The terms ‘may be’ and ‘shall be’ have always been at loggerheads in tax litigation. These have also been favourite topics to fight for by the legal luminaries. One can find a number of judgments from the Apex Court, various High Courts and fallout of these judgments in the form of a number of decisions of various Benches of the Tribunal. What happens when the interpretations of these terms are sought in the context of interpreting the Double Taxation Avoidance Agreements entered into between India and other countries? Invariably in all the tax treaties entered into by India, one can see that there are a few articles which talk about an income which ‘shall be’ taxed in a particular contracting State. However there are a few Articles whereby certain incomes ‘may be’ taxed in a particular contracting State. Present write-up is an attempt to dig out the reasoning for use of such variance in terminology and the practical impact on the taxability of income of the same.

Under Article 245(1) of the Constitution, Parliament is empowered to make laws for the whole or any part of the territory of India and the Legislature of a State is empowered to make laws for the whole or any part of the State, subject to the provisions of the Constitution. These legislative powers are distributed between Parliament and the State Legislatures, in terms of Lists I, II and III of the 7th Schedule. Article 51(c), which is part of the Directive Principles of State Policy, obliges the State to endeavour to foster respect for International Law and Treaty obligations. Article 253 is an enabling provision that empowers Parliament to make any law for the whole or any part of the territory of the country for implementing any treaty, agreement or convention with any other country.

India has comprehensive Double Taxation Avoidance Agreements with various countries. The Double Taxation Avoidance Agreements that India has entered into with various countries stipulate agreed rate of tax and jurisdiction on specified types of income arising in a country to tax resident of another country. Section 90 of the Income-tax Act is specifically intended to enable and empower the Central Government to issue a Notification for the implementation of a Double Taxation Avoidance Agreement and hence, as a consequence, the provisions of such an agreement would operate even if inconsistent with the provisions of the Income-tax Act. Section 90 of the Act gives relief to the taxpayers who have paid the tax to a country with which India has signed the Double Taxation Avoidance Agreement. It also confers the power on the Central Government to enter into any agreement with the Government of another country for granting relief to an assessee who has paid income tax under the Act and also income tax in that other country and also in respect of income tax which is chargeable under the Act and under the corresponding law of that country. This has been done with a view to promote mutual economic relations, trade and investment and for avoidance of double taxation of income under the Income-tax Act as well as the Act of the other contracting State. Section 90(2) lays down that where the Central Government has entered into an agreement with the Government of any other country for granting relief of tax or for avoidance of double taxation, then the provisions of Income- tax Act shall apply to the assessee only to the extent they are more beneficial to it. In case the provisions of the Act are more onerous and burdensome, then the provisions of the same would not apply and the assessee would be governed squarely by the provisions of the double taxation avoidance agreement.

On this aspect, Chennai Bench of the ITAT in the case of Sivagami Holdings P. Ltd. v. ACIT – [2011] 10 ITR (Trib.) 48 (Chennai) has held that the DTAA is entered into between the countries only for the limited purpose of avoiding the hardship of double taxation and if the income is not taxed in the contracting State, the same should be taxed in India is an oversimplified statement on the whole regime of Double Taxation Avoidance Agreement. It is true that the prime motivating factor in developing the concept of Double Taxation Avoidance Agreement is the genuine hardship of the international assessee that the same amount of income became the subject of taxation both in the home State and in the contracting State. It is to alleviate this burden of double taxation that the instrument of Double Taxation Avoidance Agreement has evolved through the process of law.

It is to be understood that treaties entered into between two nations are just agreements entered into between two parties and they get the colour of legally bound nature from the relevant provisions in any nation’s local law. The rules of interpretation of statutes cannot be strictly applied while interpreting these treaties. The treaties are to be read in consonance with the intention of the parties, i.e., the contracting States, entering into the same.

As has already been stated hereinabove that there are instances under the DTAAs where the terminology used is ‘shall be taxed’. In such cases there cannot be any doubt as to the position that the income has to be taxed in that state only. But what happens in case the term used is ‘may be taxed’? The questions that arise are whether this does not give absolute power to that State to tax such incomes or whether it intends to give equal power to both the States to tax the same income or it snatches away the power to tax from one State to another?

