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2010 (10) TMI 610 - AT - Income TaxDTAA - A SCN was accordingly issued to the assessee u/s 201, proposing to treat the assessee as a defaulter and also proposing to levy interest under sub-section (1A) of the section - The tax worked out to ₹ 9,77,01,621/- and the interest calculated at the prescribed rate and the period came to ₹ 1,21,56,720 - On appeal, the assessee took up a preliminary contention to the effect that it was not a person responsible for paying any income to the non-resident and, therefore, it was under no obligation to deduct tax - The general provision in the present case is the one relied on by the CIT(A), namely, clause (iii) of section 204 In the case of Union of India vs. Azadi Bachao Andolan (2003) 263 ITR 706 (SC) - In the result, while the cross objection of the assessee is allowed, the appeal of the Department is dismissed
Issues Involved:
1. Whether the assessee-bank was liable to deduct tax at source on remittances made to NRIs in UAE. 2. Applicability of the Double Taxation Avoidance Agreement (DTAA) between India and UAE. 3. Whether the assessee-bank can be considered as a "person responsible for paying" under section 204 of the Income Tax Act, 1961. 4. Whether the capital gains arising to NRIs in UAE are taxable in India. 5. Whether the Assessing Officer correctly treated the assessee-bank as a defaulter and levied interest under section 201(1A) of the Act. Detailed Analysis: 1. Liability to Deduct Tax at Source: The primary issue was whether the assessee-bank was liable to deduct tax at source on remittances made to NRIs in UAE. The assessee argued that the remittances represented short-term capital gains exempt from tax under Article 13(3) of the DTAA between India and UAE. The Assessing Officer disagreed, asserting that the capital gains did not qualify for exemption and treated the assessee as a defaulter under section 201 of the Income Tax Act, 1961. 2. Applicability of DTAA: The assessee contended that the NRIs in UAE were not liable to tax in India by virtue of Article 13 of the DTAA. The CIT(A) supported this view, citing the Supreme Court's judgment in Union of India vs. Azadi Bachao Andolan, which held that the actual payment of tax in the home country is irrelevant in determining eligibility for treaty benefits. The CIT(A) also referenced the Mumbai Bench of the ITAT's decision in ADIT vs. Green Emirate Shipping and Travels, which stated that the right to tax remains with the UAE government, irrespective of whether it is exercised. 3. "Person Responsible for Paying" under Section 204: The assessee argued that it was not a "person responsible for paying" under section 204(iia) as the capital gains were short-term. The CIT(A) invoked clause (iii) of section 204, considering the assessee as the person responsible for paying. However, the Tribunal found that clause (iia) specifically covers authorized dealers and applies only to long-term capital gains. Since the gains were short-term, the assessee was not liable to deduct tax. 4. Taxability of Capital Gains in India: The Tribunal upheld the CIT(A)'s decision that the capital gains arising to NRIs in UAE were not taxable in India. This conclusion was based on multiple orders from the Mumbai Benches of the Tribunal, which consistently held that NRIs in UAE are entitled to treaty benefits, even if UAE does not levy income tax. The Tribunal cited cases like Assistant Director of Income Tax (International Taxation) vs. Green Emirate Shipping and Travels and Hindustan Petroleum Corporation Ltd. vs. Assistant Director of Income Tax (International Taxation). 5. Treatment as Defaulter and Levy of Interest: The Assessing Officer's order treating the assessee as a defaulter and charging interest under section 201(1A) was set aside. The Tribunal concluded that the assessee-bank, acting as an authorized dealer, was not liable to deduct tax on short-term capital gains. Consequently, the assessee could not be treated as a defaulter, and no interest could be levied. Conclusion: The cross objection of the assessee was allowed, and the appeal of the Department was dismissed. The Tribunal's decision was based on the interpretation of the DTAA, the specific provisions of the Income Tax Act, and consistent judicial precedents affirming that NRIs in UAE are entitled to treaty benefits, and the assessee-bank was not liable to deduct tax on short-term capital gains.
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