioned in the section above, Other Income Article of a DTAA may embed and make reference to the taxing rights of a Contracting State/s by using different expressions. Generally, a DTAA uses either

‘dealt with’ (for instance as in the case of DTAA with UK, Japan, Zambia etc) or ‘expressly mentioned’ (for instance as in the case of DTAA with Morocco, Singapore etc). In common parlance, the term ‘dealt with’ and ‘expressly mentioned’ may be interpreted synonymously. Whilst it is true to say that intention behind entering into DTAA should always prevail, the courts have adopted a number of conventional practices to resolve ambiguities, whenever arising.

Hence, it would be useful to analyze the difference in the meaning of the expressions – ‘dealt with’ and ‘expressly mentioned’. In this regard, note the following dictionary meanings of ‘deal with’ may be referred to:

2 2006 US Model Technical Explanation

New Chambers Thesaurus:

“1. deal with a situation, attend to, concern, see to, manage, handle, tackle, cope with, get to grips with, take care of, look after, sort out, process.”

Collins Cobuild English Language Dictionary:

“If a book, speech, film etc. deals with a particular thing, it has that thing as its subject or is concerned with it.”

Shorter Oxford Dictionary (Thumb Index Edn.):

“be concerned with (a thing) in any way; busy or occupied oneself with, esp. with a view to discuss or refutation.”

New Oxford American Dictionary:

“take measures concerning (someone or something) ……. take or have as a subject; discuss.”

On the other hand, in common parlance, the expression ‘expressly mentioned’ shall mean a mere mention of anything. In view of above, it is more likely to conclude that the expression ‘deal with’ (in contrast with ‘expressly mentioned’) is a comprehensive expression having different shades of meaning.

Further note that the purpose of a DTAA is to allocate taxation rights as held, inter alia, by the Supreme Court in the case of UOI vs Azadi Bachao Andolan3. Only when an Article of a DTAA provides for tax treatment, ie, taxation right of a particular type of income to one or both the countries, it can be said that the Article has ‘dealt with’ such item of income. The expression ‘dealt with’ used in Other Income Article has to be read in the context of purpose of the DTAA, which is allocation of taxation rights. From this angle, an item of income can be regarded as ‘dealt with’ by an Article of DTAA only when such Article provides for and positively vests the power to tax such income in one or both the countries. Such vesting of jurisdiction should be positively and explicitly stated and it cannot be inferred by implication.

For instance, the expression used in Article 22 of the Swiss DTAA is ‘dealt with’ vis-à-vis the expression ‘mentioned’ used in some other DTAAs. This clearly demonstrates that the expression ‘dealt with’ is something more than a mere mention of such income in the Article and the international shipping profits can, at the most, be said to have been ‘mentioned’ in Article 7 but not ‘dealt with’ in Article 74 of the DTAA. Mere exclusion of international shipping profits from Article 7 cannot be regarded as vesting India with a right to tax international shipping profits and such profits cannot be regarded as ‘dealt with’ as envisaged in Article 225.

Further the words ‘dealt with’ by applying purposive construction imply a positive dealing with, in that, the articles in the DTAA must unequivocally provide for the allocation of tax jurisdiction in favor of either one

[2003] 263 ITR 706 (SC)

ACIT vs Mediterranean Shipping Co, SA [2013] 21 ITR(T) 300 (Mumbai)

or both Contracting States with respect to the subject item of income. As discussed above, the words ‘dealt with’ mean a positive action and not a lack of action.

Reliance could be placed on the Commentary on Double Taxation Conventions (Third Edition) by Dr Klaus Vogel wherein he has explained that Article 21 of the OECD MTC (which is equivalent to Article 22 of the Indo-Swiss DTAA) is a part of the ‘distributive rules’ contained in double tax avoidance agreements, meaning thereby that double tax avoidance agreements distribute jurisdiction. Further reliance was also placed by him on the book titled “Taxation of Cross-border Services” by Rawal wherein he has observed that in the context of DTAA ‘when an Article provides for tax treatment (distribute taxing right) of a particular type of income, the Article can be said to be dealing with such item of income’.

