TaxTMI 
TaxTMI 
2024 (11) TMI 1252
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....ing Income tax law in the UAE on Individuals and in the absence of any actual payment of Income tax and filing of any Income Tax returns in the UAE, the subject capital gains of Rs. 1,54,01,166 /- does not get the benefit of any article under the India- UAE DTAA. 2. In the facts and circumstances of the case and in law, the Ld. Assessing Officer ( AO) and consequently the Dispute Resolution Panel ( DRP) have grossly erred by concluding that since appellant is not " liable to any taxes" in the UAE and since there are no existing Income tax laws in the UAE applicable on Individuals, the question of giving benefit of the India UAE DTAA to the appellant does not arise. 3. In the facts and circumstances of the case and in law, the Dispute Resolution Panel (DRP) & consequently the Ld AO have grossly erred by concluding that as per Sec 90 ( 1 ) since the words used are " taxes paid" the benefit of India UAE DTAA cannot be given to the appellant. 4. In the facts and circumstances of the case and in law, the Dispute Resolution Panel (DRP) & consequently the Ld AO have grossly erred by disregarding the case laws as relied upon by the appellant on similar facts/ leg....
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....im of the assessee had been allowed in earlier years. (d) That tax liability also includes future tax liability as well. 4. Response of the assessee has been perused by the AO in the light of facts of the case and relevant provisions of the law. The AO held that, "the assessee contends that he may be allowed benefits of tax treaty and capital gains from sale of mutual funds may not be taxed in India. After considering response of the assessee, the issues for consideration and adjudication are: (a) Whether provisions of the double tax avoidance agreement between India and UAE can be invoked even when there is no double taxation? (b) Can tax treaty impose tax liability when there is no domestic tax law on the matter? (c) Can tax treaty provisions be invoked when the taxpayer is not covered by taxes to which the DTAA applies? Before proceeding ahead, it would be pertinent to refer to relevant provisions of the Indian Income- tax Act and provisions of the tax treaty. Section 90 of the Act provides as under: 90. (1) The Central Government may enter into an agreement with the Government of any country outside India or spec....
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.... on capital all taxes imposed on total income, on total capital, or on elements of income or of capital including taxes on gains from alienation of movable or immovable property as well as on capital appreciation. 2. The existing taxes to which the Agreement shall apply are; (a) In United Arab Emirates: (i) Income tax; (ii) Corporation tax; (iii) Wealth- tax (hereinafter referred to as "U.A.E. tax") 3. This Agreement shall also apply to any identical or substantially similar taxes on income or capital which are imposed at Federal or State level by either Contracting State in addition to, or in place of, the taxes referred to in paragraph 2 of this Article. The competent authorities of the Contracting State shall notify each other of any substantial changes which are made in their respective taxation laws. ARTICLE 3 GENERAL DEFINITIONS 1. In this Agreement, unless the context otherwise requires: (e) The term "person" includes an individual, a company, and any other entity which is treated as a taxable unit under the taxation laws in force in the respective Contracting State; ARTICLE 4 RESIDEN....
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.... may enter into an agreement with the Government of any country outside India or specified territory outside India,- (a) for the granting of relief in respect of- (i) income on which have been paid both income- tax under this Act and income- tax in that country or specified territory, as the case may be, or (ii) income- tax chargeable under this Act and under the corresponding law in force in that country or specified territory, as the case may be, to promote mutual economic relations, trade and investment, or (b) for the avoidance of double taxation of income under this Act and under the corresponding law in force in that country or specified territory, as the case may be, [ without creating opportunities for non- taxation or reduced taxation through tax evasion or avoidance ( including through treaty- shopping arrangements aimed at obtaining reliefs provided in the said agreement for the indirect benefit to residents of any other country or territory),] or (c) for exchange of information for the prevention of evasion or avoidance of income- tax chargeable under this Act or under the corresponding law in force in that country or specifi....
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....orities to consider the issues and position of the assessee in the subsequent years. Thus, plea of the assessee is not acceptable and the same is hereby rejected. A perusal of preamble of the tax treaty and relevant background at the time of signing of the tax treaty makes it clear that the objective of the tax treaty is to provide relief from burden of double taxation. The taxes which the UAE government was contemplating to impose on individuals as per recommendations of the IMF, as noted by the Hon'ble AAR in its order in case of Sh. Abdul Razak Memon; and which have not been imposed till date, keeps the individuals excluded from tax treaty. Thus, keeping in view the objective of tax treaty enshrined in the preamble of tax treaty and exclusion of individual tax residents from existing tax laws of UAE as per article 2 of tax treaty, remaining provisions of the tax treaty are not applicable in case of the assessee. Capital gains from sale of mutual funds are covered within scope of income us 5 of the Act. Accordingly, capital gains from sale of mutual funds are hereby added to income of the assessee". 5. Aggrieved, the assessee filed appeal before the Tribunal. 6....