This issue, for the first time, came up for consideration before the Karnataka High Court in
CIT v. R. M. Muthaiah (1993) 202 ITR 508 (Kar.), which was in relation to Indo-Malaysian DTAA. Here also, the High Court had an occasion to deal with the phrase “may be taxed” as given in Article-VI(1) which, at the relevant time, read as “income from immovable property may be taxed in the Contracting State in which such property is situated”. The High Court held that the result of this clause is that where the income from immovable property in Malaysia has been expressed as “may be taxed” by the Government of Malaysia, then it operates as a bar on the power of the Indian Government to tax such income. This bar would operate in sections 4 & 5 of the Income-tax Act, 1961 also. The High Court has also drawn its inference from the language of sub-sections (a) and (b) of section 90 wherein, the former reference is for granting of relief in respect of the income on which income tax has been paid both under the domestic law and under the laws of other countries and later clause refers to avoidance of double taxation which means once tax has been paid to the other contracting State then no tax is to be paid here in India. This distinction, it was held that, has to be taken into consideration while deciding this issue because once the assessee has paid tax in other Contracting State in terms of the agreement, then by necessary implications, Indian Government cannot levy tax on the same income.

Since the department did not go in appeal against this decision, before the Supreme Court, it has attained finality and this fact has also been noted down by the Apex Court in the landmark judgment in the case of
Azadi Bachao Andolan reported in 263 ITR 707 (SC).

The issue, later, arose in the year 1994 regarding taxation of capital gains and business incomes, arising from sources in Malaysia, to a Hindu Undivided Family from south of India, which was resident in India, before Madras High Court in the case of
CIT v. VR. S.R.M Firm 208 ITR 4 (Mad.). During the year certain business income as well as capital gains on sale of an immovable property situated in Malaysia arose to the assessee firm. The Assessing Officer proceeded only on the basis of the provisions of Indian domestic law that since assessee was resident of India and hence global income is to be taxed, taxed both these incomes in assessee’s hands. On assessee’s reliance on the DTAA between India and Malaysia whereby these incomes were provided to be ‘may be taxed’ in Malaysia, the A.O. was of the view that it is only ‘may be’ taxed, therefore the resident State has the absolute right to tax.

On appeal, the High Court pointed out that Article XXII(1) of the agreement with Malaysia declares that the laws in force in either of the contracting States will continue to govern the taxation of income in the respective States except where provisions to the contrary are made in the agreement. Therefore, where there exists a provision to the contrary in the agreement, there is no scope for applying the domestic law. The Court, further, observed that sections 22 to 27 of the Income-tax Act broadly deal with the income from house property. But in view of paragraph 1 of Article VI of the agreement between India and Malaysia, income from immovable property can be taxed only in and by the contracting State where the property is situated. There is no scope for the other contracting State to deal with such income. Further, on the interpretation of the term ‘may be’ on which heavy reliance was placed by the revenue, Hon’ble High Court observed as under:

“The contention on behalf of the Revenue that wherever the enabling words such as “may be taxed” are used there is no prohibition or embargo upon the authorities exercising powers under the Income-tax Act, 1961, from assessing the category or class of income concerned cannot be countenanced as of substance or merit. As rightly pointed out on behalf of the assessees, when referring to an obvious position such enabling form of language has been liberally used and the same cannot be taken advantage of by the Revenue to claim for it a right to bring to assessment the income covered by such clauses in the agreement, and that the mandatory form of language has been used only where there is room or scope for doubts or more than one view possible, by identifying and fixing the position and placing it beyond doubt.”

