AI Drafter 
TaxTMI 
TaxTMI 
1999 (5) TMI 582
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....nd in the circumstances of the case, whether the applicant would be entitled to be taxed at the lower rate of tax as per article 10-para. 2(b) and article 11-para. 2(b) of the said Double Taxation Avoidance Treaty - (a) at the rate of 15 per cent., on gross dividend income, arising in India (for dividend income prior to July 1, 1997) and (b) at the rate of 12.5 per cent., on gross interest income on investment accruing and arising in India to the applicant from the investments made in debentures and bonds of Indian companies or any other interest income on loans/advances made out of his moneys from his Non-Resident External Account ? Question No. 3 : Whether on the facts and in the circumstances of the case and having regard to the fact that the applicant is a resident of UAE in terms of article 4 of the said Double Taxation Avoidance Treaty, gains arising on sale/transfer of his movable properties would be taxable only in the UAE and not in India as per article 13-para. 3 of the said DTA ? The applicant claims to be an individual who is not a resident of India and is permanently residing in Abu Dhabi, UAE, since 1977. The applicant has annexed a copy of the employment ....
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....om mutual funds is stated to be approximately Rs. 75,000. The applicant claims relief under various provisions of the Double Taxation Avoidance Agreement between India and the United Arab Emirates. Section 4 of the Income-tax Act imposes a (charge of) tax on the total income of a person for any assessment year at the rate that may be prescribed by any Central Act. "Total income" will have to be computed in accordance with the provisions of section 5 of the Income-tax Act. There is a difference between the total income of a person who is a resident and a person who is a non-resident. Broadly stated, the total income of a person who is a resident will include all income from whatever source derived which is received or deemed to be received in India in such tax year by or on behalf of such person and also any income which accrues or arises to him outside India during such year. Sub-section (2) of section 5 deals with the computation of total income of a non-resident. It lays down that the total income of a non-resident will include all income from whatever source derived which is received or is deemed to be received in India in such year by or on behalf of such person or which acc....
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....nt of India by virtue of the authority given by section 90 of the Income-tax Act. Article 265 of the Constitution lays down that no tax shall be levied or collected except in accordance with law. Tax imposed by any Central Act cannot be reduced or waived or modified by the Government unless and only in so far as it is authorised by the statute. Moreover, modification of a rate of tax imposed by the statute can be made by the Government only to the extent empowered by the statute. Section 90 of the Income-tax Act enables the Central Government to enter into an agreement with foreign countries for granting relief in respect of income which has suffered income-tax both under the Indian law and the laws of the foreign country. The provisions of section 90 are as under : "90. (1) The Central Government may enter into an agreement with the Government of any country outside India- (a) for the granting of relief in respect of income on which have been paid both income-tax under this Act and income-tax in that country, or (b) for the avoidance of double taxation of income under this Act and under the corresponding law in force in that country, or (c) for exchange of informati....
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....ch profits in that country, or (b) for the avoidance of double taxation of chargeable profits under this Act and under any law relating to the taxation of income or profits in force in that country, or (c) for exchange of information for the prevention of evasion or avoidance of surtax chargeable under this Act or the tax chargeable under the corresponding law in force in that country or investigation of cases of such evasion or avoidance, or (d) for recovery of tax under this Act and under any law relating to the taxation of income or profits in force in that country. The Central Government under section 24A is only empowered to grant relief by an agreement with a foreign country in respect of chargeable profits "on which have been paid both surtax under this Act and tax of a similar character or income-tax on such profits in that country." Therefore, no relief can be granted under clause (a) of section 24A except in cases where surtax has actually been paid on chargeable profits in the two contracting countries. Clause (b) also deals with the situation where chargeable profits are liable to be taxed twice under the Indian Act and also under the corresponding tax law i....