In this regard, reference is made to the decision rendered by the Mumbai bench of the tribunal in the case of ACIT vs Mediterranean Shipping Co, SA [2013] 21 ITR(T) 300 (Mumbai). The relevant extracts are reproduced hereunder:

“35…………………………………………………In order to say that a particular item of income has been dealt with, it is necessary that the relevant Article must state whether Switzerland or India or both have a right to tax such item of income. Vesting of such jurisdiction must positively and explicitly stated and it cannot be inferred by implication as sought to be contended by Shri. Srivastava relying on Articles 7 and 8 of the treaty. As rightly contended by the learned counsel for the assessee, the mere exclusion of international shipping profit from Article 7 cannot be regarded as an item of income dealt with by the said Article as envisaged in Article 22(1). The expression “dealt with” contemplates a positive action and such positive action in the present context would be when there is an Article categorically stating the source of country or the country of residence or both have a right to tax that item of income. The fact that the expression used in Article 22(1) of the Indo-Swiss treaty is “dealt with” viz-a-viz the expression “mentioned” used in some other treaties clearly demonstrates that the expression “dealt with” is something more than a mere mention of such income in the Article and as rightly contended by the learned counsel for the assessee, the international shipping profits can at the most be said to have mentioned in Article 7 but the same cannot be said to have been dealt with in the said Article.”

[Emphasis supplied]

The principles emanating from the above ruling provides useful guidance on the interpretation of the fairly common expression ‘dealt with’ used in the Other Income Article of a DTAA. Where a specific Article of a DTAA has positively allocated taxation right on a particular income stream, the residuary Other Income Article cannot be invoked to determine taxation right for such income stream.

However, in the case of Gearbulk AG, In re [2009] 184 TAXMAN 383 (AAR – NEW DELHI), the authority held that even exclusion of a particular stream of income shall amount of allocation of taxing rights. The relevant extracts are as follows:

“….9.1 The applicant’s counsel submitted that an item of income can be said to have been dealt

with in an Article of the Treaty only if it defines its scope as well as allocates the right to tax such income between the two Contracting States. Mere exclusion of shipping business profits from Article 7 does not amount to dealing with that item of income. We find it difficult to accept this contention. Allocation of taxing right to the source State can well be done by such a process of exclusion. There is no particular manner or methodology of achieving that result. The expression ‘dealt with’ does not necessarily mean that there should be a detailed or elaborate treatment of the subject.”

Further a chart enlisting the cases wherein courts have adjudicated whether or not exclusion of shipping income from Article 7 is ‘dealt with’ in the DTAA, and hence, by virtue of the same whether or not taxability under the Other Income Article arises.

Principles emerging: In view of the above, it is a likely to adopt a viewpoint that the interpretation taken by the authority in the case of Gearbulk AG seems unjustified. Therefore, there ought to be a difference in the interpretation of the terms ‘dealt with’ and ‘not expressly mentioned’ as held by the Mumbai bench of the Tribunal in the case of Mediterranean Shipping Co, SA.

Absence of Fee for Technical services (“FTS”) Article in the DTAA – Resorting to ‘Other Income’ Article?

There may arise a situation wherein FTS clause in a DTAA may not be present (for a list of DTAA entered into by India wherein there is no Article dealing with FTS, refer Annexure 2). In such a situation, the moot question is how to treat FTS in such a situation? Whether do we resort to the Other Income Article then, since the income is not dealt with on account of absence of FTS Article?

The issue under consideration could be reframed by putting forth that in case wherein FTS Article is missing, whether the technical services rendered shall be taxable under the Act or as Business Profits (Article 7) or under the Other Income Article (Article 21 of the MTC)?

The issue with respect to taxation of FTS has been a subject matter of dispute before the judicial authorities. The authorities have also dealt with this issue where the FTS clause is missing in the relevant tax treaties.

In this regard, please find below a (self-explanatory) chart segregating the outcomes with reference to major rulings rendered in this context:

As mentioned above, there are three possibilities that have been adjudicated by the Courts:

Held to be taxable as per the provisions of the Act: The Chennai Tribunal6 has held that if the provisions of the DTAA are silent on the FTS Article, FTS is not automatically taxable as business income under that DTAA. In such a case, the provisions of the Act need to be considered and applied.