Revenue carried the matter in appeal before Apex Court in the case reported as CIT v. P.V.A.L. Kulandagan Chettier (2004) 267 ITR 654 (SC). The Apex Court observed that when it is intended under the DTAA that even though it is possible for a resident in India to be taxed in terms of sections 4 and 5 of the Act, if he is deemed to be a resident of a contracting State where his personal and economic relations are closer, then his residence in India would become irrelevant. In terms of the DTAA, wherever any expression is not defined in the agreement, the expression defined in the Income-tax Act would be attracted. Since income includes capital gains under the domestic law, capital gains derived from immovable property situated in Malaysia would be income under the DTAA and, Article VI would be attracted. With regard to the argument as to the interpretation of phrase ‘may be’ raised by department, the Apex Court held as under:

“We need not enter into an exercise in semantics as to whether the expression “may be” will mean allocation of power to tax or is only one of the options and it only grants power to tax in that State and unless tax is imposed and paid, no relief can be sought. Reading the treaty in question as a whole, when it is intended that even though it is possible for a resident in India to be taxed in terms of sections 4 and 5, if he is deemed to be a resident of a contracting State where his personal and economic relations are closer, then his residence in India will become irrelevant, the treaty will have to be interpreted as such and prevails over sections 4 and 5 of the Act. Therefore, we are of the view that the High Court is justified in reaching its conclusion, though for different reasons from those stated by the High Court.”

In this way, though, the Apex Court refrained itself from giving a precise meaning to the term ‘may be’, the order of the High Court was confirmed on a different line.

In this background, interpretation of the term ‘may be’ can be inferred on the following lines:


The bilateral double taxation agreements generally lay down two situations, in the first situation an assessee may be required to pay tax in the country of residence and is exempted in the country in which the income arises. In the other situation the country where the income arises deducts tax at source and the taxpayer receives compensation in the form of a foreign tax credit in the country of residence which would entitle the taxpayer to a credit in the country of residence to the extent the income that has been taxed in the country where the income has so arisen. To be able to avail the benefit of foreign tax credit the assessee has to declare himself (in the country where income has arisen) to be a non-resident.

It is to be kept in mind that the treaties are entered into between the two nations primarily to avoid double taxation of a single instance of income by both the states simultaneously. There are two methods of elimination of double taxation. Exemption or Avoidance Method provides to tax one income in only one of the States. Wherever the term used in the DTAA is ‘shall be taxed’ or ‘shall not be taxed’ or ‘shall be exempt ‘etc., the avoidance method for elimination of double taxation is being perceived. These Articles remain uncontroversial in view of such clear language. The other method of elimination of double taxation is the ‘Credit Method’. Whenever an income is taxed by both the contracting States, the credit of taxes paid by the assessee in the other contracting State will be given by the State in which the assessee is a resident. The term ‘may be taxed’ in fact contemplates this method of elimination of double taxation.

These two rules have been explained in para 19 of OECD commentary under the title taxation of income and capital read as under:

“19. For the purpose of eliminating double taxation, the Convention establishes two categories of rules. First, Articles 6 to 21 determine, with regard to different classes of income, the respective rights to tax of the State of source or situs and of the State of residence, and Article 22 does the same with regard to capital. In the case of a number of items of income and capital, an exclusive right to tax is conferred on one of the contracting States. The other contracting State is thereby prevented from taxing those items and double taxation is avoided. As a rule, this exclusive right to tax is conferred on the State of residence. In the case of other items of income and capital, the right to tax is not an exclusive one. As regards two classes of income (dividends and interest), although both States are given the right to tax, the amount of tax that may be imposed in the State of source is limited. Second, insofar as these provisions confer on the State of source or situs a full or limited right to tax, the State of residence must allow relief – as to avoid double taxation; this is the purpose of Articles 23A and 23B. The Convention leaves it to the contracting States to choose between two methods of relief, i.e. the Exemption Method and the Credit Method.”

India follows Credit Method for relieving double taxation.


It can by no stretch of imagination be perceived that whenever it is said that a certain income ‘may be taxed’ in a particular State, it may mean that the said income is not to be taxed in that particular State or only the other contracting State has the power to tax the said income. The reason is simply the fact that the treaties are drafted by the people possessing high degree of legal prudence. If this is the case, who stopped them to provide in the relevant Article the taxability in the intending state by using the words like ‘shall be’ or ‘will be’. What was the need to use such gibberish language? Such an interpretation will be defeat of all common principles of interpretation of statute or of simple agreements.

