Treaty residence under India-UAE DTAA depends on tax liability, not actual tax payment, preserving capital gains exemption.

Treaty residence under the India-UAE Double Taxation Avoidance Agreement depends on liability to tax in the other Contracting State by reason of domicile, residence, place of management, place of incorporation or a similar criterion, and not on actual payment of tax there. The distributive rule in Article 13(3) can prevent both current and potential double taxation. Where the UAE had the right to tax the taxpayer by reason of fiscal residence, the absence of an actual levy in the UAE did not defeat treaty residence or exemption under Article 13(3). The capital gains were therefore not taxable in India.

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Issues: Whether a resident of UAE, who did not actually pay tax there on capital gains, was entitled to treaty protection under Article 13(3) of the India-UAE Double Taxation Avoidance Agreement in view of Article 4(1).

Analysis: The treaty expression "resident of a Contracting State" turns on being liable to tax by reason of domicile, residence, place of management, place of incorporation or a similar criterion. That phrase is not confined to cases where tax is in fact paid or where the income is actually taxed in the other State. The treaty operates on the distributive rule and can prevent not only current double taxation but also potential double taxation. Once the other Contracting State has the right to tax a person by reason of fiscal residence, the absence of an actual levy in that State does not defeat treaty residence or the entitlement to exemption under Article 13(3).

Conclusion: The assessee was entitled to the benefit of the India-UAE treaty, and the capital gains were not taxable in India.

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