Held to be taxable under the residuary Article: The AAR7 has held that since there is no specific Article for taxation of FTS in the DTAA hence it would be governed by Article 22 of the DTAA which is residuary Article in the DTAA.

Held to be taxable under the Article 7 (Business Profits): Note that in various decisions, the Tribunal and AAR has held that services rendered by the taxpayer did not fall under the FTS or FIS under the DTAA. Since there was no Article which dealt with these payments, the said payments were not covered under the DTAA. It was also held that when a DTAA does not assign taxability rights of a

particular kind of income to the source state under the DTAA provision dealing with that particular kind of income, such taxability cannot be invoked under the residuary Article of the DTAA8.

The Madras High Court9 dealt with the issue of taxability of royalty and FTS under Article 12 and Article 7 of the DTAA. It is to be noted that DTAA (India- Thailand DTAA in the said case) does not include specific FTS clause. Therefore, the High Court examined the taxability of FTS under Article 7 and since there was no PE, it was held that such FTS was not taxable India. Accordingly, since the taxability of royalty and FTS was considered under specific articles of the DTAA (being Article 12 and Article 7 respectively), said payments cannot be made taxable under residuary Article of the DTAA.

Principles emerging: Hence, in the light of the above High Court ruling (being the only High Court ruling in context of the above discussed issue), it could be a likely position to be adopted that when there is no FTS Article, the technical services should be treated as business income.

However, such principle cannot be treated a water tight one; the facts and circumstances would definitely influence the position to be taken. Further, when it is possible to substantiate the fact that such technical service has no direct nexus with the business of the taxpayer, a view can be taken that same is taxable under the Other Income Article (and not under Business Profits).

The Permanent Establishment or Fixed base exemption (Paragraph 2 of the Article)

On account of the words “The provisions of paragraph 1 shall not apply…”, paragraph 2 of Article 21 provides for an exception to paragraph 1 of the Article.

DCIT vs TVS Electronics Ltd [2012] 22 Taxmann.com 215 (Chennai)

Lanka Hydraulic Institute Ltd [2011] 11 taxmann.com 97 (AAR)

DCIT vs Andaman Sea Food (P) Ltd [2012] 18 ITR(T) 509 (Kolkata)

In the case of Bangkok Glass Industry Co Ltd vs ACIT [2012] 34 Taxmann.com 77 (Mad)

Paraphrasing paragraph 2, paragraph 1 of Article 21 does not apply if the following conditions are satisfied:

Income other than income from immovable property [as defined in Article 6(2)] is received;

Such income is received by a resident of a Contracting state;

Such resident carries on business in a state through a permanent establishment situated therein, or performs in the state independent personal services from a fixed base situated therein;

The right or property in respect of which the income is paid is effectively connected with such PE or fixed base.

If the above conditions are satisfied, provisions of Article 7 or 14, as the case may be, apply to the aforementioned income.

An obvious question that may arise in this regard is that why there was a need to add paragraph 2 to Article 21 of the DTAA dealing with the permanent establishment or fixed base exemption when there already exists Article 7(1). Whether the exclusion is implicit in any event because all business income of a resident of a Contracting State arising in another Contracting State shall always be already dealt with in Article 7(1) of the DTAA; hence such income can never fall under Other Income Article.

The above proposition is implicit, of course in the context of Article 10(4) in respect of dividends, Article 11(4) in respect of interest and Article 12(3) in respect of royalties.

However, the answer appears to be that specific paragraphs dealing with effectively connected shareholdings, debt claims or rights or property in respect to dividends, interest or royalties in one Contracting State and paid are limited only to dividends, interest or royalties in one Contracting

State (source state) and paid to a resident of other Contracting State (resident state) but do not deal with dividends, interest or royalties arising in a third state or arising in the state of residence.

In addition to above, note that income mentioned in Article means income ‘wherever arising’. It may be cited that the OECD MTC (UN/US MTC ) specifically chose clarify the Other Income Article so that it would not include income arising in a third state or arising in state of residence from property effectively connected with permanent establishment or a fixed base in the state in which the permanent establishment or fixed base is situate. Corollary to the above shall be income (royalty, interest and dividend) arising in third state and not effectively connected with the permanent establishment shall get covered by the Other Income Article.

