Withholding tax and treaty relief for NRI capital gains turn on specific remittance rules and fiscal residence

A specific withholding provision for authorised dealers remitting consideration for transfer of foreign exchange assets by non-resident Indians prevails over the general deduction rule, and its application is confined to long-term capital assets. As the gains in question were short-term capital gains, the authorised dealer-bank was not liable to deduct tax at source. The article also states that, under the Indo-UAE treaty, "liable to tax" refers to fiscal liability and treaty residence, not actual tax collection in the foreign state; accordingly, UAE residents were entitled to treaty protection and the credited capital gains were not taxable in India on that basis.

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Issues: (i) whether an authorised dealer remitting sale proceeds of securities to non-resident Indians was a person responsible for deducting tax at source where the gains were short-term capital gains; and (ii) whether NRIs resident in UAE were entitled to treaty benefit so as to exclude Indian tax liability on the capital gains credited to their NRE accounts.

Issue (i): whether an authorised dealer remitting sale proceeds of securities to non-resident Indians was a person responsible for deducting tax at source where the gains were short-term capital gains

Analysis: Section 204 contained a general rule in clause (iii) and a specific rule in clause (iia) dealing with authorised dealers remitting sums representing consideration for transfer of foreign exchange assets by non-resident Indians. The specific provision was introduced to cover a distinct situation and operated to the exclusion of the general provision. The liability of the authorised dealer to deduct tax under the special clause arose only where the foreign exchange asset transferred was a long-term capital asset. The Revenue did not controvert the assessee's claim that the gains were short-term capital gains.

Conclusion: The assessee-bank was not liable to deduct tax at source under section 195 in respect of the remittances.

Issue (ii): whether NRIs resident in UAE were entitled to treaty benefit so as to exclude Indian tax liability on the capital gains credited to their NRE accounts

Analysis: The expression "liable to tax" in the Indo-UAE treaty was to be understood in the sense of fiscal liability and treaty eligibility, and not as depending on actual collection of tax in UAE. The issue was covered by earlier Tribunal orders applying the treaty provisions and holding that the absence of an operative income-tax law in UAE did not by itself deprive a UAE resident of treaty protection. The capital gains were therefore not exigible to tax in India on that footing, and the assessee could not be treated as an assessee in default for non-deduction.

Conclusion: The treaty benefit was available and the assessee-bank was not liable to deduct tax on the amounts credited to the NRE accounts.

Final Conclusion: The assessee succeeded on both the withholding-tax issue and the treaty issue, and the Revenue's challenge failed.

Ratio Decidendi: A specific statutory withholding provision governing a distinct class of remittances prevails over the general provision, and treaty eligibility under a "liable to tax" clause depends on fiscal residence rather than proof of actual taxation in the foreign state.

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