Pune Bench of the Tribunal, in DCIT v. Patni Computer System Ltd., [2008] 114 ITD 159 (Pune), has categorically specified that the decision of R.M. Muthaiah (supra) and S.R.M. Firm & Ors. (supra) lays down the prevailing legal position in India which has been affirmed by the Hon’ble Supreme Court in Azadi Bachao Andolan (supra) and P.V.A.L. Kulandagan Chettiar (supra) that once the income is held to be taxable in a tax jurisdiction under the DTAA, unless there is a specific mention that it can also be taxed in the other tax jurisdiction, the other tax jurisdiction is denuded of its power to tax the same.

ITAT Mumbai Bench ‘L’ in the case of Ms Pooja Bhatt v. DCIT [2008] 26 SOT 574 (Mumbai)
held that when the film artist assessee is a resident of India who had participated in an entertainment show performed in Canada in the year under consideration i.e. 1994-95 and had received certain sum for the participation and tax was also deducted at source in Canada in respect of said receipt/income, then in this situation, in view of Article 18 of DTAA between India and Canada, amount so received by the assessee could not be taxed in India. ITAT, Mumbai Bench interpreting the expression “may be taxed” in para 1 in Article 18 held that this expression gives only an option to the other contracting state to tax the income but does not preclude the contracting state of residence to assess the said income. Accordingly, such expression authorizes only contracting state of source to tax such amount and by necessary implication the contracting state of residence is precluded from taxing such income.


For getting benefit of a tax treaty, one has to read the treaty with respect to the income, taxability of which has to be taxed. The relevance of the term ‘may be taxed’ lies on the fact that the subject income may be or may not be exigible to tax as per local laws of the state in which it is provided to be ‘may be’ taxed. Since the DTAAs are meant to provide and are applicable only to the extent more beneficial to a subject than the local laws. In such a scenario income which is not taxable under the local laws of a state is not desirable to be taxed as per the DTAA. In this context judicial interpretation given to such situations that one need not go to the DTAA if a certain income is not taxable as per the Income Tax Act, is useful. Therefore, the desired conclusion emerges that in a situation where an income ‘may be’ taxed in a particular state, it should be taxed in that state only if it is also taxable as per its local law.

It should be kept in mind that the term ‘may be’ has been placed mainly in those articles concerning taxability of those incomes, on which the source state has a limited right of taxation, i.e. to the extent the income is attributable to the activities carried out in that state only. This fact also leaves open the right of taxation to the resident state also to a certain extent.

In a way the term is permissive and it permits taxability rather giving an option.


This inference may simply be drawn from the fact that in a situation where an income is not taxed in the particular state in which it is provided to ‘may be’ taxed because of it not being taxed as per the local laws, the other contracting state also not taxing the same may provide for elimination even once the taxation of income. The logical conclusion is that in cases of income ‘may be’ taxed in a particular state, that state gets the first right to tax the same. However both the States are equally entitled to tax the same and in such a scenario the elimination of double taxation regime comes into picture.

Chennai Bench of the Tribunal in ITO v. M/s. Data Software Research Co. Pvt. Ltd., ITA No. 2072/Mum./2006, order dated 27th November 2007, wherein on interpretation of a similar phrase appearing in Indo-U.S. DTAA appeared, has held that if the P.E. of a resident Indian is assessed in U.S.A., it is entitled to tax credit for the tax paid in the contracting State but there is nothing in the DTAA which states that such profit has to be exempted in India. Thus, the Tribunal was of the opinion that both the countries have the jurisdiction to tax wherever there is an expression “may be taxed”.