The aforementioned analysis can be explained by way of the following example:

India US UK

I Co

PE – I Co

Income arising in third state

Analysis:

I Co, a resident of India, have a PE in US. Therefore, India- US DTAA shall be applicable.

It earns royalty income in US. However, the said royalty income is attributable to I Co’s PE in US (assumption).

Accordingly, as per Article 12(6)10 of India- US DTAA, income attributable to the PE shall be governed by Article 7 of the DTAA (Business Profits).

Further, say a royalty arises in UK which is effectively connected with I Co’s PE in US. Note that such royalty cannot be governed by Article 12(6) of the India- US DTAA; the reason being such royalty does not arise in US (source state). Therefore, such an income is not expressly dealt in the DTAA.

Thus, in such a scenario, paragraph 2 of Article 2311 of India-US DTAA shall get triggered. It provides that income (wherever arising, in the instant case, UK) attributable to PE shall get governed by Article 7. Therefore, provisions of Article 7 shall apply.

10 Article 12(6) of India- US DTAA: “The provisions of paragraphs 1 and 2 shall not apply if the beneficial owner of the royalties or fees for included services, being a resident of a Contracting State, carries on business in the other Contracting State, in which the royalties or fees for included services arise, through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the royalties or fees for included services are attributable to such permanent establishment or fixed base. In such case the provisions of Article 7 (Business Profits) or Article 15 (Independent Personal Services), as the case may be shall apply”

11Article 23(2) of India-US DTAA: “The provisions of paragraph 1 shall not apply to income, other than income from immovable property as defined in paragraph 2 of Article 6 [Income from Immovable Property (Real Property)], if the beneficial owner of the income, being a resident of a Contracting State, carries on business in the other Contracting State through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the income is attributable to such permanent establishment or fixed base. In such case the provisions of Article 7 (Business Profits) or Article 15 (Independent Personal Services), as the case may be, shall apply.”

Hence, Article 23 (Other Income) broadens the ambit of Article 7 (Business Profits) of the DTAA.

Exception to exception – Income from immovable property:

The exception within exception in paragraph 2 is income from immovable property, which shall be taxed only in the State where the immovable property itself is situated.

It should be noted that Article 6 in dealing with income with immovable property makes no reference to the case of such property being effectively connected with a permanent establishment or a fixed base. Therefore, all income of a taxpayer from immovable property situated in other state is taxable in the other state by virtue of Article 6 (and not Article 7 or 14), and income from immovable property situated in the state of residence is Other Income, even though the same is effectively connected with a permanent establishment in the other State.

Payments by and to (fiscally transparent) Partnerships:

Although dividends, interest and royalties are expressly mentioned in the MTC, the relevant articles are limited to such payments made to a resident of the other Contracting State. While it is often debatable whether or not a partnership is a person12 a partnership cannot be a resident of a Contracting State unless the partnership is liable to tax therein by reason of domicile, residence, place of management or other criterion of a similar nature. Therefore, where a partnership firm is treated as a fiscally transparent and the partners, and not the partnership itself, are liable to pay tax on the income of the partnership; the partnership does not meet the criterion for residence. In these circumstances, payment of dividends, interest or royalties to a partnership are not dealt with by Article 10, 11 and 12 of the MTC (unless such payments are considered as having been made to the partners and they are residents of the Contracting State). Prima facie, it may appear that since such an income of the partnership firm is not expressly dealt with, such income may take shelter of the residuary Article of the DTAA.

A pre-condition for invocation of Other Income Article of DTAA is that income should arise to ‘a resident of a Contracting State’ (note that paragraph 1 of the Article reads as: “Items of income of a resident of a Contracting State, wherever arising, not dealt with in the foregoing Articles of this Convention shall be taxable only in that State”). However, since such amounts are even not items arising to ‘a resident of a Contracting State’, they are even beyond the ambit of the Other Income Article of the DTAA.

Therefore, the widely used Other Income Article may not completely cover all items of other income, unless by internal law, or by DTAA provisions, or both, a partnership is properly considered to be a

12 Refer Schellenberg Wittmer, In re [2012] 24 taxmann.com 299 (AAR – New Delhi); Linklaters LLP vs ITO [2010] 40 SOT 51 (MUM) in this regard

resident of a Contracting State, or by payments made to it are considered as payments to the partners in whatever proportions.