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....TAA, as per the decision of the ITAT in the case of ACIT v. Green Emirates Shipping & Travels, 100 ITD 203 wherein, it has been, inter alia, held that the expression ' liable to tax' in the Contracting State does not necessarily imply that the person should actually be liable to tax but would also cover the cases where other Contracting State has the right to tax such persons- irrespective of whether or not such a right is exercised by the Contracting State. The sole reason adopted by the CIT (A) for giving the impugned relief is that as long as UAE has right to tax the assessee in respect which, whether such right has been exercised or not, the assessee is entitled to benefits of Indo UAE DTAA. The Assessing Officer is aggrieved and is in appeal before us. 3. We have heard the rival contentions and perused the material on record. We find that, as rightly noted by the CIT (A), the issue is covered in favour of the assessee by the decision of the Tribunal in the case of ACIT v. Green Emirates Shipping & Travels, (supra), wherein, on identical facts, the Tribunal has held that the assessee is entitled to the benefits of Indo UAE DTAA. We have also noted that in the c....
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....le of a person is that person is actually liable to pay tax in that country, he is to be treated as resident of that Contracting State. 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 ' That would mean that merely a person living in a Contracting State should not be sufficient, that person should also have fiscal domicile in that country. These texts of fiscal domicile which are given by way of examples following the expression liable to tax by reason of i. e., domicile, residence, place of management, place of incorporation etc. are no more than examples of locality related attachments which attract, residence type taxation, that ' person ' is to be treated as resident and this status of being a ' resident ' of the Contracting State is independent of the activity of tax on that person. Viewed in this perspective, we are of the considered opinion that being ' liable to tax in the Contracting State by the virtue of an existing legal provision but would also....
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.... Dutch company, XBV emigrated from the Netherlands to Greece in 1995 and advised the Dutch tax authorities that they now exercised management and contract from their new location, as a consequence of which the company became a Greek resident. This was not in dispute in May, 2000, the taxpayers informed the authorities that, since their relocation, they had endeavoured to register the company with Greek tax authorities, but failed to succeed because of the Greek tax authorities, but failed succeed because of the Greek bureaucracy the company had not yet been assessed to the corporate income- tax. These facts were not contested by the Dutch authorities. But in 2004 they assessed the taxpayers for the Dutch corporate income- tax retrospective for the year 1995. The tax Inspector argued for applying art. 4(1) of the Netherlands- Greece tax liability is not sufficient rather a subjective indebtedness" (" een feitelike subjective onderworpnheld") is required. The however, refuted this argument it pointed out that the tax treaty did not postulate factual taxation: instead a legal obligation to pay tax on worldwide income was called for, which under Greek was established. 7. In le....
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....y to last for long. 9. We have noted that a successful initiative has indeed been made to resolve this issue level of the Contracting States. On 6th March, 2007 a protocol, amending the Indo- UAE tax has been entered into. This protocol has since been notified by the Government of India Notification No. 282 of 2007, dt. 28 th Nov., 2007 [(2007) 213 CTR ( St) 64]. One of amendments made by this protocol is the change in definition of ' resident' in art. 4 ( 1 )( b) now provides that for the purpose of the Indo- UAE tax treaty, resident of a Contracting State, the case of the UAE, means "an individual who is present in the UAE for a period or periods aggregating totalling in aggregate at least 183 days in the calendar year concerned, and, company, which is incorporated in UAE and which is managed and controlled wholly in UAE". Amendment in the definition of resident of UAE, thus accepts the broad proposition that taxability in one of the Contracting States is not a sine qua non to avail treaty benefits in the other Contracting Assessment year: 2003- 04 State. The fundamental assumption by the AO that " an individual who is not liable to pay tax under the UAE law cann....
