Treaty residency and "liable to tax" under the India-UAE DTAA can apply without actual tax payment in the UAE.

The expression "liable to tax" in the India-UAE treaty was interpreted to include a legal liability to taxation, even where no actual tax was levied in the UAE. Read with Section 90 of the Income-tax Act, the treaty operates by allocating taxing rights and does not require proof of tax payment in both States. The relevant test was whether the assessee had fiscal domicile and a sufficient legal nexus with the UAE to be treated as resident there for treaty purposes. On that basis, treaty eligibility was accepted and the income was held not taxable in India on the Revenue's objection.

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Issues: Whether the assessee, though not actually taxed in the UAE, was entitled to treaty benefits under the India-UAE Double Taxation Avoidance Agreement on the basis that it was "liable to tax" in the UAE.

Analysis: The treaty expression "liable to tax" in Article 4(1) was construed in the light of Section 90 of the Income-tax Act, 1961 and the governing principle that a double taxation avoidance agreement operates through allocation of taxing rights and is not confined to cases of actual tax payment in both Contracting States. The decisive consideration was whether the assessee had fiscal domicile and a legal nexus with the UAE sufficient to make it a resident of that State for treaty purposes. Since the right to tax in the UAE was vested in that Contracting State even if not exercised, actual levy of tax was not a precondition for treaty eligibility.

Conclusion: The assessee was entitled to the benefit of the India-UAE treaty and the income was not taxable in India on the objection raised by the Revenue.

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