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....atute. The Central Government has no power either to levy or to withdraw any tax on its own. It is permitted by the statute to grant relief to a taxpayer by an agreement with a foreign country where his income has been subjected to tax both in the foreign country and India. This power can be exercised only for avoidance of double taxation of the same income under the Income-tax Act or the Surtax Act and the corresponding laws in force in the foreign country. This matter can be viewed from the angle of the taxpayer. Liability to pay tax both in India and the foreign country entitles a taxpayer to claim relief under the rules laid down in the Double Taxation Avoidance Agreement. If a taxpayer pays tax or is liable to pay tax under the laws in force in one country alone, he cannot claim any relief from a non-existent burden of double taxation under the Double Taxation Avoidance Agreement. The Double Taxation Avoidance Agreement is meant only for the benefit of taxpayers who are liable to pay tax twice on the same income. Here, we have an Agreement entered into between the Government of the Republic of India and the Government of the UAE for the avoidance of double taxation with ....
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....ting States. In the instant case, no tax is payable by an individual under the tax laws prevailing in the UAE. Therefore, no question of relieving an individual from the brunt of double taxation arises. If the agreement is examined, it will be seen that no attempt has been made in the agreement to give relief to any individual who does not pay tax in the UAE. We shall now examine the provisions of the Double Taxation Avoidance Agreement between India and the United Arab Emirates (UAE). The agreement came into force on September 22, 1993. It was entered into by the Government of India in pursuance of the powers conferred by section 90 of the Income-tax Act, 1961. The object of the agreement is "for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and on capital". The following articles are relevant for this case (see [1994] 205 ITR (St.) 49) : "Article 1 Personal scope This agreement shall apply to persons who are residents of one or both of the Contracting States. Article 2 Taxes covered 1. There shall be regarded as taxes on income and on capital all taxes imposed on total income, on total capital, or on ....
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.... and economic relations are closer (centre of vital interests) ; (b) if the State in which he has his centre of vital interests cannot be determined, or if he has not a permanent home available to him in either State, he shall be deemed to be a resident of the State in which he has an habitual abode ; (c) if he has an habitual abode in both States or in neither of them, he shall be deemed to be a resident of the State of which he is a national; (d) if he is a national of both States or of neither of them, the competent authorities of the Contracting States shall settle the question by mutual Agreement. 3. Where by reason of the provisions of paragraph 1, a person other than an individual is a resident of both Contracting States, then it shall be deemed to be a resident of the State in which its place of effective management is situated. Article 6 Income from immovable property 1. Income derived by a resident of a Contracting State from immovable property (including income from agriculture or forestry) situated in the other Contracting State may be taxed in that other State. 2. The term "immovable property" shall have the meaning which it has under the law of....
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....rom other corporate rights which is subjected to the same taxation treatment as income from shares by the laws of the State of which the company making the distribution is a resident. Article 11 Interest 1. Interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. 2. However, such interest may be taxed in the Contracting State in which it arises and according to the laws of that State, but if the recipient is the beneficial owner of the interest, the tax so charged shall not exceed. (a) 5 per cent. of the gross amount of the interest if such interest is paid on a loan granted by a bank carrying on a bona fide banking business or by a similar financial institution ; and (b) 12.5 per cent. of the gross amount of the interest in all other cases. 3. Notwithstanding the provisions of paragraph 2 interest arising in a Contracting State shall be exempt from tax in that State provided it is derived and beneficially owned by : (i) the Government, a political sub-division or a local authority of the other Contracting State ; or (ii) the Central Bank of the other Contracting State. 4. The term ....
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.... from the alienation of immovable property referred to in paragraph 2 of article 6 and situated in the other Contracting State may be taxed in that other State. 2. Gains from the alienation of movable property forming part of the business property of a permanent establishment which an enterprise of a Contracting State has in the other Contracting State or of movable property pertaining to a fixed base available to a resident of a Contracting State in the other Contracting State for the purpose of performing independent personal services, including such gains from the alienation of such a permanent establishment (alone or together with the whole enterprise) or of such fixed base may be taxed in that other State. 3. Gains from the alienation of any property other than that mentioned in paragraphs 1 and 2 shall be taxable only in the Contracting State of which the alienator is a resident." Now the question is of which State is the applicant a resident Article 4 defines "resident" of a Contracting State to mean any person who is liable to tax in that State by reason of his domicile, residence, place of management and place of incorporation, etc. The applicant is an individual ....
