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2010 (10) TMI 304 - AT - Income TaxDTAA - The assessee is a resident of United Arab Emirates and fiscal domicile is in the UAE - In terms of Article 13(3) of this Indo UAE tax treaty as it stood at the relevant point of time capital gains on alienation of shares are taxable only in the Contracting State of which alienator is resident -While on the amendments brought about the protocol amending the Indo UAE tax treaty it is also important to take note of the fact that old Article 13(3) in the original Indo UAE tax treaty stands substituted by new Article 13(3) 13(4) and 13(5) which considerably narrow down taxability of capital gains on alienation of shares in the domicile country. Except in a situation in which the shares are of a company holding directly or indirectly principally immoveable property in the other Contracting State capital gains on alienation of shares are to be taxed in the Contracting State of which the company is resident. This provision however comes into effect from 1st April 2008 and will not therefore have any application on the facts of the present case. - Decided in favor of assessee.
Issues:
Interpretation of Indo UAE tax treaty regarding taxability of short term capital gains on sale of shares for a resident of United Arab Emirates. Analysis: The appeal challenges the correctness of an order holding the assessee liable to pay tax on short term capital gains on the sale of shares for the assessment year 2000-01. The key issue revolves around the interpretation of the Indo UAE tax treaty, specifically Article 13(3), which states that capital gains on alienation of shares are taxable only in the Contracting State of which the alienator is a resident. The Assessing Officer denied tax treaty benefits to the assessee based on the decision in Cyril Eugene Pereira's case, stating that if an individual is not liable to pay tax under UAE law, they cannot claim relief from the tax payable in India under the agreement. The assessee, being a resident of UAE, claimed benefits under the tax treaty, which was rejected by the authorities below, leading to the current appeal. The Tribunal, in a previous decision involving ADIT vs Green Emirate Shipping and Travels, held that actual payment of tax in one contracting state is not a condition precedent to avail benefits of the DTAA in the other state. The Tribunal emphasized that the right to tax UAE residents remains with the UAE under the tax treaty, irrespective of whether that right is exercised. The concept of fiscal domicile and being liable to tax in a contracting state by virtue of domicile, residence, or other criteria was crucial in determining residency for tax purposes. The Tribunal's decision in Green Emirates Shipping & Travels was followed, highlighting that double non-taxation is a reality in international taxation, and the interpretation of tax treaties must align with the provisions therein. Furthermore, a Dutch High Court judgment supported the Tribunal's decision, emphasizing the legal obligation to pay tax on worldwide income rather than factual taxation. The significance of international judicial precedents in interpreting tax treaties was underscored, promoting consistency in judicial interpretations across different tax regimes. The Tribunal's decision was upheld, emphasizing the need for clarity in tax treaty benefits and urging governments to resolve such fundamental issues promptly. Subsequently, a protocol amending the Indo UAE tax treaty broadened the definition of a resident of UAE, indicating that taxability in one contracting state is not a prerequisite for availing treaty benefits in the other state. The protocol introduced clarity on eligibility for tax treaty benefits without conditional dual taxability of the same income. The amendments in the treaty narrowed down taxability of capital gains on alienation of shares, effective from a later date, but not applicable to the present case. Ultimately, the Tribunal upheld the assessee's grievance and directed the Assessing Officer to extend the benefits of the Indo UAE tax treaty to the assessee, granting relief accordingly. In conclusion, the appeal was allowed, emphasizing the adherence to the Indo UAE tax treaty provisions and the subsequent protocol amendments, ensuring clarity on tax treaty benefits for residents of contracting states.
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