DTAA residence-based capital gains allocation blocked Indian tax and TDS on UAE investors' T-Bill transfers.

Capital gains from transfer of Government of India T-Bills by UAE resident investors were treated as taxable only in the state of residence under the India-UAE DTAA, because the securities were movable property and did not fall within the immovable property or business-property exceptions. The residence article was applied on the basis that "liable to tax" includes a state's right to tax, not only actual tax payment. The protocol and notification did not change that allocation for Government T-Bills. As a result, the gains were not taxable in India and the bank was not liable for TDS or interest under section 201.

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Issues: Whether capital gains arising to UAE resident investors from transfer of Government of India T-Bills were taxable in India under the India-UAE DTAA and, consequently, whether the bank was liable under section 201(1) and section 201(1A) for failure to deduct tax at source.

Analysis: The Tribunal held that the investors were residents of UAE and that the T-Bills were movable property not covered by the specific immovable property and business-property exceptions in Article 13(1) and Article 13(2). Under Article 13(3), gains from alienation of property other than that covered by those paragraphs are taxable only in the contracting state of which the alienator is a resident. The Tribunal further relied on the principle that the expression "liable to tax" in the residence article does not require actual payment of tax in the foreign state, but includes cases where that state has the right to tax. The subsequent protocol and notification did not alter the position for Government T-Bills, because the amended capital gains clause continued to allocate taxing rights to the state of residence for gains not specifically covered by the other paragraphs.

Conclusion: The capital gains were not taxable in India, and the bank was not liable to deduct tax at source under section 201(1) or pay interest under section 201(1A).

Final Conclusion: The Revenue's appeals failed and the deletion of the demands was upheld.

Ratio Decidendi: Where a DTAA assigns taxing rights over capital gains to the state of residence, the source state cannot levy tax or invoke TDS merely because the residence state does not actually impose tax, if that state retains the right to tax the income.

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