Fact that a stream of income is dealt with/ expressly mentioned (though not taxable) in the foregoing Article is sufficient to exclude the same from the ambit of the Other Income Article

Pertinent to clarify here that it is not the fact of ‘taxability’ under Article 6 to 22 which leads to taxability under Article 23, but the fact of income of that nature being ‘covered’ by the said Articles. Therefore, Article 23 does not apply to income which can be classified under Articles 6 to 22 – whether or not taxable (in light of conditions specified therein). In other words, say in the case of income from technical services, which cannot be taxed under Article 7, 12 or 14 because conditions laid down therein are not satisfied – such income can therefore not be taxed under Article 23 either!

Further, when a DTAA does not assign taxability rights of a particular income to the source state under the respective Article, such taxability cannot be invoked under the Other Income Article. The Other Income Article covers only income which is either covered under specific scope of that Article itself or such income which is not covered within the scope of any other Article of the DTAA.

Reference in relation to the above be made to the decision of the Tribunal in the case of ACIT vs Viceroy Hotels Ltd [2011] 11 taxmann.com 216 (Hyd) and DCIT vs Andaman Sea Food (P) Ltd [2012] 18 ITR(T) 509 (Kolkata).

Relevance of the Other Income Article – Absence of the same in the DTAA entered into

Mere presence of the Other Income Article in the DTAA is immense, since the same throws light on the sharing of the taxing right in relation to income not expressly mentioned or dealt with in the foregoing provisions of the DTAA. Therefore, least to say that that in all the DTAAs entered into by India, there has been an Other Income Article featuring at the end of the agreement. However, it may be pertinent to note that there is no Other Income Article in the DTAA entered into by India with Libya and Netherlands. Therefore, it may not be unusual for states to conclude DTAA without an Other Income Article. Perhaps this is a result from lack of appreciation of the relevance this residuary Article plays in the DTAAs. In this regard, please note the Memorandum on General Tax Treaty Policy submitted by Netherlands Finance Minister to Parliament on December 3, 1987, in dealing with other income; it states:

“….In the tax treaties, the various categories of income are so extensively covered that the importance of the Other Income Article is generally restricted. This is particularly true if a separate rule is included in the preceding treaty articles for annuities and social insurance benefits … Whether the Netherlands is prepared to consider the UN approach depends on the degree of completeness with which the various sources of income have been covered by the preceding articles. To the extent the importance of the Other Income Articles is smaller, our

country has less objection to following the UN Model in this respect. In cases where the sources of income have been practically fully covered, it is sometimes decided not to take up the Other Income Article at all”

[Emphasis supplied]

In view of the above, it can be remarked that there usually are specific articles inserted in the DTAAs dealing with specific streams of income (like dividends, interest, royalty, FTS etc); which are of specific interest to the negotiating States. However, there still may remain some streams of income not expressly mentioned or dealt with, generally arising in the state of residence or any third state. Hence, as problem with respect to taxing such an income stream arises. Clearly, therefore, a DTAA without such an Article is incomplete as it will not effectively deal with all items of income by virtue of the characterization of income, source or both.

Absence of Other Income Article in DTAA: Where a DTAA does not contain an Other Income Article, unfortunate consequences may follow since then the income stream (which is not dealt with in the foregoing provisions of the DTAA) may fall within the arms of the domestic laws of the state of residence. Moreover, the condition shall only worsen when such a ‘person’ is a resident of the both the Contracting States – the case of ‘dual residency’ (under the domestic/ internal laws of the State). Though, the Article 4 of the DTAA dealing with the residential status of the person may provide for (tie-breaker) rules for determining residency, however such residency shall only be for the purpose of the DTAA. The said rules may be of little help since the Other Income Article remain absent in the DTAA and the person in all circumstances continues to be the resident of both the Contracting States and may be liable to full taxation under the internal laws of the both Contracting States. Therefore, there shall be double taxation on the same income and the very purpose of the DTAA shall turn futile!

Because of the reasons cited above, it is considered favorable to include the Other Income Article in the DTAA that are entered into recently; since at the end of the day, all that matters is achieving the real object/ aim of the DTAA, ie, avoidance of double taxation.

