Treaty residence under the Indo-UAE DTAA does not require actual foreign tax payment for capital gains protection

Under the Indo-UAE DTAA, a UAE resident was entitled to treaty protection on capital gains from transfer of shares and securities because the phrase "liable to tax" in Article 4 was treated as referring to fiscal domicile, not actual assessment or payment of tax in the UAE. The Tribunal applied the settled principle that treaty relief depends on the other State having the right to tax, even if that right is not exercised, and that the treaty guards against potential as well as current double taxation. On that basis, the capital gains were not taxable in India under the treaty.

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Issues: Whether a resident of the UAE was entitled to the benefit of the Indo-UAE DTAA in respect of capital gains on transfer of shares and securities notwithstanding that no tax was actually paid in the UAE and whether the expression "liable to tax" in Article 4 required actual taxability or payment of tax in the other contracting State.

Analysis: The dispute turned on the interpretation of Article 4 and Article 13(3) of the Indo-UAE DTAA. The Tribunal followed the settled view that the expression "liable to tax" is linked to fiscal domicile and does not require that the person must in fact be assessed to tax or actually pay tax in the other contracting State. It was held that a treaty allocation of taxing rights operates even where the other State merely has the right to tax and does not exercise it. The Tribunal relied on the principle that a tax treaty prevents not only current double taxation but also potential double taxation, and that the exemption under the treaty is independent of actual levy in the source or residence State.

Conclusion: The assessee was entitled to treaty protection, the capital gains were not taxable in India under the Indo-UAE DTAA, and the revenue's challenge failed.

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