2011 (9) TMI 654 - AT - Income Tax

DTAA- Capital Gains - Individual Residents of UAE - Government T-Bills - Held that - - the decision in the case of Green Emirate Shipping and Travels (2005 -TMI - 80954 - ITAT MUMBAI) is clearly applicable to the facts of the case. As held in the aforesaid case the 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 the contracting sate but would also cover the cases where that other Contracting State has the right to tax such person whether or not such a right is exercised. The term resident has been defined in the notification as individual who is present in that UAE for a period or periods totalling in the aggregate at lease 183 days in the calendar year concerned . In this case there is no dispute with reference to the fact that these persons are residents of UAE. Therefore, we are of the opinion that there is no liability to tax the capital gains arising to the individual constituents/investors on the transactions in Government Treasury Bills undertaken through the Bank. Since there is no liability to tax in India, obviously the Bank is not covered by the provisions of TDS.

Summary

Issues Involved:
1. Levy of interest and tax liability under sections 201(1) and 201(1A) of the I.T. Act.
2. Applicability of DTAA between India and UAE on capital gains arising to non-resident Indians residing in UAE.
3. Interpretation of "resident" under Article 4 of the DTAA.
4. Jurisdiction to tax capital gains under Article 13 of the DTAA.
5. Impact of the Protocol amending the DTAA.

Issue-wise Detailed Analysis:

1. Levy of Interest and Tax Liability under Sections 201(1) and 201(1A) of the I.T. Act:
The Revenue appealed against the orders of the CIT(A), which deleted the tax and interest levied under sections 201(1) and 201(1A) of the I.T. Act. The A.O. had determined the total tax liability under section 201(1) at Rs. 94,02,048/- and under section 201(1A) at Rs. 9,25,437/-. Another demand under section 201(1) was raised at Rs. 2,40,71,073/- and under section 201(1A) at Rs. 23,69,899/-. The CIT(A) deleted these demands, leading to the Revenue's appeal.

2. Applicability of DTAA between India and UAE on Capital Gains:
The Bank argued that its clients, non-resident Indians residing in UAE, were entitled to the benefits of Article 13 of the DTAA, which exempts capital gains from being taxed in India. The Bank contended that the Treaty should be applied as it is more beneficial to the investors. The CIT(A) supported this view, stating that excluding individuals from the Treaty would defeat its purpose.

3. Interpretation of "Resident" under Article 4 of the DTAA:
The A.O. argued that since individuals are not taxable in UAE, they cannot be considered residents under Article 4(1) of the Treaty, thus making the Treaty inapplicable to them. However, the CIT(A) and the Tribunal disagreed, citing the Supreme Court's decision in Azadi Bachao Andolan and the Tribunal's decision in Green Emirates Shipping & Travels, which held that the term "liable to tax" does not necessarily imply actual tax liability but includes the right to tax.

4. Jurisdiction to Tax Capital Gains under Article 13 of the DTAA:
Article 13(3) of the DTAA states that gains from the alienation of any property other than those mentioned in paragraphs 1 and 2 shall be taxable only in the contracting state of which the alienator is a resident. Since the constituents were residents of UAE, the right to tax the capital gains rested with UAE. The Tribunal upheld this interpretation, rejecting the A.O.'s view that the capital gains were taxable in India.

5. Impact of the Protocol Amending the DTAA:
The Protocol amending the DTAA, effective from 15th June 2006, introduced changes to Article 13, allowing gains from the alienation of shares of a company with immovable property in a contracting state to be taxed in that state. However, the Tribunal noted that the transactions in question involved Government T-Bills, not shares, and thus remained covered by Article 13(5), which assigns the right to tax to the state of residence of the alienator. Consequently, the capital gains were not taxable in India.

Conclusion:
The Tribunal upheld the CIT(A)'s decision, confirming that the capital gains arising from the sale of Government T-Bills by residents of UAE were not taxable in India under the DTAA. As a result, the Bank was not liable to deduct tax at source, and the demands raised under sections 201(1) and 201(1A) were canceled. The Revenue's appeals were dismissed.