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....he Assessee is an individual. He is a resident of UAE. During the previous year he earned short term capital gain of RS. 5,04,89,379/-. He claimed that the short term capital gain cannot be brought to tax in India in view of Article 13(3) of the Indo- UAE DTAA. Since the Assessee was a Resident of UAE, it is only UAE which has a right to tax capital gain and not India. Article 13 of the agreement for avoidance of double taxation between India and the UAE (hereinafter referred to as ' the India- UAE Treaty') provides an exemption from capital gains tax in India to residents of UAE. It reads as under:- Article 13 : Capital gains : 1) Gains derived by a resident of a contracting state 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) Gain 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 f....
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.... in the country of domicile i.e., UAE, but this contention was rejected by the Assessing Officer on the ground that the assessee 'is not paying taxes in UAE'. The Assessing Officer relied upon the decision of the AAR in the case of Cyril Eugene Pereria, In re [ 1999] 239 ITR 6501 in support of the proposition that the provisions of the DTAA do not apply to any case which the 'same income is not liable to be taxed twice by the existing laws of both the Contracting States'. 5. The Tribunal firstly disagreed with the view expressed by the AAR in the case of Cyril Eugene Pereria ( Supra) on the ground that the said decision was held to be not laying down the correct law by the Hon'ble Supreme Court in the case of Union of India v. Azadi Bachao Andolan [ 2003] 263 ITR 7061 at page 742 The tribunal held that:- 6. Undoubtedly, in Cyril Eugene Pereria' s case ( supra), Hon'ble Authority for Advance Ruling, deviating from the stand taken by it in the earlier rulings including ruling in Mohsinally Alimohammed Rafik, In re [ 1995] 213 ITR 3171, concluded that " an individual who is not liable to pay tax under the UAE law cannot claim any relief from the only tax on income wh....
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....xable in the other Contracting State, or upon whether it is actually taxed there." It is, therefore, not possible for us to accept the contentions so strenuously urged by the respondents that the avoidance of double taxation can arise only when tax is actually paid in one of the Contracting States." 6. The Tribunal also held that the decision of the Authority for Advance Ruling in the case of Abdul Razak A. Menon, In re [ 2005] 276 ITR 306 was also not good law. 7. The Tribunal dealt with the argument of the Learned Departmental Representative that as non- corporate entities are not taxable entities under the UAE Tax Treaty such non- corporate entities, even though based in UAE, cannot be treated as ' resident' for the purposes of the India- UAE DTAA as follows: "Our attention is also invited to the learned Assessing Officer' s observations to the effect that " the provisions of the DTAA do not apply to any case which the same income is not liable to be taxed twice by the existing laws of both the Contracting States" and that "since the assessee has failed to prove that it is paying taxes in UAE, the DIT relief sought by the assessee is rejected"....
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....me Court in the case of Azadi Bachao Andolan (supra). Referring to the Klaus Vogel' s Commentary on Double Taxation Conventions, Their Lordships, inter alia, observed as follows: "In other words, Contracting States mutually bind themselves not to levy taxes or to tax only to a limited extent in cases when the treaty reserves taxation for the other Contracting State either entirely or in part. Contracting States are said to waive 'tax claims' or more illustratively to divide 'tax sources', 'taxable objects', amongst themselves. Double taxation avoidance treaties were in vogue even from the time of the League of Nations. The experts appointed in the early 1920s by the League of Nations describe this method of classification of items and their assignments to the Contracting States. While the English lawyers called it 'classification and assignment rule', the German jurists called it 'the distributive rule' (Vertei- lungsnorm). To the extent that an exemption is agreed to, its effect is in principle independent of both whether the Contracting State imposes a tax in the situation to which the exemption applies, and irrespective of whether the State actually levies the tax. Comm....
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....State should not be sufficient, that person should also have fiscal domicile in that country. These tests of fiscal domicile which are given by way of examples following the expression 'liable to tax by reason of' i.e., domicile, residence, place of management, place of incorporation etc. are no more than examples of locality related attachments that attract residence type taxation. Therefore, as long as a person has such locality related attachments which attract residence type taxation, that 'person' is to be treated as resident and this status of being a 'resident' of the Contracting State is independent of the actual levy of tax on that person. Viewed in this perspective, we are of the considered opinion that being ' liable to tax' in the Contracting State does not necessarily imply that the person should actually be liable to tax in that Contracting State by the virtue of an existing legal provision but would also cover the cases where that other Contracting State has the right to tax such persons - irrespective of whether or not such a right is exercised by the Contracting State. In our humble understanding, this is the legal position emerging out of Hon'ble Supreme ....