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....ship firm or an association of persons which is not liable to pay tax in the UAE will not be treated as a "person". Paragraph 1 of article 4 lays down liability to pay tax as the criterion for deciding whether a person is a resident of a Contracting State or not. Paragraph 2 will apply only when an individual is found to be a resident of both the Contracting States. Paragraph 3 will apply where a person other than an individual is a resident of both Contracting States. But neither paragraph 2 nor paragraph 3 will apply unless the individual or a person other than an individual is found to be resident of both the Contracting States. From all these provisions, it follows that unless a person is liable to pay tax in a Contracting State he is not to be treated as a resident of that State under article 4. Individuals falling under clauses (a), (b), (c) and (d) of paragraph 2 must be persons who are liable to pay tax in both the Contracting States. Likewise non-individuals in paragraph 3 must be persons who are liable to pay tax in both the Contracting States. There is no other criterion laid down for determination of residence other than liability to pay tax under article 4. Tax has ....
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....ting of relief in case of a non-resident partner of a registered firm assessed as a resident in India. All these provisions of section 91 provide relief where there is actual taxation in a foreign country of income on which tax is also payable in India. Both sections 90 and 91 deal with relief from double taxation of income. Relief can be granted under section 90(1)(a) when there has been actual payment of tax in both the contracting countries. Relief can also be granted to a taxpayer from the burden of double taxation under section 90(1)(b) by an agreement with a foreign country. This agreement can be entered into only when there is a law in force in the foreign country subjecting the income which is taxable in India to a further levy of tax. Section 91 seeks to grant relief in cases where income liable to tax in India has been actually charged to tax in a foreign country with which India does not have a double taxation agreement. The important thing to note is that neither under section 90 nor under section 91, has any attempt been made to grant relief where there is no law in force in a foreign country subjecting to tax the same income which is taxable under the Income-tax....
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....ally be taxed under paragraph 2. This tax is something in addition to the tax leviable under paragraph 1. If dividend income is taxable under paragraph 1, relief from double taxation of such dividend is provided by paragraph 2 by reducing the rate of tax payable on the dividends. This benefit of a smaller rate of tax is given in paragraph 2 only because the dividend income has to bear full tax under paragraph 1 which is the primary tax. The endeavour of article 10 is to grant relief in a case of double taxation of dividends. Paragraph 2 pre-supposes that a tax is leviable under paragraph 1. The word "also" in paragraph 2, signifies that besides the first levy under paragraph 1, there may be an additional levy of tax. If there is no liability to pay tax at all in the UAE, paragraph 1 will not be attracted. In such a case there cannot be any question of a further tax "also" in the State in which the company resides which in this case is India. Since, this tax payable in India is not something in addition to the tax payable in the UAE, paragraph 2 of article 10 is not attracted. This means the treaty does not restrict the liability of the shareholder to pay tax on his dividend income ....
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....ividend being taxable in the hand of the shareholder in the state in which he resides. In any event in India, section 90 of the Income-tax Act does not authorise the Central Government to reduce the rate of tax imposed by Parliament even when the dividend income is liable to be taxed in the hands of an individual only in India and not at all under any corresponding law in force in a foreign country. It must be presumed that the Central Government did what it could lawfully do. Paragraph 2 of article 10 is clearly conditional upon paragraph 1. It has been argued that the U. N. and O.E.C.D. Model Codes have been devised to alleviate the burden of a taxpayer from the rigours of double taxation. This agreement based on the model case grants relief from not only actual but potential double taxation. Lord Macnaghten in the case of London County Council v. Attorney-General [1900] 4 TC 265, observed that (page 293) : "Income-tax, if I may be pardoned for saying so, is a tax on income. It is not meant to be a tax on anything else". The argument based on potential double taxation overlooks this simple but basic fact that income tax is a tax on income. It is an actual annual levy and not a....
