Imagine Mr. Sharma works in India but also earns consulting income from a UK client. Both India and the UK want to tax that income — that's double taxation, and it's deeply unfair. Section 90 is the legal backbone that lets the Indian government sign Double Taxation Avoidance Agreements (DTAAs) with other countries to fix exactly this problem.
The Central Government can enter into a DTAA with any foreign country or specified territory (think Hong Kong, Macau — areas notified by the government but not technically 'countries') for four purposes: (a) granting tax relief on doubly-taxed income, (b) avoiding double taxation altogether, (c) exchanging information to prevent tax evasion, and (d) helping each other recover taxes. Once a DTAA is in place, the most beneficial rule applies — meaning if the DTAA gives Mr. Sharma a lower tax rate than the Income Tax Act, he gets the DTAA rate. If the Act is more beneficial, he uses the Act. He picks whichever is better for him (sub-section 2). This is the treaty override principle — examiners love testing this.
Here's the big exception students miss: Chapter X-A (General Anti-Avoidance Rules / GAAR) always applies, even if it is not beneficial to the assessee (sub-section 2A). GAAR cannot be bypassed by hiding behind a DTAA. Also, if you are a non-resident claiming DTAA benefits, you must obtain a Tax Residency Certificate (TRC) from your home country's government — without it, you cannot claim treaty relief (sub-section 4). Finally, if a technical term appears in a DTAA but isn't defined there or in the Act, the meaning assigned by a government notification will apply, and it is deemed to have effect from the date the DTAA came into force (Explanations 3 & 4). This is frequently asked as a 4-mark theory question in CA Inter exams.
📊 Worked example
Example 1 — Choosing the More Beneficial Rate
Ms. Iyer, a resident of India, has business income of ₹10,00,000 from Germany. Under the India-Germany DTAA, Germany is allowed to tax this income at 10%. Under the Income Tax Act (assuming the normal slab + surcharge), her effective rate works out to 30%.
Which rate applies in India?
| Scenario | Rate |
|---|---|
| Income Tax Act rate | 30% |
| DTAA rate (India-Germany) | 10% |
| Applicable rate (more beneficial) | 10% |
Ms. Iyer pays tax at 10% on ₹10,00,000 = ₹1,00,000 instead of ₹3,00,000. Section 90(2) ensures she gets the better deal.
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Example 2 — Non-Resident Without TRC
Rajesh & Co. Pvt. Ltd. is a Singapore-based company earning ₹25,00,000 of royalty income from an Indian company. The India-Singapore DTAA caps withholding tax at 10%, but the Income Tax Act prescribes 20% for royalties to non-residents (u/s 115A).
Rajesh & Co. did not obtain a Tax Residency Certificate from the Singapore government.
- Can they claim the 10% DTAA rate? No — sub-section 90(4) bars DTAA relief without a TRC.
- Tax withheld at: 20% × ₹25,00,000 = ₹5,00,000
- If TRC had been obtained, tax would have been: 10% × ₹25,00,000 = ₹2,50,000
Final answer: ₹5,00,000 is deducted at source because TRC was missing. The lesson — always get your TRC before claiming DTAA benefits.
⚠️ Common exam mistakes
- Students think DTAA always overrides the Act. Wrong — Section 90(2) says apply whichever is more beneficial. If the Act gives a lower rate, use the Act. The taxpayer chooses.
- Students forget GAAR breaks through the DTAA shield. Section 90(2A) explicitly states Chapter X-A (GAAR) applies even if it hurts the assessee. Don't write that DTAA always protects the taxpayer from GAAR — it doesn't.
- Students confuse 'country' with 'specified territory'. DTAAs can be signed with specified territories (like Hong Kong) too — these are areas notified by the Central Government, not necessarily sovereign nations. Don't say DTAAs only apply to 'countries'.
- Students miss the TRC requirement for non-residents. Sub-section 90(4) is clear — a non-resident must produce a Tax Residency Certificate from their home country's government. No TRC = no DTAA benefit, even if a valid DTAA exists.
- Students ignore the 'higher rate for foreign companies' Explanation. Explanation 1 clarifies that charging a foreign company at a rate higher than a domestic company is NOT discrimination under a DTAA. Don't argue that a higher rate for a foreign company violates treaty provisions — it legally does not.
📖 Bare Act text — Section 90, Income Tax Act 1961
(click to expand)
(1) The Central Government may enter into an agreement with the Government of any country outside India or specified territory outside India,—
(a) for the granting of relief in respect of—
(i) income on which have been paid both income-tax under this Act and income-tax in that country or specified territory, as the case may be, or
(ii) income-tax chargeable under this Act and under the corresponding law in force in that country or specified territory, as the case may be, to promote mutual economic relations, trade and investment, or
(b) for the avoidance of double taxation of income under this Act and under the corresponding law in force in that country or specified territory, as the case may be, or
(c) for exchange of information for the prevention of evasion or avoidance of income-tax chargeable under this Act or under the corresponding law in force in that country or specified territory, as the case may be, or investigation of cases of such evasion or avoidance, or
(d) for recovery of income-tax under this Act and under the corresponding law in force in that country or specified territory, as the case may be,
and may, by notification in the Official Gazette, make such provisions as may be necessary for implementing the agreement.
(2) Where the Central Government has entered into an agreement with the Government of any country outside India or specified territory outside India, as the case may be, under sub-section (1) for granting relief of tax, or as the case may be, avoidance of double taxation, then, in relation to the assessee to whom such agreement applies, the provisions of this Act shall apply to the extent they are more beneficial to that assessee.
(2A) Notwithstanding anything contained in sub-section (2), the provisions of Chapter X A of the Act shall apply to the assessee even if such provisions are not beneficial to him.
(3) Any term used but not defined in this Act or in the agreement referred to in sub-section (1) shall, unless the context otherwise requires, and is not inconsistent with the provisions of this Act or the agreement, have the same meaning as assigned to it in the notification issued by the Central Government in the Official Gazette in this behalf.
(4) An assessee, not being a resident, to whom an agreement referred to in sub-section (1) applies, shall not be entitled to claim any relief under such agreement unless a certificate of his being a resident in any country outside India or specified territory outside India, as the case may be, is obtained by him from the Government of that country or specified territory.
(5) The assessee referred to in sub-section (4) shall also provide such other documents and information, as may be prescribed.
Explanation 1.—For the removal of doubts, it is hereby declared that the charge of tax in respect of a foreign company at a rate higher than the rate at which a domestic company is chargeable, shall not be regarded as less favourable charge or levy of tax in respect of such foreign company.
Explanation 2.—For the purposes of this section, "specified territory" means any area outside India which may be notified as such by the Central Government.
Explanation 3.—For the removal of doubts, it is hereby declared that where any term is used in any agreement entered into under sub-section (1) and not defined under the said agreement or the Act, but is assigned a meaning to it in the notification issued under sub-section (3) and the notification issued thereunder being in force, then, the meaning assigned to such term shall be deemed to have effect from the date on which the said agreement came into force.
Explanation 4.—For the removal of doubts, it is hereby declared that where any term used in an agreement entered into under sub-section (1) is defined under the said agreement, the said term shall have the same meaning as assigned to it in the agreement; and where the term is not defined in the said agreement, but defined in the Act, it shall have the same meaning as assigned to it in the Act and explanation, if any, given to it by the Central Government.
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