Inclusion of Other Income Article providing taxing rights to both Contracting Sates – Analysis: However, attention is invited to Article 23 of the India- Italy DTAA (another example wherein similarly language is employed is India- Canada DTAA) which churns out a unique negotiation/ text in relation to treatment of the residuary item of income. The same reads as:

“ARTICLE 23 : Other Income – Items of income of a resident of a Contracting State, wherever arising, not dealt with in the foregoing Articles of this Convention may be taxed in both the Contracting States.”

[Emphasis supplied]

Prima facie, it may appear that just an appearance of the Other Income Article (as cited above in the case of India- Italy DTAA) may grant unlimited rights to both the Contracting States to tax the miscellaneous category of income. Hence, it may appear that inclusion of such a clause/ Article may be as good as absence of the same (as discussed above). Therefore, granting unlimited rights, especially in the case of dual residence situation, may only result in double taxation of income (contrary to the main objective of

DTAAs) since the Article does not deal with apportionment of taxing rights between the state of residence and the state of source. However, on an in-depth analysis of the situation (say in an India- Italy DTAA scenario),

where a taxpayer is a dual resident and Article 4 (dealing with residency rules) resolves its residential status, and

in a situation where such a person is a resident of only one Contracting State

Such state of residence shall be required by virtue of Article 24 of the (India- Italy) DTAA to grant relief by way of tax credit in case miscellaneous income is taxed by both the states.

Therefore, although in a case where the Other Income Article is missing or duly included in the DTAA, the tax consequence shall be the same – income shall be taxed as per internal laws of both the Contracting States. In this regard, note that Article 24 dealing with tax credit state that for a relief shall be granted where an item of income or capital is taxed by the State of source in accordance with the provisions of the DTAA13. In this regard, an extract of Article 24 (of say India- Italy DTAA) is produced hereunder:

“ARTICLE 24 : Method for elimination of double taxation – 1. The laws in force in either of the Contracting States will continue to govern the taxation of income in the respective Contracting States except where provisions to the contrary are made in this Convention.

It is agreed that double taxation shall be avoided in accordance with the following paragraphs of this Article.

(a) The amount of Italian tax payable under the laws of Italy and in accordance with the provisions of this Convention, whether directly or by deduction by a resident of India, in respect of income from sources within Italy which has been subjected to tax both in India and Italy, shall be allowed as a credit against the Indian tax payable in respect of such income but in an amount not exceeding that proportion of Indian tax which such income bears to the entire income chargeable to Indian tax.

(b) For the purposes of the credit referred to in sub-paragraph (a) above, where the resident of India is a company by which surtax is payable, the credit to be allowed against Indian tax shall be allowed in the first instance against the income-tax payable by the company in India and, as to the balance, if any, against the surtax payable by it in India……………”

Principles emerging: In view of the above, it can be said that the tax credit shall be available only when an item of income is taxed as per the DTAA. Therefore, in case there is no Other Income Article in the DTAA, the taxpayer shall not pay taxes as per the DTAA (but as per the provisions of the Act). The tax credit as embodied in the DTAA shall not be available accordingly.

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13 Paragraph 32.1 of Commentary on Article 23A and 23B of the OECD MTC

Whether residuary head of a DTAA is analogous to sections 56 and 57 of the Act dealing with income from other sources

Note that it can be feebly argued the residuary head of ‘Other Income’ under the DTAA is analogous to sections 56 and 57 of the Act. If certain receipt cannot be taxed under any other head, only then the sections dealing with ‘Income from Other Sources’, come into play in domestic taxation matters. Similarly, under the tax treaties, if a sum can be taxed under any other Article, provisions of Article 22 of the DTAA will not be applicable.14 In other words, it can be placed that since the income does not fall as miscellaneous income, the same cannot be brought under Other Income Article of the DTAA15.

Further, it can well be argued by saying that Article 7 (Business Profits overrides the Other Income Article. Meaning thereby that business income cannot be taxed under residual article if the same is not taxable under Article 7on account of absence of PE16

Conclusion

It may be noted that there are several treaties (for instance, DTAA entered into by India with Netherlands and Libya) that have been brought into force without an Other Income Article. One among many reasons that pops up in our minds for the non inclusion of the same is the belief of the negotiating states that they have covered virtually all sources of income by the specific articles. This certainly is the view of the Dutch Minister of Finance, and has been rightly criticized.

