2012 (5) TMI 185 - AT - Income Tax

Tribunal grants deduction under Section 80HHC, upholding non-discrimination principle for UAE resident.

Bhagwan T. Shivlani Versus Income-tax Officer (IT) -2(2), (Mumbai)

The Tribunal directed the AO to allow the deduction claimed by the Assessee under Section 80HHC, thereby allowing the appeal. The decision emphasized that ... The expression 'liable to tax' - Non residents - DTAA between India and UAE. - Relief under Explanation 1(b) of Sec. 9(1)(i) of the Income Tax Act, 1961 - Export of electronic goods and plastic mould to Dubai and Nigeria. - Deduction u/s 80HHC - held that:- The expression 'liable to tax' is not to read in isolation but in conjunction with the words immediately following it i.e., 'by reason of domicile, residence, place of management, place of incorporation or any other criterion of similar nature'. The case of Green Emirate Shipping & Travels (2005 -TMI - 80954 - ITAT MUMBAI) is squarely applicable to the facts of the present case. As held in the aforesaid case, expression 'liable to tax' in the contracting state as used in Article 4(1)of Indo-UAE-DTAA does not necessarily imply that the person should actually be liable to tax in that contracting state and that it is enough if other contracting state has right to tax such person, whether or not such a right is exercised. Thus the Assessee has to be treated as 'Resident of UAE' and the provisions of the DTAA between India-UAE have to be examined by treating him as a resident of UAE. Deduction u/s 80HHC / 80HHE to non residents - held that:- The provisions of Sec.80-HHE and 80-HHC are identical and so are the relevant clauses of the DTAA between India and UAE regarding non-discrimination. Respectfully following the ratio laid down by the Special Bench in the case of Rajeev Sureshbhai Gajwani (2011 -TMI - 202351 - ITAT, AHMEDABAD), we hold that the Assessee cannot be denied the benefit of deduction u/s.80-HHC of the Act on the sole ground that he was not a resident. Issues Involved:1. Disallowance of deduction claim under Section 80HHC for profits from exports.2. Entitlement to relief under Explanation 1(b) of Section 9(1)(i) of the Income Tax Act, 1961.3. Application of Article 26(2) of the DTAA between India and UAE regarding non-discrimination.Issue-wise Detailed Analysis:1. Disallowance of Deduction Claim Under Section 80HHC:The Assessee, a non-resident individual, claimed a deduction of Rs.3,94,641 under Section 80HHC of the Income Tax Act, 1961, for profits derived from the export of electronic goods and plastic moulds to Dubai and Nigeria. The AO disallowed this deduction, stating that the benefit under Section 80HHC was available only to resident individuals. The AO also rejected the Assessee's argument that he was entitled to benefits under the DTAA between India and UAE, as individuals in UAE are not subject to tax, and thus the Assessee did not qualify as a resident of UAE under the DTAA. The AO relied on the decision in Abdul Razack Meman, In re, which held that the Assessee failed to prove liability to pay tax in UAE.2. Entitlement to Relief Under Explanation 1(b) of Section 9(1)(i):The Assessee argued before the CIT(A) that under Article 26(2) of the DTAA between India and UAE, he should not be subjected to more burdensome tax than enterprises of the contracting state (India). The CIT(A) rejected this argument, stating that the denial of the deduction was due to the Assessee's non-resident status, not nationality. The CIT(A) relied on the decision in Credit Lyonnais vs. DCIT, which held that non-availability of deduction under Section 80M to foreign companies cannot be considered discrimination based on nationality.3. Application of Article 26(2) of the DTAA Between India and UAE:The Tribunal considered whether the Assessee could be considered a resident of UAE. It was noted that the Assessee would be liable to tax in UAE, even if not actually taxed, as UAE does not tax individual income. The Tribunal referenced the case of Green Emirate Shipping & Travels, which established that the expression 'liable to tax' does not necessarily imply actual liability but includes the right to tax. The Tribunal concluded that the Assessee should be treated as a resident of UAE and thus eligible for DTAA benefits.The Tribunal also examined whether Article 26(2) of the DTAA between India and UAE, which prohibits less favorable taxation of a PE of an enterprise of a contracting state, entitles the Assessee to the deduction under Section 80HHC. The Tribunal referred to the Special Bench decision in Rajeev Sureshbhai Gajwani, which held that non-discrimination clauses in DTAAs ensure that exemptions and deductions available to residents must also be granted to non-residents carrying on the same activities. The Tribunal concluded that the Assessee should not be denied the deduction under Section 80HHC solely on the ground of non-residency.Conclusion:The Tribunal directed the AO to allow the deduction claimed by the Assessee under Section 80HHC, thereby allowing the appeal. The decision emphasized that the Assessee, being treated as a resident of UAE under the DTAA, should not face discrimination and is entitled to the same tax benefits as resident individuals.