A very apt interpretation of the phrase has been given by the Mumbai Bench of the Tribunal in the case of
Essar Oil Ltd. v. Addl. CIT(2013) 28 ITR (Trib.) 609 (Mum.), which reads as under:

“The phrase “may be taxed” gives the taxing right to the source country, however, this does not in any manner delimit the right of tax or extinguishes the right to tax of the country of residence which alone has a mandate to tax the global income of its resident under the domestic law. This is followed mostly all over the world. This fundamental aspect as discussed above has been time and again opined and laid emphasis by OECD commentaries, U.N. model commentaries various eminent jurists like Klaus Vogel, Philip Baker, which have been discussed in earlier part of our findings. The international view had been that the phrase “may be taxed” cannot be interpreted in the manner that the country of resident is left with no right to tax its resident. However, we reiterate here that these international conventions or views do not have a binding precedence but have a great persuasive value in understanding the various concepts which are based on understanding the international law and the negotiation of the treaty. When the model convention of the treaty or the OECD model has been made the basis of agreement, (which here in this case both the treaties, Oman and Qatar are based on OECD model), then the commentaries given under these conventions acts as an external aid and a guiding factor. It is assumed that negotiating parties have understood the various expressions used in the treaty in the manner provided by these commentaries and international conventions. In the present case, both the treaties, Oman DTAA and Qatar DTAA are based on model convention, hence the views expressed has a great persuasive value. That is why the Hon’ble Supreme Court in Azadi Bachao Andolan (supra) has referred to and placed reliance on various international commentaries and views expressed by OECD, Klaus Vogel, Philip Baker, Lord Mc’nair and other foreign Court decisions. The Hon’ble Supreme Court had no inhibition on relying on these views because they reflect the concept prevailing under the international law.”

Delhi Tribunal in the case of Telecommunications Consultants India Ltd. v. Additional Commissioner of Income-tax (2012) 18 ITR (Trib.) 368(Del.), held that if, in the DTAA, an item of income is “may be taxed” in State of source and nothing is mentioned about taxing right of State of residence in convention itself, then State of residence is not precluded from taxing such income and can tax such income using inherent right of State of residence to tax such global income of its resident. Only in the case where phrase “shall be taxed only” used, then only the State of residence is precluded from taxing it. In such cases, where the phrase “may be taxed” used, the State of residence has been given its inherent right to tax.


Though all the abovesaid is equally true for India as well, however, in this context a Notification No. 91 of 2008 dated 28-8-2008 issued by Central Government in respect of Double Taxation Relief is relevant which reads as under:

“In exercise of the powers conferred by sub-sections (3) of section 90 of the Income-tax Act, 1961 (43 of 1961), the Central Government hereby notifies that where an agreement entered into by the Central Government with the Government of any country outside India for granting relief of tax or as the case may be, avoidance of double taxation, provides that any income of the resident of India “may be taxed” in the other country, such income shall be included in his total income chargeable to tax in India in accordance with the provisions of the Income-tax Act, 1961 (43 of 1961), and relief shall be granted in accordance with the method for elimination or avoidance of double taxation provided in such agreement.”

This notification was issued in the context of sub section (3) to section 90, which reads as under:

“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.”

The effect of this notification is retrospective from the date on which the respective treaties are entered into. This proposition is fortified by the explanation 3 to section 90 of the Act inserted by Finance Act, 2012 w.e.f 1-10-2009 as under:

“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.”

The objective behind introduction of this amendment is explained in the Memorandum explaining the provisions of the Finance Bill, 2012 as follows:


Section 90 of the Act, empowers the Central Government to enter into an agreement with foreign countries or specified territories for the purpose of granting reliefs particularly in respect of double taxation. Under this power, the Central Government has entered into various treaties commonly known as Double Taxation Avoidance Agreements (DTAA’s).

Section 90A of the Act similarly empowers the Central Government to adopt and implement an agreement between a specified association in India and any specified association in a specified territory outside India for granting relief from ‘double taxation’ etc., on the lines of section 90 of the Act.

Sub-section (3) of sections 90 and 90A of the Act empowered the Central Government to assign a meaning, through notification, to any term used in the Agreement, which was neither defined in the Act nor in the agreement.

