2005 (11) TMI 239 - AT - Income Tax

DTAA - Liable to pay tax versus paying tax - Held that - being liable to tax in the Contracting State does not necessarily imply that the person should actually be liable to tax in that Contracting State by the virtue of an existing legal provision but would also cover the cases where that other Contracting State has the right to tax such persons - irrespective of whether or not such a right is exercised by the Contracting State. -

Issues Involved:
1. Applicability of the Double Taxation Avoidance Agreement (DTAA) between India and UAE.
2. Requirement of actual tax payment in UAE to claim DTAA benefits.
3. Interpretation of "liable to tax" under the DTAA.

Detailed Analysis:

1. Applicability of the Double Taxation Avoidance Agreement (DTAA) between India and UAE:
The primary issue in this case is whether the assessee, a shipping line based in UAE, is eligible for benefits under the Indo-UAE DTAA. The assessee claimed that its income from shipping operations should be taxed only in UAE as per Article 8 of the DTAA. The Assessing Officer (AO) rejected this claim, arguing that the assessee was not paying taxes in UAE and thus could not avail of the DTAA benefits.

2. Requirement of Actual Tax Payment in UAE to Claim DTAA Benefits:
The AO relied on the Authority for Advance Ruling (AAR) in Cyril Eugene Pereria's case, which stated that DTAA provisions do not apply unless the income is liable to be taxed in both contracting states. The AO contended that since the assessee did not prove it was paying taxes in UAE, it could not claim DTAA benefits. However, the CIT(A) reversed this decision, directing the AO to allow DTAA benefits based on the tax residency certificate provided by the assessee.

3. Interpretation of "Liable to Tax" under the DTAA:
The Tribunal noted that the CIT(A) took a superficial view by not addressing whether the assessee was "liable to tax" in UAE. The Tribunal referred to the Supreme Court judgment in Azadi Bachao Andolan, which clarified that the avoidance of double taxation does not require actual tax payment in one of the contracting states. The Supreme Court emphasized that DTAA aims to prevent both current and potential double taxation, and the term "liable to tax" should be interpreted to include the right to tax, not necessarily the actual imposition of tax.

The Tribunal also highlighted that the judgments of the Supreme Court are binding, unlike the rulings of the AAR, which only have persuasive value. The Tribunal rejected the AO's reliance on the AAR ruling in Cyril Eugene Pereria's case, as it was not binding and had been disapproved by the Supreme Court.

Conclusion:
The Tribunal concluded that the assessee's fiscal domicile in UAE, evidenced by the tax residency certificate, was sufficient to claim benefits under the Indo-UAE DTAA. The Tribunal held that actual tax payment in UAE was not a prerequisite for availing DTAA benefits. The appeal by the revenue was dismissed, and the decision of the CIT(A) to allow DTAA benefits to the assessee was upheld.

Additional Observations:
The Tribunal suggested that the Government should take a clear stand on such fundamental issues to avoid prolonged litigation and uncertainty. The Tribunal emphasized the need for a resolution at the governmental level to determine eligibility for DTAA benefits conclusively.

Final Judgment:
The appeal by the revenue was dismissed, and the CIT(A)'s decision to grant DTAA benefits to the assessee was upheld.

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