2004 (10) TMI 89 - AAR - Income Tax

Applicant, a resident of UAE got the shares as per the scheme of demerger and amalgamation in the companies - applicant now proposes to dispose of the said shares. From the perusal of annexure III it appears that the applicant wanted to sell the shares, at the consideration indicated therein which resulted in capital gains- long-term capital gain-to the applicant held that gains from alienation of shares in Indian companies held by the applicant, will not be taxable in India.

Summary

Issues:
1. Taxability of gains from alienation of shares in an Indian company held by a resident of the U.A.E under the Double Taxation Avoidance Agreement.
2. Availment of benefits under section 48 and section 112 if relief is not available.
3. Availment of lower tax rate of 10% under section 112 after calculating long-term capital gain.

Analysis:

Issue 1:
The applicant, a non-resident firm, sought an advance ruling under section 245Q(1) of the Income Tax Act, 1961 regarding the taxability of gains from the alienation of shares in an Indian company held by a resident of the U.A.E. The Double Taxation Avoidance Agreement between India and the U.A.E., signed in 1993, stipulates that such gains will be taxable only in the U.A.E. as per Article 13(3 of the Agreement. The applicant, being a resident of the U.A.E., provided the necessary Tax residency certificate. The Authority considered the provisions of the Treaty and the Act, emphasizing that the terms of the Treaty prevail over the Act in case of a conflict. It was ruled that the capital gains from the alienation of shares in Indian companies held by the applicant, a resident of the U.A.E., will not be taxable in India.

Issue 2:
The Authority noted that questions 2 and 3, regarding the availment of benefits under section 48 and section 112, are consequential to the ruling on the main issue of taxability under the Double Taxation Avoidance Agreement. Since it was ruled that the gains will not be taxable in India, questions 2 and 3 became irrelevant and did not require further consideration.

Conclusion:
The ruling by the Authority established that the gains from the alienation of shares in Indian companies held by a resident of the U.A.E. will not be taxable in India as per the Double Taxation Avoidance Agreement. Consequently, the questions regarding the availment of benefits under sections 48 and 112 were deemed unnecessary due to the primary ruling. The decision provided clarity on the tax treatment of capital gains in cross-border transactions, aligning with the provisions of the Treaty and ensuring compliance with international tax agreements.