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2011 (5) TMI 35 - AT - Income TaxDTAA with UAE - Capital gain on sale of shares - assessse 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. - Held that - a tax treaty not only prevents current but also potential double taxation - 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 - 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 - Decided in the favour of the assessee
Issues Involved:
1. Entitlement to the benefit of the Double Taxation Avoidance Agreement (DTAA) between India and UAE. 2. Taxability of short-term and long-term capital gains earned by a UAE resident from the transfer of securities in India. 3. Interpretation of the term "liable to tax" under Article 4 of the Indo-UAE DTAA. Issue-wise Detailed Analysis: 1. Entitlement to the Benefit of DTAA between India and UAE: The primary issue was whether the assessee, a resident of UAE, was entitled to the benefits of the DTAA between India and UAE. The revenue contended that the assessee was not entitled to these benefits because he was not paying taxes in UAE. However, the Tribunal referred to Article 13 of the Indo-UAE DTAA, which provides an exemption from capital gains tax in India for UAE residents. The Tribunal upheld the CIT(A)'s decision that the assessee was entitled to the benefits of Article 13(3) of the Indo-UAE DTAA, which states that gains from the alienation of any property other than immovable property and business property shall be taxable only in the contracting state of which the alienator is a resident. 2. Taxability of Short-term and Long-term Capital Gains Earned by a UAE Resident from the Transfer of Securities in India: The assessee earned short-term capital gains from the sale of shares in India and claimed that these gains should not be taxed in India based on Article 13(3) of the Indo-UAE DTAA. The Assessing Officer (AO) rejected this claim, arguing that the assessee must have paid tax on the income in UAE to claim the benefits of the DTAA. The Tribunal, however, referred to the decision in the case of Green Emirate Shipping & Travels, where it was held that the provisions of the DTAA apply even if the income is not taxed in the other contracting state. The Tribunal reiterated that the right to tax capital gains lies with the country of residence (UAE) and not with India. 3. Interpretation of the Term "Liable to Tax" under Article 4 of the Indo-UAE DTAA: The AO's rejection was based on the interpretation that the assessee must be "liable to tax" in UAE, which the AO interpreted as actually paying taxes in UAE. The Tribunal disagreed with this interpretation, referring to the Supreme Court's decision in Azadi Bachao Andolan, which clarified that "liable to tax" does not necessarily mean that the person should actually be paying taxes. It is sufficient if the other contracting state (UAE) has the right to tax the individual, regardless of whether this right is exercised. The Tribunal concluded that the term "liable to tax" should be understood in the context of fiscal domicile, meaning that the person should have a residence or other similar connection to the contracting state. Conclusion: The Tribunal upheld the CIT(A)'s decision, confirming that the assessee was entitled to the benefits of the Indo-UAE DTAA, and thus, the capital gains earned from the transfer of securities in India were not taxable in India. The appeal by the revenue was dismissed, reinforcing the principle that the right to tax under the DTAA depends on the fiscal domicile and not on the actual payment of taxes in the other contracting state.
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