2005 (5) TMI 12 - AAR - Income Tax

Non-resident individuals - citizens of India - receiving dividends and interest income from investments made in India - also receiving interest which accrues to his NRI account and other accounts from the banks in India - regularly selling and intends to sell his shares, debentures, etc., in the Indian stock market which would yield short/long-term capital gain held that applicant, an individual, residing in UAE is not entitled to claim the benefit of the provisions of the treaty (DTAA)

Issues Involved:

1. Entitlement to the benefit of the India-UAE Double Taxation Avoidance Agreement (DTAA).
2. Liability to capital gains tax in India under Articles 13(3) and 4 of the India-UAE DTAA.
3. Liability to capital gains tax on transfers of movable assets under Section 112 of the Income-tax Act, 1961.
4. Tax liability on assets acquired before and after becoming a non-resident.
5. Taxation of dividend income under Article 10 of the India-UAE DTAA.
6. Taxation of interest income under Article 11 of the India-UAE DTAA.

Comprehensive, Issue-Wise Detailed Analysis:

1. Entitlement to the Benefit of the India-UAE Double Taxation Avoidance Agreement (DTAA):

The core issue is whether the applicant, an Indian national residing in the UAE, can claim the benefits of the DTAA between India and the UAE. The applicant contends that the treaty allocates jurisdiction for tax purposes and limits tax rates, thus entitling him to benefits under Articles 10, 11, and 13 of the treaty. The Commissioner argues that since individuals are not subject to income tax or capital gains tax in the UAE, the applicant is not entitled to the treaty's benefits. The Authority notes that the interpretation of treaties should make their provisions effective and not redundant. The principle of contemporanea expositio and the context of the treaty negotiations, which assumed future UAE tax laws covering individuals, are also considered.

2. Liability to Capital Gains Tax in India under Articles 13(3) and 4 of the India-UAE DTAA:

The applicant seeks clarity on whether he is liable to capital gains tax in India on the transfer of movable assets such as shares and debentures under Articles 13(3) and 4 of the DTAA. The Authority examines the definition of "resident" under Article 4, which requires that a person be "liable to tax" in their state of residence. The Authority concludes that the applicant, not being a taxable unit under UAE law, does not meet the criteria of being "liable to tax" and thus cannot claim the benefits of the treaty.

3. Liability to Capital Gains Tax on Transfers of Movable Assets under Section 112 of the Income-tax Act, 1961:

The applicant questions his liability to capital gains tax on the transfer of movable assets in India, considering Section 112 of the Income-tax Act and the provisions of the DTAA. The Authority reiterates that without being a resident under the treaty, the applicant cannot invoke the treaty's provisions to seek relief from capital gains tax in India.

4. Tax Liability on Assets Acquired Before and After Becoming a Non-Resident:

The applicant seeks clarification on the tax implications for assets acquired before the treaty's effect, before becoming a non-resident, and after becoming a non-resident from non-repatriable funds in India. The Authority's ruling on the applicant's non-resident status under the treaty implies that the timing of asset acquisition does not alter his ineligibility for treaty benefits.

5. Taxation of Dividend Income under Article 10 of the India-UAE DTAA:

The applicant queries whether his dividend income in India is liable to tax at 15% under Article 10 of the DTAA, despite the Finance Act, 1997 exempting dividend income from tax. The Authority notes that the treaty's provisions regarding dividend taxation would apply only if the applicant qualifies as a resident under the treaty, which he does not.

6. Taxation of Interest Income under Article 11 of the India-UAE DTAA:

The applicant inquires about the tax rate on interest income received in India under Article 11 of the DTAA. The Authority concludes that the applicant cannot claim the treaty's benefits, including the preferential tax rate on interest income, due to his non-resident status under the treaty.

Conclusion:

The Authority's ruling hinges on the interpretation of the term "resident" under Article 4 of the India-UAE DTAA. Since the applicant, as an individual, is not a taxable unit under UAE law, he does not qualify as a resident for treaty purposes and thus cannot claim the benefits of the DTAA. Consequently, the applicant is liable to tax in India on dividends, interest, and capital gains as per Indian tax laws without any relief under the treaty.

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