1996 (8) TMI 544 - AAR - Income Tax

Summary

Issues Involved:
1. Maintainability of the application under Section 245Q of the IT Act, 1961.
2. Applicability of the Agreement for Avoidance of Double Taxation (DTAA) between India and UAE.
3. Tax treatment of dividend income under Article 10 of the DTAA.
4. Tax treatment of interest income under Article 11 of the DTAA.
5. Tax treatment of capital gains under Article 13 of the DTAA.

Detailed Analysis:

1. Maintainability of the Application:
The preliminary issue was whether the applicant, a resident of Abu Dhabi, could maintain the application under Section 245Q of the IT Act, 1961, which is permissible only for non-residents. The Authority examined the applicant's stay in India across financial years and concluded that while the applicant was a resident but not ordinarily resident (R&OR) in the financial year 1994-95, he was a non-resident in the financial year 1995-96. Since the revised application was filed on 5th July 1996, the Authority deemed it maintainable as the applicant was a non-resident in the financial year preceding the application date.

2. Applicability of the DTAA between India and UAE:
The applicant sought relief under the DTAA between India and UAE. The Authority considered whether the applicant could be regarded as a resident of UAE under Article 4 of the DTAA, which defines a resident as someone liable to tax in that State by reason of domicile, residence, or other similar criteria. Despite the absence of personal income tax in UAE, the Authority, referencing the precedent set in Mohsinally Alimohmed Rafik, In re, determined that residents of UAE should still be treated as residents under the DTAA. The Authority concluded that the applicant was a resident of both India and UAE but, due to his habitual abode in Abu Dhabi, should be treated as a resident of UAE for DTAA purposes.

3. Tax Treatment of Dividend Income (Article 10):
Article 10 of the DTAA specifies that dividends paid to a resident of UAE by an Indian company shall be taxed at a rate of 15% on the gross amount if the recipient is the beneficial owner. The Authority confirmed that this condition was met in the applicant's case. Moreover, the definition of 'dividend' under Article 10 was interpreted to include income from units of the Unit Trust of India (UTI) and mutual funds specified under Section 10(23D) of the IT Act, given that such income is accorded the same tax treatment as dividends from shares. Consequently, the applicant's dividend income from Indian companies, UTI, and specified mutual funds would be taxed at 15%.

4. Tax Treatment of Interest Income (Article 11):
Article 11 of the DTAA provides that interest income accruing to a resident of UAE from Indian sources shall be taxed at a rate of 12.5%. The Authority confirmed that the interest income received by the applicant from India would be subject to this tax rate.

5. Tax Treatment of Capital Gains (Article 13):
Article 13 of the DTAA deals with capital gains and stipulates that gains from the sale of movable assets, such as shares, debentures, units, and other securities, shall be taxable only in the State of residence of the seller. Therefore, the applicant's capital gains from the sale of these assets would be exempt from income tax in India and taxable only in UAE.

Ruling:
1. Question No. 1: The applicant can claim the benefits of the DTAA from the assessment year 1995-96 onwards.
2. Question No. 2(a): The dividend income from companies, Unit Trust of India, and mutual funds specified in Section 10(23D) of the IT Act will be liable to tax at 15%.
3. Question No. 2(b): The interest income derived from India will be liable to tax at 12.5%.
4. Question No. 2(c): The capital gains arising from the sale of movable assets will be exempt from income tax in India.
5. Question No. 3: This question does not arise due to the affirmative answer to Question No. 1.