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....oncerned in this case, empowers the Central Government by section 44A to enter into an agreement "for the avoidance or relief of double taxation" under the Wealth-tax Act and "the corresponding law in force in the reciprocating country." If there is no corresponding tax law in force in another country, there is no scope for double taxation. There is no question of avoidance of something which is non-existent. It has to be emphasised at the cost of repetition that the agreement with the UAE is applicable only to the existing taxes and not to any potential levy of taxes. Taxes covered under article 2 are taxes which have been imposed on total income or total capital or elements of total income or total capital which will include dividend, interest and capital gain. It is specifically declared that the agreement applies to the existing laws enumerated therein. There is no existing law taxing the income of individuals in the UAE. Therefore, the agreement cannot be extended to the income of individuals. Similar will be the position of interest under article 11. Paragraph 1 thereof speaks of interest arising in one State and paid to the resident of the other State. As we have no....
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....e taxation of that income in that particular year of account. In making an assessment, the Assessing Officer has only to consider the law in force in the accounting year and not what the law may be in future. It is also to be noted that article 3 expressly provides that any new tax on income or capital will come within the ambit of the agreement as and when such new taxes are imposed. The argument that even though a person has no existing liability to pay any tax in the UAE he will be entitled to relief from potential double taxation is incomprehensible. The Central Government can enter into an agreement with the Government of any foreign country for the avoidance of double taxation of income under the Income-tax Act and under the corresponding law in force in that country. The Central Government in the instant case has actually entered into an agreement for this purpose with the UAE. The agreement is avowedly for the purpose of avoiding double taxation and also for the prevention of fiscal evasion. If there is any double taxation of income of a person both in India and also in the UAE, this agreement will apply. But in cases where there is no double taxation of income at all du....
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....aforesaid unless there is a change in law or facts on the basis of which the advance ruling has been pronounced." Thus, sub-section (2) of section 245S has limited the binding nature of the ruling to the case of the applicant in respect of the transaction in relation to which the advance ruling is sought and to the Commissioner and authorities subordinate to him only in respect of the applicant and the transaction involved. This is not to say that a principle of law laid down in a case will not be followed in future. The Act has made the ruling binding in the case of one transaction only and the parties involved in that case in respect of that transaction. For other transactions and for other parties, the ruling will be of persuasive nature. One important point which was lost sight of in Rafik's case [1995] 213 ITR 317 (AAR), was the scope of section 90 of the Income-tax Act which confers upon the Government of India jurisdiction to enter into an agreement for the purpose of avoidance of double taxation only in a case where income of a person is taxable twice, i.e., under the Indian law as also under the corresponding law in force in a foreign country. If the income of a pers....
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....tion in his case. In fact this agreement is in consonance with the powers conferred upon the Government of India by section 90 of the Income-tax Act. If the Government of India seeks to grant any relief from taxation imposed by Parliament beyond what has been expressly permitted by the statute, exercise of that power will be ultra vires the statute. Fortunately, this agreement with the UAE has been carefully worded to keep it within the ambit of the authority given to the Government of India by section 90 of the Income-tax Act, 1961. This aspect of the matter was overlooked in Rafik's case [1995] 213 ITR 317 (AAR). Rafik's case [1995] 213 ITR 317 (AAR), takes note of the fact that the only tax imposed in the UAE is on income of the corporate bodies. It further notices that though each Emirate has its own income-tax decree, the decrees are similar. The judgment records (page 327) : "However, it is clear that individuals like the applicant, are not liable to tax under the Dubai law. This being so, it can be said, the applicant cannot claim to be a resident of the UAE, entitled to the benefit of articles 10, 11 and 13 of the Double Taxation Avoidance Agreement." The judgment ....
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....and the law of the foreign country. In a case falling under clause (b), the agreement is for avoidance of double taxation of the same income which is otherwise taxable under the Incometax Act and the corresponding law in force in the foreign country. The Central Government is not competent to enter into an agreement for granting relief from taxation to an individual or a company or any other entity under section 90 unless that income is also liable to be taxed under the law of the other country. The agreement goes to show that the Central Government has not done what it could not do under section 90 and no interpretation should be placed on the agreement which tends to make the agreement ultra vires section 90 of the Income-tax Act. The definition given to "resident" in article 4 of the Double Taxation Avoidance Agreement is a reproduction of the definition of the expression "resident" given in the UN model code. That definition has been reproduced verbatim in article 4 without any modification. It will not be right to suggest that there was a special underlying object of encouraging UAE investments in India in that definition. The only country where the applicant pays income-ta....
