Conflict of Source versus Residence-Based Taxation in India with Reference to Fees for Technical Service

Abstract

Highly internationalized trade and commerce, in wake of globalization, is a contemporary reality. However, the increasing porosity of national boundaries has not changed the fact that every country has the sovereign right to tax income accruing, arising or received in it, on account of activities carried on in its territory. Yet, an important change with internationalization is that increasingly there are more than one sovereign nation entitled to claim ‘right to tax’. This sovereign right to impose tax, as is well known, can be exercised by either the country from where the income is sourced (source country) or the country where the taxpayer resides (residence country). However, in current times, where it is common for individuals or businesses to have activities connected to two or more than two countries, exercise of this ‘right to tax’ by each nation has given rise to a complex situation of individuals or business entities being faced with the problem of being subjected to the rigors of double taxation. The concept of ‘residence jurisdiction’ and ‘source jurisdiction’ are two fundamental concepts in the domain of International Taxation. While conflict between these two concepts of taxation is a problem in the international arena, interestingly in India, this preference for one over the other has been a bone of contention between legislature and judiciary of the country. While judiciary has been showing preference for ‘residence jurisdiction’, the legislature has been in favour of a regime based on the concept of ‘source jurisdiction’. This article explains the contours of this conflict as played out between the legislature and the judiciary in India. While endorsing the idea of tilt towards ‘source jurisdiction’ as a more appropriate regime for a developing country like India, this article argues that the need of the day is for taxation regime which contains adequate mixture of elements from both ‘residence jurisdiction’ and ‘source jurisdiction’.