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....ent, the gains from the alienation of Units of an Equity oriented Mutual Fund is thus taxable under Article 13( 4) of the India- UAE Treaty in India i. e. the contracting State in which the company, whose share / units have been transferred, is a resident. 6. The learned Commissioner of Income Tax (Appeals)- II Kochi erred in relying on the decision of the Mumbai Bench of ITAT without considering the fact that the decision of the Mumbai Bench of ITAT is not binding on the Income- tax authorities of Kerala Charge. 7. For these and other grounds that may be adduced at the time of hearing, it is prayed that the order of the learned Commissioner of Income Tax (Appeals)- II Kochi may be cancelled and that of the AO may be restored." 3. Brief facts of the case are as follows: The assessee, an individual, is non- resident for the relevant assessment year, viz., A. Y. 2012- 2013 The assessee Sri.K.E. Faizal. had sold units of equity oriented mutual funds during the relevant assessment year and derived short term capital gains ( STCG) on the same amounting to Rs. 1,34,99,407. For the assessment year 2012- 2013 the return of income was filed on 31....
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....ear the assessee sold equity linked mutual funds and derived STCG. As per section 5(2) r.w. s. 9(1)(i) of the I.T. Act, transfer of a capital asset situated in India shall be deemed to accrue or arise in India. The income from transfer of units of an equity-oriented mutual funds situated in India is deemed to accrue or arrive in India and therefore is taxable in India even in the case of a non- resident. However, taxation in the case of non- resident is subject to the provisions of the relevant Treaty between India and the State of residency of the assessee. In the instant case, the provisions of India- UAE Treaty would be applicable. Section 90 (2) of the I. T. Act states that the provisions of the Treaty shall apply to the extent they are more beneficial to the assessee as compared to the corresponding provisions of the Act. The Assessing Officer also does not state that the assessee is not entitled to the beneficial provisions of the DTAA entered between India and UAE. The Assessing Officer negated the assessee' s contention by holding Article 13(4) of the Treaty would apply and not Article 13 (5) of the Treaty. To understand the issue in controversy, it is necessary to repr....
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.... As per Article 3(2) of the tax treaty, any term not defined under the tax treaty shall, unless the context otherwise requires, have the meaning which it has under the laws of the country whose tax is being applied. Therefore, the term " share" would carry the meaning ascribed to it under Act, and if no meaning is provided under the Act, then the meaning that the term carries under other allied Indian laws would need to be applied. The Act does not define the term "share". However, section 2(84) of the Indian Companies Act, 2013 defines the term " share" to mean " a share in the share capital of a company and includes stock". Further, the term "company" has been defined to mean a " company incorporated under the Companies Act, 2013 or under any previous company law". Under the Securities and Exchange Board of India (Mutual Funds) Regulations, 1995 mutual funds, in India can be established only in the form of " trusts", and not "companies". Therefore, the units issued by Indian mutual funds will not qualify as " shares" for the purpose of Companies Act, 2013. Further, under the Securities Contract (Regulation) Act, 1956, a security is defined to include inter alia - (a) sha....
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....s specifically enacted, which in the instant case was confined only to deeming the UTI as a company, and the income from the units as a dividend. If as a matter of fact, the Legislature had contemplated making the unit as also a deemed share, then it would have stated so. In the absence of any such specific deeming in regards to units as shares, it would be erroneous to extend the provisions of Section 32 (3) of units of UTI for the purpose of holding that the unit is a share." 6.6 In view of the aforesaid reasoning and the judicial pronouncement cited supra, we are of the view that the CIT(A) is justified in deleting the addition of Rs. 1,34,99,407 as short term capital gain. It is ordered accordingly. 7. In the result, the appeal filed by the Revenue is dismissed." 11. In the case of ADIT Vs. Green Emirate Shipping and Travels (286 ITR 60) (Mum.) vide order dated 30 11.2005 the Co-ordinate Bench of ITAT held as under: "1 The only grievance raised by the Revenue in this appeal is as follows : On the facts and in the circumstances of the case and in law, the learned CIT( A) erred in directing the AO to allow the benefit of DTAA merely on produ....
