When a person earns money the source of which is located outside the country and it becomes liable to tax in two countries. The country in which the income is earned and the one in which he is the resident. This is situation is very for multinational and trans-national corporate entities and double taxation on their incomes is a distinct possibility. Which is hardly just and desirable and to take care of this anomaly many countries enter into bilateral agreements for avoidance of double taxation. or granting relief in respect of the income on which tax has already been paid in both countries. This mechanism also proves greatly useful for the tax authorities of the countries to interact and exchange information for the prevention and investigation of tax evasion and avoidance of taxes and also assistance in recovery of taxes levied on them.

International trade necessitates cross-border movement of goods, services, capital and human resources and determining the tax jurisdiction of a country over a particular person assumes particular significance. It is necessary to decide whether a particular income is to be taxed in the country where the particular income arise. In the case of immovable property or intellectual property it is an important aspect to decide if the tax jurisdiction lies with the country of residence of the property or with the country where the property is situated or where the intellectual property is utilized. Both the countries may have tax jurisdiction viz., the residence or the home country and the source or the host country , over the same income of the same assessee. The principal objective behind a Double Taxation Avoidance Treaty is to provide a rational and equitable basis of allocation between two countries of income over which both have jurisdictions.

This mechanism of a treaty is basically designed to promote trade between two countries on the basis of revenue sharing between them arising out of the bilateral trade. There are two models of treaties in this regard, viz., OECD model and UN model. The OECD model follows the principle that the foreign income should also be taxed in the country of residence of the taxpayer. The UN model on the other hand, is a compromise between the residence and the sourced rules. Unlike the USA or UK or most of the Commonwealth countries, such treaties are not an act of legislation. In India under Article 253 of the Constitution Parliament has power to make any law for the whole or any part of the territory of India for implementing any treaty or convention with any other country. The Central Government has enacted the provisions for dealing with double tax being empowered under the afore-mentioned constitutional provisions.

Thus the Central Government can enter into an agreement with the government of any country outside India for granting relief in respect of income on which taxes have been paid in both the countries; for avoidance of double taxation of income under this Act and under the corresponding law in force in that country to promote mutual economic relations, trade and investment; for exchange of information for the purposes outlined earlier; for recovery of income tax under the corresponding law in force in that country.