Since this assignment of meaning is in respect of a term used in a treaty entered into by the Government with a particular intent and objective as understood during the course of negotiations leading to formalisation of treaty, the notification under section 90(3) gives a legal framework for clarifying the intent, and the clarification should normally apply from the date when the agreement which has used such a term came into force.

Therefore, the legislative intent of sub-section (3) to section 90 and section 90A that whenever any term is assigned a meaning through a notification issued under section 90(3) or section 90A(3), it shall have the effect of clarifying the term from the date of coming in force of the agreement in which such term is used, needs to be clarified.

It is proposed to amend section 90 of the Act to provide that any meaning assigned through notification to a term used in an agreement but not defined in the Act or agreement, shall be effective from the date of coming into force of the agreement. It is also proposed to make similar amendment in section 90A of the Act.

The amendment in section 90 will take effect retrospectively from 1st October, 2009 and the amendment in section 90A shall take effect retrospectively from 1st June, 2006″.

The Memorandum states that the notification under section 90(3) of the Act merely gives a legal framework for clarifying the intent and objective as understood during the course of negotiations of the treaty and thus the same shall be applicable to the DTAA from the date of entering of the DTAA even if the said DTAA is entered into prior to coming into force of section 90(3) of the Act on 1-4-2004. However even if the notification were said to be clarificatory it could be retrospectively applicable only from Assessment Year 2004-05 onwards when section 90(3) was introduced, this view was taken by the Mumbai Bench of the Tribunal in the case of
Essar Oil Ltd. v. ACIT (supra), wherein it was held that the Notification No. 91 of 2008 was clarificatory and applicable from Assessment Year 2004-05 onwards only.

The decision in the case of Essar Oil Ltd. (supra) was followed by the Hyderabad Bench of the Tribunal in the case of
N. S. Srinivas v. ITO, ITA No. 310/Hyd/10, dated 17-4-2014.

It is also clear that the said provision has been brought into the statute in order to remove any ambiguity arising in drafting of the treaty, out of the use of the term ‘may be’. With this for a resident of India, the situation is very clear, if an income which ‘may be’ taxed in other State, India has all the right to tax the same in the assessee’s hand, however credit of taxes paid in that other State has to be given in India in order to eliminate double taxation.


The issue of interpretation of phrase “may be taxed in other contracting States”, as used in different Articles including Article 7 in the DTAA has been discussed in detail by the Tribunal in Essar Oil Ltd. (supra) after taking into consideration various decisions of the High Court, Supreme Court, effect of amendment in section 90(3) and notification dated 28th August 2008, issued by the Central Government. The conclusion arrived by the Tribunal after discussing various aspects are as under:

Once the tax is payable or paid in the country of source, then country of residence is denied of the right to levy tax on such income or the said income cannot be included in return of income filed in India, would no longer apply after the insertion of provision of sub-section (3) of section 90 w.e.f. 1st April, 2004, i.e. Assessment Year 2004-05.

The notification dated 28th August 2008 is clarificatory in nature and hence interpretation given by Government of India through this notification will be effective from 1st April 2004, i.e., from the date when provision of section 90(3) was brought in the statute, giving a legal framework for clarifying the intent of one of the negotiating parties.

The phrase “may be taxed” is not appearing in the statute, but it is appearing in the agreement and therefore, the interpretation as understood and intended by the negotiating parties should be adopted. Here one of the parties i.e., Government of India has clearly specified the intent and the object of this phrase. If the phrase were used in a statute, then any interpretation given by the High Court or the Supreme Court is binding on all the subordinate Courts and has to be reckoned as law of the land.

The notification is not contrary to the provisions of the Act. Consequently, the judgments rendered prior to Assessment Year 2004-05, will not have binding precedence in the later years.

In this way the effect of the judgments of Supreme Court, High Courts and benches of the Tribunal, rendered in this context may not hold good with effect from the Assessment Year 2004-05 onwards, intention of the legislature has to be arrived at while judging the taxability of such incomes.

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