Treaty residence and non-discrimination under the India-UAE DTAA can support section 80HHC relief for a non-resident taxpayer.

In the India-UAE DTAA context, "liable to tax" in Article 4(1) was treated as covering not only actual taxation but also a Contracting State's right to tax a person by reason of residence or similar connecting factors; the absence of actual tax on UAE individuals did not prevent treaty residence. Applying that treaty residence, the non-discrimination clause in Article 26(2) was read to prohibit denying section 80HHC deduction merely because the claimant was a non-resident, where comparable domestic enterprises would receive the benefit. The analysis therefore supports treaty-based access to the deduction on equal footing with resident taxpayers.

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Issues: (i) Whether the assessee, a non-resident individual, could be treated as a resident of the UAE for the purposes of the India-UAE DTAA even though individuals in the UAE were not actually taxed on income; and (ii) whether, by virtue of the non-discrimination clause in the India-UAE DTAA, the assessee was entitled to deduction under section 80HHC of the Income-tax Act, 1961.

Issue (i): Whether the assessee, a non-resident individual, could be treated as a resident of the UAE for the purposes of the India-UAE DTAA even though individuals in the UAE were not actually taxed on income.

Analysis: The expression "liable to tax" in Article 4(1) of the India-UAE DTAA was held to cover not only actual taxability, but also cases where the other Contracting State had the right to tax the person by reason of residence, domicile, or similar connecting factors. The absence of actual tax levy in the UAE on individuals did not negate residence for treaty purposes, since treaty residence depends on fiscal domicile and the right to tax, not on proof of actual payment of tax.

Conclusion: The assessee was to be treated as a resident of the UAE for the purposes of the India-UAE DTAA.

Issue (ii): Whether, by virtue of the non-discrimination clause in the India-UAE DTAA, the assessee was entitled to deduction under section 80HHC of the Income-tax Act, 1961.

Analysis: Article 26(2) of the India-UAE DTAA requires that taxation of a permanent establishment or enterprise of one Contracting State in the other Contracting State not be less favourable than the taxation of comparable domestic enterprises carrying on the same activities. Since section 80HHC and the corresponding treaty protection were materially analogous to the provision considered in the cited special bench ruling, the denial of deduction solely on the ground of non-resident status amounted to impermissible discrimination under the treaty.

Conclusion: The assessee was entitled to deduction under section 80HHC and could not be denied the benefit merely because he was not a resident.

Final Conclusion: The appeal succeeded and the deduction claim was directed to be granted in accordance with the treaty-based non-discrimination principle.

Ratio Decidendi: For treaty purposes, "liable to tax" includes a Contracting State's right to tax a person even if that person is not actually taxed there, and a non-discrimination clause can require extension of a domestic export deduction to a treaty resident on the same footing as a resident enterprise carrying on identical activities.

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