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....Contracting State cannot be treated as a resident of that State. To hold otherwise will make the definition of a "resident" meaningless. This will also defeat the whole purpose of the agreement and make the agreement ultra vires section 90 of the Income-tax Act. We are of the view that there are compelling reasons for not following the view taken in Rafik's case [1995] 213 ITR 317 (AAR). On a reading of the preamble to the agreement there can be no dispute that the underlying idea behind the agreement is to promote mutual economic relations by relieving the taxpayers from the burden of paying tax twice on the same income in two different countries. This double obligation to pay tax on the same income is sought to be relieved by the agreement. However, the problem of double taxation can only arise if the same income has been subjected to tax simultaneously in two countries in the same year. But here we have a case where an individual has been subjected to tax in respect of his income in India only. There is no tax payable at all by an individual on his income under any law in force in the UAE. Having regard to the object of the Double Taxation Avoidance Agreement, there is no ....
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.... fresh agreement will be necessary in respect of these taxes. The competent authority of the Contracting States shall notify to its counterpart in the other Contracting State of any change in the tax laws whereupon the newly imposed taxes will come within the ambit of the agreement automatically. If any tax is imposed by the UAE on the income of individuals, the UAE authority will have to notify the Indian authority about such changes in tax laws. Thereupon, the tax levied on income of an individual will qualify for the relief provided in the Double Taxation Avoidance Agreement. Further in all these articles, residence of an individual is a very important factor. For example, income derived by a resident of the Contracting State in respect of professional services shall be taxable only in that State. This is the general law subject to some exceptions. Likewise, salaries, wages and other remuneration derived by a resident of the Contracting State, shall be taxable only in that State. However, if the employment is in the other Contracting State then such remuneration may be taxed in the other State. A close scrutiny of the articles will reveal that these articles have been worded ....
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....The same is the position with pension. These provisions have been inserted with full knowledge that pension earned by an individual from an employment in the UAE or outside, will not be taxed at all in the UAE under any circumstances. That is the existing law. Therefore, these provisions cannot be given effect to until and unless the UAE imposes a tax on income earned by individuals. In other words, these provisions will become effective as soon as tax laws corresponding to the Indian taxes come in force in the UAE. In Rafik's case [1995] 213 ITR 317 (AAR), it was recognised that this will be the position if a literal interpretation of the agreement was made. But it was held that a liberal interpretation should be made to grant relief to the individuals residing in the UAE and the agreement should be held to be effective for individuals from the day it came into force. It is difficult to comprehend that the Central Government with full knowledge that no income-tax is at all payable by an individual in the UAE would enter into an agreement about non-existent taxes. If the Central Government entered into the agreement to grant tax relief in India to nontax paying individuals in....
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....lief has to be given even when the income in question is taxable only in one country and not at all by the other contracting country. It has next been argued that relief has to be granted on the basis of potential tax. This argument has to be rejected straightaway. The question of granting relief from double taxation can only arise when the income-tax assessment of a person is taken up. If the Assessing Officer finds that any income of the assessee has already been subjected to tax in another country with which the Government of India has not entered into any agreement for avoidance of double taxation, then the Assessing Officer will have to allow deduction from the income-tax payable on such income in the manner laid down in section 91. Similarly, if at the time of assessment, the Income-tax Officer finds that the assessee has earned income which is taxable under the existing laws of another country with which the Government of India has entered into an agreement for avoidance of double taxation then relief has to be given to the assessee under section 90. There are two situations under which this relief can be given : (a) Where income-tax has been paid both under the Inc....
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....ment at all on the basis of the law as it stands now in the UAE. Lastly, an argument has been made that the Central Government has entered into this agreement with the UAE with full knowledge of the fact that there is no corresponding income-tax law in force in respect of individuals residing in the UAE. There is no reason to presume that the agreement was entered into for the purpose of safeguarding the future contingencies of imposing of such laws in the UAE. The agreement must be implemented as it is. An individual residing in the UAE who does not pay any tax there will be entitled to the full benefit of the agreement. There are three major difficulties in upholding this argument. The agreement is for avoidance of double taxation and prevention of fiscal evasion not for reducing the burden of the only tax payable by individuals like the petitioner in India. If there is no corresponding income-tax law in respect of individuals in the UAE, no question of double taxation of such individuals can arise. The avowed object of the agreement is to avoid double taxation. The agreement must not be presumed to be anything other than what it is stated to be. Secondly, as has been em....