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....the CIT(A), Revenue is in appeal before us. 3. We have heard the learned Departmental Representative but none appeared for the assessee. We have also perused the material on record and duly considered the applicable legal position and factual matrix of the case. 4. The impugned order passed by the CIT(A) takes a rather superficial view of the matter and has conveniently ducked the core issue really required to be adjudicated upon. It has simply brushed aside the real objection raised by the AO which was that in order to avail benefits of the India- UAE DTAA, a person need not only be resident of one of the Contracting State but should also be ' liable to tax' therein. Then, there is next question about the connotations of the expression ' liable to tax'. Does it mean liability at present or does it also cover a potential future liability? A residency certificate, by itself, does not decide the matter one way or the other because what, according to the AO, is important is whether the assessee was liable to tax in UAE or not. Therefore, whether the assessee was resident in UAE or not would not have really mattered from the point of view of the AO. Fo....
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....id ruling. In the case of Asstt, Collector of Central Excise v. Dunlop India Ltd. Hon'ble Supreme Court has, inter alia, observed as follows : We desire to add and as was said in the Cassel & Co. Ltd. v. Broome ( 1972) AC 1027 ( HL), we hope it will never be necessary to say so again that ' in the hierarchical system of Courts' which exists in our country, ' it is necessary for each lower tier'... ' to accept loyally the decisions of the higher tiers', ' it is inevitable in a hierarchical system of Courts that there are decisions of the supreme Tribunal which do not attract unanimous approval of all the members of the judiciary.... But judicial system works only if someone is allowed to have the last word and that last word, once spoken is loyally accepted'. (See observations of Lord Hallsham and Lord Diplock in Broome v. Cassett). The wisdom of the Court below has to yield to the higher wisdom of the Court above. We respectfully follow the higher wisdom of the Courts above and decline to approve AO' s reliance upon the ruling given by the Authority for Advance Rulings in Cyril Eugene Pereira' s case (supra). 6.....
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....r the State actually levies the tax. Commenting particularly on the German Double Taxation Convention with the United States, Vogel comments: "Thus, it is said that the treaty prevents not only ' current' but also merely ' potential' double taxation". Further, according to Vogel, "only in exceptional cases and only when expressly agreed to by the parties, is exemption in one of the Contracting States dependent upon whether the income or capital is taxable in the other Contracting State, or upon whether it is actually taxed there. It is, therefore, not possible for us to accept the contentions so strenuously urged by the respondents that the avoidance of double taxation can arise only when tax is actually paid in one of the Contracting States. Clearly, therefore, there is no meeting ground between the ruling given by the Authority for Advance Rulings in Cyril Eugene Pereira' s case (supra) and the judgment delivered by the Hon'ble Supreme Court in Azadi Bachao Andolan' s case (supra). The choice, however, poses no difficulty in the light of the elementary legal position that the judgments of Hon'ble Supreme Court have binding force o....
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....existing laws of both the Contracting States" and that "since the assessee has failed to prove that it is paying taxes in UAE, the DIT relief sought by the assessee is rejected"; but it is the very proposition underlying these observations which was rejected by the Hon'ble Supreme Court holding that "it is... not possible for us to accept the contentions so strenuously urged by the respondents that the avoidance of double taxation can arise only when tax is actually paid in one of the Contracting States". As we have noted earlier also, the Revenue is on record to have opposed the very argument that the Revenue has taken in the present case, as evident from the Hon'ble Supreme Court' s following observation : The appellants ( i.e., Union of India) contended that, acceptance of the respondent' s submission that double taxation avoidance is not permissible unless the tax is paid in both the countries is contrary to the intendment of Section 90 It is urged that Clause ( b) of Sub- section ( 1) of Section 90 applies to a situation where income- tax has been paid in both the countries, but Clause ( b) deals with the situation of avoidance of double taxation of in....
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....hether the State actually levies the tax. Commenting particularly on the German Double Taxation Convention with the United States, Vogel comments: " Thus, it is said that the treaty prevents not only ' current' but also merely ' potential' double taxation. It is thus clear that a tax treaty not only prevents current' but' also potential' double taxation. Therefore, irrespective of whether or not the UAE actually levies taxes on non- corporate entities, once the right to tax UAE residents in specified circumstances vests only with the Government of UAE, that right, whether exercised or not, continues to remain exclusive right of the Government of UAE. As noted above, the exemption agreed to under the ' assignment' or ' distributive' rule, is independent of ' whether the Contracting State imposes a tax in the situation to which exemption implies'. In the case of John N. Gladden v. Her Majesty the Queen 85 Tax Cases 5188, which was quoted with approval by the Hon' ble Supreme Court in Azadi Bachao Andolan' s case (supra), Federal Court of Canada has observed that the non- resident can benefit from the exemption (unde....