1994 (12) TMI 329 - AAR - Income Tax

Whether the applicant an individual residing in the U. A. E. is entitled to claim the benefit of the provisions of the tax treaty entered into between India and U. A. E. ? Whether in terms of article 13(3) and article 4 of the tax treaty between India and U. A. E. the applicant an individual Indian national residing in U. A. E. is liable to capital gains tax on the transfer effected in India of movable assets in the nature of shares debentures and other securities ? Whether the applicant is liable to capital gains tax on the transfer effected in India of movable assets in the nature of shares debentures and other securities read with section 112 of the Income-tax Act 1961 and the provisions of the tax treaty between India and U. A. E. ? Whether in terms of the tax treaty between India and U. A. E. the applicant is liable to capital gains tax on the transfer effected in India of movable assets in the nature of shares debentures and other securities are (a) acquired prior to the coming into effect of the tax treaty between India and U. A. E. ; (b) acquired prior to his becoming a non-resident ; (c) after his becoming a non-resident but from out of nonrepatriable funds in India. Whether in terms of article 10 of the tax treaty between India and the U. A. E. the income received/receivable by applicant in India by way of dividend is liable to tax in India at 15 per cent. ? Whether in terms of article 11 of the tax treaty between India and the U. A. E. the income received/receivable by the applicant in India by way of interest on debentures/bonds/balance in the capital account in partnership-firm is liable to tax in India at 12.5 per cent. ?

Summary

Issues Involved:
1. Applicability of the tax treaty between India and U.A.E. to the applicant.
2. Tax liability on capital gains from the transfer of movable assets in India.
3. Tax liability on dividend income received in India.
4. Tax liability on interest income received in India.

Issue-wise Detailed Analysis:

1. Applicability of the Tax Treaty:
The applicant, an Indian national residing in the U.A.E., sought to determine if he could claim the benefits of the tax treaty between India and the U.A.E. The Authority emphasized that for the DTAA to apply, the applicant must be considered a resident of one of the Contracting States. Article 4 of the DTAA provides criteria for determining residency, including domicile, residence, place of management, or incorporation. The applicant contended he was a resident of the U.A.E. and not of India. The Authority concluded that the applicant, having his personal and economic relations closer to Dubai, and maintaining a habitual abode there, qualifies as a resident of the U.A.E. under clauses (a) and (b) of paragraph 2 of Article 4 of the DTAA.

2. Tax Liability on Capital Gains:
The applicant raised questions regarding his liability to capital gains tax on the transfer of movable assets such as shares, debentures, and other securities in India. The Authority referred to Article 13(3) of the DTAA, which states that gains from the alienation of property other than immovable property shall be taxable only in the Contracting State of which the alienor is a resident. Since the applicant is considered a resident of the U.A.E., any capital gains arising from the transfer of such assets on or after April 1, 1994, will not be taxable in India. The distinction between assets acquired before or after the treaty's effect or the applicant's non-resident status is irrelevant for applying the DTAA.

3. Tax Liability on Dividend Income:
The applicant sought clarity on the tax rate applicable to dividend income received in India. Article 10 of the DTAA specifies that dividends paid by a company resident in one Contracting State to a resident of the other Contracting State may be taxed in that other State. However, such dividends may also be taxed in the Contracting State of the company paying the dividends, but the tax shall not exceed 15% of the gross amount of the dividends if the recipient is the beneficial owner. The Authority confirmed that the applicant's dividend income received in India is liable to tax at 15%.

4. Tax Liability on Interest Income:
The applicant also questioned the tax rate applicable to interest income received in India. Article 11 of the DTAA states that interest arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. However, such interest may also be taxed in the Contracting State in which it arises, but the tax shall not exceed 12.5% of the gross amount if the recipient is the beneficial owner. The Authority ruled that the applicant's interest income received in India is liable to tax at 12.5%.

Conclusion:
The Authority ruled affirmatively on all questions posed by the applicant, confirming his entitlement to the benefits of the DTAA between India and the U.A.E. as a resident of the U.A.E. This includes tax rates of 15% on dividend income and 12.5% on interest income, and exemption from capital gains tax on the transfer of movable assets in India.