Further, another reason for the non-inclusion of the same may be conflicts between the negotiating states as to which model to be followed, OECD or UN.

Further to highlight that in the absence of such article also burdens the assessee by way of getting doubly taxed in respect to the same income with no privilege of taking resort of the tax credit Article as envisaged in the DTAA.

Hence, an inclusion of Other Income Article is important for the full functioning of the DTAA for the purpose of achieving the object of avoidance of double taxation

T. McKinsey Indonesia v. DDIT [2013] 29 taxmann.com 100 (Mum)

Bangkok Glass Industry Co. Ltd vs ACIT [2013] 34 taxmann.com 77 (Madras)

Rajiv Malhotra, In re (2006) 284 ITR 564 (AAR), Bangkok Glass Industry Co Ltd vs ACIT [2013] 34 taxmann.com

(Madras), McKinsey & Company (Thailand) vs DDIT [ITA No 7624 of 2010] (Mum)

Annexure 1

Extracts of various forms of ‘Other Income’ Article in DTAAs entered into by India

Usage Of Expression ‘dealt with’ (For instance, below is an extract of India- Swiss Confederation DTAA)

“ARTICLE 22 – Other income 1. – Items of income of a resident of a Contracting State, wherever arising, not dealt with in the foregoing Articles of this Agreement shall be taxable only in that State.

The provisions of paragraph 1 shall not apply to income, other than income from immovable property as defined in paragraph 2 of Article 6, if the recipient of such income, being a resident of a Contracting State, carries on business in the other Contracting State through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the right or property in respect of which the income is paid is effectively connected with such permanent establishment or fixed base. In such case the provisions of Article 7 or Article 14, as the case may be, shall apply.

Notwithstanding the provisions of paragraph 1, if a resident of a Contracting State derives income from sources within the other Contracting State in the form of lotteries, crossword puzzles, races including horse races, card games and other games of any sort or gambling or betting of any form or nature whatsoever, such income may be taxed in that other Contracting State”

Usage of expression ‘expressly mentioned’ (For instance, below is an extract from India- Australia DTAA)

“ARTICLE XXII – Income not expressly mentioned – 1. Items of income of a resident of one of the Contracting States which are not expressly mentioned in the foregoing Articles of this Agreement shall be taxable only in that State.

However, any such income derived by a resident of one of the Contracting States from sources in the other Contracting State may also be taxed in that other State.

The provisions of paragraph (1) shall not apply to income derived by a resident of one of the Contracting States where that income is effectively connected with a permanent establishment or fixed base situated in the other Contracting State. In such a case, the provisions of Article 7 or Article 14, as the case may be, shall apply.”

Usage of expression ‘expressly dealt with’ (For instance, below is an extract from India- US DTAA)

“ARTICLE 23 – Other Income – 1. Subject to the provisions of paragraph 2, items of income of a resident of a Contracting State, wherever arising, which are not expressly dealt with in the foregoing Articles of this Convention shall be taxable only in that Contracting State.

The provisions of paragraph 1 shall not apply to income, other than income from immovable property as defined in paragraph 2 of Article 6 [Income from Immovable Property (Real Property)], if the beneficial owner of the income, being a resident of a Contracting State, carries on business in the other Contracting State through a permanent establishment situated therein, or performs in that other State independent personal services from a fixed base situated therein, and the income is attributable to such permanent establishment or fixed base. In such case the provisions of Article 7 (Business Profits) or Article 15 (Independent Personal Services), as the case may be, shall apply.

Notwithstanding the provisions of paragraphs 1 and 2, items of income of a resident of a Contracting State not dealt with in the foregoing articles of this Convention and arising in the other Contracting State may also be taxed in that other State”

Annexure 2

List of DTAAs wherein there is no FTS clause

In the following Indian DTAAs, there is no Article dealing with taxation of FTS:

Greece

Bangladesh

Brazil

Indonesia

Libya

Mauritius

Myanmar

Nepal

Philippines

Saudi Arabia

Sri Lanka

Syria

Tajkistan

Thailand

United Arab Emirates