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....l so far as the UAE tax authorities are concerned. The income of an individual is not taxable at all. There are similar provisions for directors' fees in article 16, income by entertainers and athletes in article 17, remuneration and pensions in respect of government services as well as non-governmental pensions and annuities in articles 18 and 19. These provisions will have sense and purpose only if and when the UAE passes law imposing tax on individuals and notifies such law in the manner laid down in article 3. In that event, it will not be necessary to enter into a fresh agreement. Therefore, it will not be right to say that all these provisions are presently applicable and not for a future contingency. In this context, the definition of "residence" given in article 4 has to be kept in view. This definition is specially given for the purpose of this agreement. A person who does not pay any tax in the UAE is not a resident of the UAE at all. The provisions granting relief to residents of the UAE cannot be availed of by persons who do not pay any tax there. The position becomes even more clear from articles 20 and 25. Article 20 provides that an individual "who is a residen....
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....ax is paid by the individual residing in India there is no scope for adjustment of that tax in the UAE because he has no present liability of paying any tax in the UAE. These provisions are akin to article 23E of the UN Model Code. These provisions cannot be enforced so far as individuals residing in the UAE are concerned unless suitable law is made in the UAE for levying tax on income of individuals. This agreement is based on the OECD and the UN model of double taxation which seeks to reduce the burden of double taxation. The mischief that the UN model seeks to rectify is the likelihood of the same income being taxed twice in two different countries in that same year. Both the UN model and the OECD models were devised for relieving the taxpayer from the burden of paying tax on the same income for the identical period. The definition of "resident" in article 4 is also based on the UN model convention. A resident paying tax in one country is entitled to get relief from the burden of double taxation when a similar tax is imposed by the Contracting State. The adoption of the UN model or the OECD model in the Double Taxation Agreement between India and the UAE is not to reduc....
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....ruling of this authority in the case of M. A. Rafik's case [1995] 213 ITR 317 (AAR) and other cases. It is unnecessary to repeat the discussion here. It is sufficient to state that applicant should be considered to be a resident of both the UAE and India within the meaning of paragraph 1 of article 4. This being the situation, one has to turn to the terms of paragraph 2 of article 4 which provides for such cases". Since the present chairman of the authority finds himself unable to agree with the ruling given in Rafik's case [1995] 213 ITR 317 (AAR), it has become necessary for me to explain my position while concurring with the ruling given by him. Even in Rafik's case [1995] 213 ITR 317 (AAR), the then chairman had taken the view that individuals were entitled to the benefit of concessions under the provisions of the Income-tax Act on account of the provisions of article 4 of the Agreement for Avoidance of Double Taxation and Prevention of Fiscal Evasion with respect to the Taxes on Income and Capital between India and the United Arab Emirates (DTAA). He observed as under (page 331) : "It will thus b....
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....he could still be considered as a resident of a Contracting State as envisaged by article 4. It would appear that it is not permissible to bring in any extraneous considerations when the meaning of the words is so plain as in article 4 of the Double Taxation Avoidance Agreement. I am, therefore, in respectful agreement with the conclusions of the present chairman. In tune with the above thinking, K. Srinivasan in his Guide to Double Tax Avoidance (Vidhi Publishing (P.) Limited, 1998, page 193), has observed as under : "If a Contracting State does not levy income-tax on individuals or on certain sources of income of the individual, no individual who is required to pay any tax in the other Contracting State will be exposed to any risk of double taxation on the whole of his income or any part of it derived from the exempt sources and, therefore, he has no scope for invoking the Double Taxation Avoidance Agreement and seeking any 'relief' from the country in which he has a tax liability on whatever income does not suffer any tax under the law. This aspect, it is submitted with respect, has escaped due consideration in t....